INVENTORY
MANAGEMENT AND
CONTROL
INTRODUCTION
The term inventory means the value or amount of
materials or resource on hand. It includes raw
material, work-in-process, finished goods &
spares.
Inventory Control is the process by which
inventory is measured and regulated according to
predetermined norms such as economic lot size for
order or production, safety stock, minimum level,
maximum level, order level etc.
Inventory control pertains primarily to the
administration of established policies, systems &
procedures in order to reduce the inventory cost.
OBJECTIVES OF INVENTORY CONTROL
To meet unforeseen future demand due to
variation in forecast figures and actual figures.
To average out demand fluctuations due to
seasonal or cyclic variations.
To meet the customer requirement timely,
effectively, efficiently, smoothly and
satisfactorily.
To smoothen the production process.
To gain economy of production or purchase in
lots.
To reduce loss due to changes in prices of inventory
items.
To meet the time lag for transportation of goods.
To meet the technological constraints of
production/process.
To balance various costs of inventory such as order
cost and inventory carrying cost.
To balance the stock out cost/opportunity cost due
to loss of sales against the costs of inventory.
To minimize losses due to deterioration,
obsolescence, damage, pilferage etc.
NATURE OF INVENTORY
Dependent demand- Demand for one product is
linked with demand for another product, such as
components, subassemblies etc.
Independent demand- Demand for a product/
service occurs independently of demand for any
other for any other product or service, such as
finished product, service parts, lubricants, cutting
oil, greases, preservatives etc.
INVENTORY COSTS
TYPES OF INVENTORY COSTS
Ordering (purchasing) costs
Inventory carrying (holding) costs
Out of stock/shortage costs
Other costs
ORDERING COSTS
It is the cost of ordering the item and securing its
supply.
Includes-
Expenses from raising the indent
Purchase requisition by user department till the
execution of order
Receipt and inspection of material
INVENTORY CARRYING COSTS
Costs incurred for holding the volume of inventory
and measured as a percentage of unit cost of an
item.
It includes-
Capitalcost
Obsolescence cost
Deterioration cost
Taxes on inventory
Insurance cost
Storage & handling cost
CARRYING COSTS AS-
Capital costs
Storage space costs
Inventory service costs
Handling-equipment costs
Inventory risk costs
OUT-OF-STOCK COSTS
It is the loss which occurs or which may occur due
to non availability of material.
It includes-
Break down/delay in production
Back ordering
Lost sales
Loss of service to customers, loss of goodwill, loss due
to lagging behind the competitors, etc.
OTHER COSTS
Capacity Costs
Over-time payments
Lay-offs & idle time
Set-up Costs
Machine set-up
Start-up scrap generated from getting a production run
started
Over-stocking Costs
INVENTORY MODELS
INVENTORY CONTROL SYSTEMS
SinglePeriod Model
Fixed Order Quantity Model
Fixed Time Period Model
SINGLE PERIOD MODEL
The model answers the question of how much to order when
an item is purchased only one time and it is expected that it
will be used and then not reordered
The order quantity may depend upon the amount of risk that
one is willing to take for running out of inventory.
The optimum stocking level using marginal analysis occurs at
the point where the expected benefits derived from carrying
an extra unit are less than the expected cost.
P <= Cu / (Co + Cu)
FIXED ORDER QUANTITY MODEL(EOQ)
EOQ or Fixed Order Quantity system is the
technique of ordering materials whenever stock
reaches the reorder point.
Economic order quality deals when the cost of
procurement and handling of inventory are at
optimum level and total cost is minimum.
In this technique, the order quantity is larger than
a single period’s requirement so that ordering
costs & holding costs balance out.
ASSUMPTIONS OF EOQ
Demand for the product is constant
Lead time is constant
Price per unit is constant
Inventory carrying cost is based on average
inventory
Ordering costs are constant per order
All demands for the product will be satisfied (no
back orders)
EOQ MODEL
Tc (Total Cost)
Cost (Rs.)
Carrying Cost
(Q/2)H
DS/Q (Ordering Cost)
EOQ
Order Quantity Size (Q)
BASIC FIXED ORDER QUANTITY MODEL
(EOQ)
Annual Annual
Total Annual Cost = Purchase + Annual + Ordering
Cost Holding Cost
Cost
Q D
TC DC H S
2 Q
TC = Total annual cost
D = Demand
2 DS C = Cost per unit
EOQ Q = Order quantity
H
S = Cost of placing order/setup cost
H = Annual holding and storage cost
per unit of inventory
IMPORTANT TERMS
Minimum Level – It is the minimum stock to be
maintained for smooth production.
Maximum Level – It is the level of stock, beyond
which a firm should not maintain the stock.
Reorder Level – The stock level at which an order
should be placed.
Safety Stock – Stock for usage at normal rate
during the extension of lead time.
FIXED TIME PERIOD MODEL
INVENTORY TURN CALCULATION
CLASSIFICATION OF INVENTORY
CONTROL
ALWAYS BETTER CONTROL (ABC) ANALYSIS
This technique divides inventory into three
categories A, B & C based on their annual
consumption value.
It is also known as Selective Inventory Control
Method (SIM)
This method is a means of categorizing inventory
items according to the potential amount to be
controlled.
ABC analysis has universal application for fields
requiring selective control.
PROCEDURE FOR ABC ANALYSIS
Make the list of all items of inventory.
Determine the annual volume of usage & money value
of each item.
Multiply each item’s annual volume by its rupee value.
Compute each item’s percentage of the total inventory
in terms of annual usage in rupees.
Select the top 10% of all items which have the highest
rupee percentages & classify them as “A” items.
Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
The next 70% of all items with the lowest rupee
percentages are “C” items.
ADVANTAGES OF ABC ANALYSIS
Helps to exercise selective control
Gives rewarding results quickly
Helps to point out obsolete stocks easily.
In case of “A” items careful attention can be paid
at every step such as estimate of requirements,
purchase, safety stock, receipts, inspections,
issues, etc. & close control is maintained.
In case of “C” items, recording & follow up, etc.
may be dispensed with or combined.
Helps better planning of inventory control
Provides sound basis for allocation of funds &
human resources.
VED CLASSIFICATION
VED: Vital, Essential & Desirable classification
VED classification is based on the criticality of the
inventories.
Vital items – Its shortage may cause havoc & stop the work in
organization. They are stocked adequately to ensure smooth
operation.
Essential items - Here, reasonable risk can be taken. If not
available, the plant does not stop; but the efficiency of
operations is adversely affected due to expediting expenses.
They should be sufficiently stocked to ensure regular flow of
work.
Desirable items – Its non availability does not stop the work
because they can be easily purchased from the market as &
when needed. They may be stocked very low or not stocked.
FSN ANALYSIS
FSN: Fast moving, slow moving & non moving
Classification is based on the pattern of issues
from stores & is useful in controlling obsolescence.
Date of receipt or last date of issue, whichever is
later, is taken to determine the no. of months
which have lapsed since the last transaction.
The items are usually grouped in periods of 12
months.
It helps to avoid investments in non moving or slow
items. It is also useful in facilitating timely
control.
For analysis, the issues of items in past two or
three years are considered.
If there are no issues of an item during the period,
it is “N” item.
Then up to certain limit, say 10-15 issues in the
period, the item is “S” item
The items exceeding such limit of no. of issues
during the period are “F” items.
The period of consideration & the limiting number
of issues vary from organization to organization.
