Inventory Control

Rinki Chaudhary
Assistant Professor
School of Physics, Humanities and Applied Sciences
Shobhit Deemed University, MEERUT - 250110
 Syllabus

 Inventory Control: Introduction, Meaning of Inventory control and

its functional role, Reasons for carrying inventory and different
factors involved, Single item deterministic-Economic lot size models
with uniform rate, finite and infinite production rates, with or without
shortage – Multi-item models with constant. Deterministic models
with price – breaks – All units discount model and incremental
discount model.
 Probabilistic inventory control models: Introduction, Single
period profit maximization models with uniform demand,
Instantaneous demand, with or without setup cost. Continuous
demand without setup cost.
 Contents

Introduction
Meaning of Inventory control
Functional role of Inventory Control
Reasons for carrying inventory and different factors involved
 Introduction to Inventory
 The term ‘inventory’ is taken out from the French word ‘Inventaire’ and
the Latin word ‘Inventarium’ means a list of things found.

 The term inventory includes materials like- raw, in process, finished

packaging, spares and others; stocked in order to meet an unexpected
demand or distribution in the future.
Types of Inventory
 6
Functions of Inventory
 Consider three subsystems of an organization representing the supplier,
manufacturer and the market.
 These three subsystems are rigidly connected with each other, without any
inventories, as shown below.
 Inventories reduce dependency of one subsystem over the other in a supply
chain.

Suppliers Manufacturer Market

 Supply Chain
 Supply chain is a network of people, organizations, resources, and
technology that move goods and services from suppliers to consumers.
 Inventory Control & its Purpose

Inventory control is the process of managing a company's stock levels to

ensure that the right products are available in the right quantities. It's also
known as stock control.
Inventory control has two main purposes:
• The primary aim is to take full advantage of the level of purchaser service by avoiding
under stocking. Under stocking causes missed deliveries, backlogged orders, lost sales,
production bottlenecks, and unhappy customers.
• The next purpose of inventory control is to support effectiveness in manufacture or
purchasing by minimizing the price of provided that a sufficient level of purchaser
service.
 Need of inventory control
 To Ensure Continuous Supply : It is required so that production
should not suffer at ant time and the customers demand should also
be met.
 To Ensure Proper Investment: There should be no overstocking and
understocking and inventory control help in it.
 To reduce the Material Costs: A good inventory control system can
lead to minimization of material cost.
 To Minimize Losses: It can minimize the losses of inventory through
deterioration wastages and damages.
 To Eliminate Duplication: The same material can be ordered by
 Benefits of Inventory Control

• the retailer or the vendor to meet the demand of the customers

on time.
• helpful in maintaining the goodwill of the customers.
• helps in reducing the holding costs of the inventory.
• guards the retailer against price increases.
• helps the retailer against stock outs.
• helps in the minimization of the total cost.
• helps in smooth and efficient running of any business.
 Methods of Inventory Control
ABC Analysis
Last In, First Out (LIFO) & First In, First Out (FIFO)
VED Classification
HML Classification
SOS Classification
FSN Classification
Order Cycling System
Just In Time (JIT)
Economic Ordering Quantity (EOQ)
 ABC Analysis
• a pivotal inventory control method that categorizes inventory into three different
classes based on their importance. Often referred to as the Pareto Principle, this
method identifies that 80% of a company’s profits typically come from 20% of its
products.
• a method recognizes this disproportion and applies it to inventory management to
optimize resource allocation.
• a classification system is a strategic approach to inventory management.
• “A” category contains high-priority items that often account for 15-20% of the inventory but
generate 70-80% of revenue.
• “B” category represents a balance, typically accounting for 30% of the inventory and 15-
20% of the revenue.
• “C” category, although making up 50-60% of the inventory, only contributes around 5-10%
to revenue.
 ABC Analysis
CATEGORY NO. OF ITEMS(%) ITEM VALUE(%) MANAGEMENT
CONTROL
A 15 70 (HIGHEST) MAXIMUM

B 30 20(MODERATE) MODERATE

C 55 10(LEAST) MINIMUM

TOTAL 100 100

Last In, First Out (LIFO) & First In, First Out (FIFO)

 LIFO (Last In, First Out) and FIFO (First In, First Out) are two essential inventory
valuation methods businesses use to manage and evaluate inventory. These
methods dictate the order in which inventory is sold and consequently affect the
cost of goods sold and the value of remaining inventory.
 LIFO (Last In, First Out): Under LIFO, the most recently acquired items are sold
first. The inventory cost is based on the cost of items that were acquired last, while
the older inventory remains on hand.
 FIFO (First In, First Out): In contrast, FIFO considers that the oldest items in
inventory are sold first. It assumes that the items acquired first are the first to be
sold, mirroring a more natural flow of inventory.
 VED Classification

Specifically used for Classification of SPARE PARTS

V- part is VITAL( high stock level)

E- part is ESSENTIAL (moderate stock level )

D- part is DESIRABLE (minimum stock level)

 HML & FSN Classification

5. FSN Classification
4. HML Classification
Inventory is classified based on the Movement
Material classified on the basis of Unit
of inventories from stores, Inventory technique
Value
 H- High Value used to Avoid obsolescence
 F- Fast Moving
 M- Medium Value
 S- Slow Moving
 L – Low Value
 N- Non Moving
 JUST-IN-TIME (JIT) INVENTORY CONTROL

1.The JIT control system implies that the firm should maintain a minimal
level of inventory and rely on suppliers to provide parts and
components ‘just-in-time’ to meet its assembly requirements.

2.JIT also known as Zero Inventory Production Systems(ZIPS), Zero

Inventories(ZIN), Materials as Needed(MAN), or Neck of Time(NOT)
 SOS CLASSIFICATION

S - Seasonal Items
OS - of Seasonal Items
• It is useful for deciding the time of purchase, so that the cost of
material and holding cost may b balanced.
 Components of Inventory Control Models
• Lot Size
 Lot-size in inventory generally mentions to the total quantity of a
product ordered for manufacturing. The order quantity term is
commonly used for lot-size in inventory models. All inventory cost be
contingent on lot-size of products or manufacturing items.
• Planning Horizon
 The Epoch over which a specific inventory Level will be retained is
called planning horizon. It may be finite or infinite.
 Lead Time

• The time gap between the placing of an order and being paid of the
inventory is called lead time.
 Stock Replenishment

• The rate at which the units are added to the inventory is mentioned to as
stock replenishment.
• The replenishment can transpire instantaneously or at a uniform rate.
Instantaneous replenishment transpires when the units are purchased from
some outside source.
• Moreover, when the units are manufactured within the association, it is
raised to as uniform replenishment.
 Costs Associated with Inventory Modeling

1. Unit Cost
 The Unit Value of an item is articulated in rupees per unit. For a merchant it is
simply the price (including freight) paid to the supplier, plus any cost incurred to
make it ready for sale. It can depend, a quantity discounts on the size of the
replenishment. For manufacturers, the unit value of an item is usually more
problematic to determine.
2. Carrying Cost
 Carrying cost is the total cost of storing and holding inventory, including the cost
of the product, warehouse space, insurance, and taxes. It can also refer to the cost
of financing inventory.
 Costs Associated with Inventory Modeling
3. Capital Cost
 Capital costs are costs sustained on the acquisition of land, buildings, assembly
and tackle to be used in the creation of goods or the execution of provision.
4. Ordering Cost
 Ordering cost is the cost associated with placing an order, including
expenses related to recruits in a purchasing department, communications and
the handling of the related paperwork.
5. Set up Cost
 Setup cost embraces the recruits needed to set up the tackle, the cost of down time
through a new setup and the assets and time need to check the new set up to
accomplish the specification of the parts or materials fashioned.
6. Storage Cost
• This cost is concomitant with the stock of inventories on hand. Storage or handling
costs may be assimilated by the tangible maintenance of stock or the rent of stowage
space or in a more widespread form they may be a ration of desuetude or putrefaction.

7. Deterioration Cost
• The deteriorating cost occurs in the situation in which the real value of the inventory
has deteriorated due to overstocking or storage for long period.

8. Purchase Cost
• It is unit cost of an item acquired either from and external source or from the unit
replenishment cost of interior production. It is not necessarily constant. The unit
purchasing price depends on the quantity secured happening in many practical
situations.
9. Remanufacturing Cost
 Remanufacturing cost is the cost of the unit remanufactured/repaired during the
remanufacturing process, which embraces direct labor, direct material, etc.

10. Shortage Cost

 Shortage cost is concomitant with the unsatisfied demand, which rises due to the
stock out situation. It happens when the demand for an item outstrips its stream. That
is in the absence of inventory, stock proves to be insufficient to meet the demand of
the consumer.

11. Lost Sale Cost

 This is the opportunity cost when the customer moves to another supplier.
 Some Key Points

 Preservation Technology:
Preservation technology is the technology under which the effect of deterioration decreases.
Investing on preservation technology (PT) has received little attention in the past years (2006) found that the retailer
can reduce effectively the deteriorating rate of item by improving the storage facility than the total annual
relevant inventory cost will be reduce.
 Deterioration
Deterioration is defined as decay, change or spoilage that prevents the items from being used for its original purpose.
Examples: Foods, chemical, blood, drugs e. t. c.
 Non-Instantaneous Deterioration:
When items at retailer’s house deteriorate starts after some time due to its extremely good quality and environment
conditions then, this kind of deterioration is called non-instantaneous deterioration.
 Some Key Points

 Permissible delay in payment

 Supplier offers a credit period for buyer’s, in paying for the amount of purchasing cost,
during this period no interest is charged by the supplier ,but beyond this period interest is
charged by the supplier under the terms and conditions agreed upon.
 The existence of credit period serves to reduce the cost of holding to the user.
 Inflation
• Inflation is a general increase in the price of goods and services over a period of time.
• Inflation is identified as that situation of instability in which a growth of manufacturing
controls tends to cause or is the outcome of rises in the price level.
• It is well standardized that inflation in earth is on structural as well as economic trend.
 Some Key Points

 Safety Stock
 Safety Stock, often referred to as “buffer stock,” is a term that finds its roots in
inventory management. It refers to the extra inventory held by a business to
mitigate the risk of stockouts due to unpredictable fluctuations in demand, supply
delays, or other unforeseen disruptions in the supply chain management.
 Calculating the correct level of safety stock is vital. Too little may lead to
stockouts, while too much can tie up capital and lead to obsolescence. Here’s a
general formula used to calculate safety stock:

Safety Stock = (Maximum Lead Time – Average Lead Time)

* (Maximum Usage – Average Usage)

 Some Key Points

Partial Backlogging
The case of unsatisfied demand arises due to the lack of stock. Partial backordering
represents a situation where some customers are ready to wait for backorders and others
would turn to buy from other buyer/supplier. Simply backordering or shortages are
demands which will be fulfilled after some time when it is required.

Warehousing
Warehouse is a commercial building used for storing goods. Supplier first keep the goods
in limited capacity own warehouse and then he keep excess items in a rented or borrow
warehouse having unlimited capacity. The holding cost of goods in rented warehouse is
much more than that of own warehouse.
 Main causes for holding inventories are:

• To satisfies predictable demand

• To take benefit of economic order cycles
• To guard against price increases
• To protect against stock outs