Submitted by- Group 5

Inventory Management-�EOQ & ABC Analysis

Dr. Susmit Jain

TO

Nanhku Singh (0084)

Vikram Sharma (0092)

Ishan Dwivedi (0079)

Introduction

• About 60% of the cost of any product is attributable to materials.

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• Consider a firm which has annual sale of Rs 10 lakhs and a profit of Rs 1 Lakh

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• Cost of materials is minimised resulting in increased profitability for the organisation

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• Inventory includes finished goods, raw materials, goods in process, and parts, components and subassemblies.

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• Manager must decide how much to order and when to order

MATERIAL MANAGEMENT

• Materials Planning and Controlling- Budgeting and forecasting of raw materials based on the demand and the sales

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• Purchasing- Selection of sources of supply

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• Stores and Inventory control- Obsolescence and damage should be minimised through timely disposal and efficient handling. Inventory control includes fixing levels of safety stock and analysing lead time

OBJECTIVES OF MATERIALS MANAGEMENT

Standardisation

Product Improvement

Keeping track

Make or Buy Decisions

Favourable supplier relations

Records should be maintained

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Good Quality

Low payroll costs

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Continuity of supply

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High inventory turnover

Low cost of storage

Low procurement price

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Inventory Management

• Inventory management is a systematic approach to sourcing, storing, and selling inventory—both raw materials (components) and finished goods (products).
• In business terms, Inventory Management means the right stock, at the right levels, in the right place, at the right time, and at the right cost as well as price.

• There is loss of goodwill and loss of repeat orders.

Shortage or Stock out Cost & Cost of Replenishment

• The costs incurred because the firm owns or maintains inventory

Carrying Cost

• The costs of getting an item into the inventory of the firm

Ordering Cost

EOQ Model

• The EOQ is a company's ideal order quantity that minimizes its total costs related to ordering, receiving, and holding inventory.
• The EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time.
• One of the important limitations is that it assumes that consumer demand is constant.

ABC Analysis

C-items: 50% of all goods contribute only 5% of the annual consumption value of the items

Which product incur the highest storage and procurement costs?

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B-items: 30% of all goods contribute to 15-25% of the annual consumption value of the items

Which product contributes considerably more to the total revenue?

A-items: 20% of all goods contribute to 70-80% of the annual consumption value of the items

Which products or services generate the highest profit?

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ABC Analysis

C is a general category that contains the largest volume of inventory goods having the least value in terms of generating business revenue.

It is basically a mid level category in which the items included in category B are bigger in terms of volume but of less utility as compared to category A.

Products included in category A are one of the most important stock items having highest value. It is also the smallest category with minimal products.

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C

B

Inventory Products

Average Consumption Value

Conclusion

• The cost of materials constitutes about 60% of the cost of any product
• The EOQ model helps to determine the order quantity. It can also deal with situations involving discounts and price breaks. The model is based on certain assumptions. It is based on knowledge of ordering costs and carrying costs. In practice these are difficult to determine. Selective inventory control or ABC analysis provides a practical alternative.

References

Thank You

Economic Order Quantity Model in Inventory Management. (n.d.). Retrieved September 23, 2021, from https://www.investopedia.com/ask/answers/052715/how-economic-order-quantity-model-used-inventory-management.asp.

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What is ABC Analysis & how it is used in inventory management. (n.d.). Retrieved September 23, 2021, from https://www.goodfirms.co/blog/abc-analysis-use-in-inventory-management.

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Definition of ABC analysis | Accounting terms | InvoiceBerry. (n.d.). Retrieved September 23, 2021, from https://www.invoiceberry.com/accounting-terms/abc-analysis.

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What is Materials Management? Definition, system & more | toolshero. (n.d.). Retrieved September 23, 2021, from https://www.toolshero.com/management/materials-management.