Inventory 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 & stores &
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.
 DEFINITION

• Inventory control is a scientific system which indicates as to what to order,

when to order, and how much to order, and how much to stock so that
purchasing costs and storing costs are kept as low as possible.
• Inventory control is defined as safe guarding of company’s property in the
form of inventory and maintaining at the optimum level considering the
operating requirements and financial resources of business. Or
• Inventory is the list of moveable items which are required to
manufacture a product or to maintain equipment. Inventory is
a unique item having identification number, nomenclature and
specification.
• Inventory control is the technique of maintaining the size of
inventory at some desire level keeping in view the best
economic interest of an organization.
 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 facilitate intermittent production of several products on the same
facility.
• 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 or set up 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.
• To stabilize employment and improve lab our relations by inventory of
human resources and machine efforts.
 FUNCTIONS
• To carry adequate stock to avoid stock-outs
• To order sufficient quantity per order to reduce order cost
• To stock just sufficient quantity to minimize inventory carrying cost
• To make judicial selection of limiting the quantity of perishable items and
costly materials
• To take advantage of seasonal cyclic variation on availability of materials to
order the right quantity at the right time.
• To provide safety stock to take care of fluctuation in demand/ consumption
during lead time.
• To ensure optimum level of inventory holding to minimize the total inventory
cost.
 FACTOR AFFECTING
INVENTORY CONTROL POLICY
A company’s inventory control policies determine how the company manages
the movement of inventory under its control. Every company has a different
philosophy on inventory management that guides how and why it sets certain
policies, and an organization’s policies can vary based on the type of product
managed.
Various factors affect inventory control policies, including the organization’s
management, the type of product managed and product cost and lead time.
 Product Type:
The type of product greatly influences the inventory control policies assigned to
manage the product. For example, products with short shelf lives, such as
perishable foods, require a different policy than men’s dress shirts. Short shelf life
products must rotate based on expiration date. Although it seems like a first in/first
out (FIFO) policy works in this case, if at any time goods come into the
warehouse out of expiration date sequence, a FIFO policy will fail to manage the
inventory properly.

 Carrying costs:
Many companies employ additional inventory control policies for high-value
products. For example, many warehouses that inventory expensive audio-video
equipment keep some of the most expensive equipment secured in cages; only a
few of the warehouse personnel have access to this equipment. Along with having
the products caged, most companies require a signature from authorized personnel
before high-value products move from one location within a facility to another.
Depending on the value of the product, a security guard may accompany the
movement or transfer.
 Lead Time:
A major factor that affects inventory control policies is product lead time-the
time from receipt of an order to the time of delivery. Some industries and
products have extraordinarily long lead times.
For example, most of a retailer’s furniture no longer is produced in North
Carolina but is made overseas in China and Vietnam. When furniture was made
in North Carolina, the furniture retailer could order furniture from its supplier
and have it delivered within two to four weeks. This short lead time reduced the
amount of inventory the retailer needed to carry because he could get more
within a fairly short notice. When production moved to China, the lead time
increased from two to four weeks to 90 to 120 days. This completely changed
the retailer’s inventory policies. He now has to warehouse more inventory
because of the increased lead time. The increased amount of inventory also
increases the workload associated with managing the inventory, such as cycle
counting, yearly physical inventory and general warehouse maintenance.
TYPES OF INVENTORY COSTS
 Ordering costs:

This is the cost of getting an item into the store. The process of
ordering starts with raising requisition, placing an order, follow up,
transportation receipt and inspection, acceptance and placing in stores.

 Carrying costs:

This is the cost of holding an item in the store till it is issued out or
sold .
• Following are the elements:-
• Interest on capital cost incurred.
• Cost of obsolescence, wastages, damages.
 Shortage costs:

These are the costs incurred both directly and indirectly due to
shortages like intangible costs due to loss of goodwill, opportunity
loss or production hold costs.

 Total Inventory costs:

A total inventory cost consists of carrying costs and ordering costs.

 Lead Time
This is the time which has elapsed between placing an order till the
same items are received, stocked and ready to use.
 Models/methods
Of Inventory Control
ECONOMIC ORDER QUANTITY

• 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 ne
requirement so that ordering costs & holding costs balance out.
 RE-ORDER LEVEL

• Reorder level of stock (also known as reorder point or ordering

point) in a business is a preset level of stock or inventory at
which the business places a new order with its suppliers to obtain
the delivery of raw materials or finished goods inventory.
• Every business has to maintain a certain level of raw materials or
finished goods in its store. This is done in order to sustain the
continuity of production in case of raw materials and the
continuity of sales in case of finished goods. For this purpose, the
business must set a specific level at which it should place a new
order with the suppliers of inventory.
 ABC ANALYSIS
•  Always Better Control (ABC) Analysis
• This technique divides inventory into three categories A, B & C
based on their annual consumption value.
• 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 OF 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
 Advantage of ABC Analysis :
• Helps to point out obsolete stocks easily.
• Helps better planning of inventory control.
• Provides sound basis for allocation of funds & human resources.

 Disadvantage of ABC Analysis :

• Proper standardization & codification of inventory items needed.
• Considers only money value of items & neglects the importance of items for
the production process or assembly or functioning.
• Periodic review becomes difficult if only ABC analysis is recalled.
 VED ANALYSIS

This analysis is generally used in controlling the spare parts inventories

required for maintenance. Under this analysis, spare parts items are
classified in vital items, essential items and desirable items, Here, V
stands for vital. These items require more attention because absence of
these may stop whole production system.They are stocked adequately to
ensure smooth operation.E stands for essential items which are given
second priority. D stands for desirable , are paid the least attention .
• It is useful in capital intensive industries, transport industries, etc.
• VED analysis can be better used with ABC analysis in the following pattern.
 SDE ANALYSIS
SDE Analysis is based on the availability of material and is
useful where materials are scarely available.Here,
 S stands for scarce items, i.e. those which are generally in
short supply or are important items. Usually these are raw
materials, spare parts and imported items.
D used for difficult items.Such items are available in the
market but they are not always immediately procured.
E stands for easy items which are easily available in the
local markets.
 HML ANALYSIS
Likewise ABC analysis,items are classified on the basis of cost of
the items.The point of difference between these two techniques is
that under HML analysis,for the purpose of classifying inventories
into various categories,only cost of the items is considered while
their annual consumption value is totally ignored.
The items under this analysis are classified based on their unit
prices. They are categorized in three groups, which are as follows:
• H-High Cost Items
• M-Medium Cost Items
• L-Low Cost Items
 FSN ANALYSIS
• This classification works like:
 F: Fast Moving
 S:Slow Moving
 N:Non-moving
• FSN Analysis is based on the assumption that all items of inventory are
not required all the time in stores.Some items are required on regular
basis and some once in a while.
• 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.
 CONCLUSION
Inventory control is a way of doing business and in the responsibility
of nearly every other function in a company : from the maintenance
foreman who order maintenance supplies to the clerk who buys office
supplies, to purchasing department and commodity buyer, to the
traffic manager, to the production stall, to the accounting department,
to the trucking department, to the sales department and so on. The
economics of inventory control are the economics of doing
businesses.It is the technique of maintaining the size of inventory at
some desire level keeping in view the best economic interest of an
organization.
Thank You