Inventory Management and
Control
Foram Machhar
Samia Bula
Index
• Introduction
– What is inventory?
– How it is classified?
• Need of inventory- Why?
– Objectives and functions
• How inventory control can be done?
– Techniques
What is Inventory Control?
Inventory may be defined as usable but idle
resources that have economic value. Inventory is
a stock of direct or indirect material, from raw
material to finished goods stocked in order to
meet an unexpected future demand. In other
words inventory is a physical stock of goods kept
for the future purposes
Inventory Classification
Inventory indicates that it may be available in
different forms depending upon the production
cycle stage it is in.
Type of inventory
Raw materials Raw materials are input goods intended
for combination and/or conversion
through the manufacturing process into
semi-finished or finished goods. They
change their form and become part of the
finished product.
Components and parts Just as raw materials are converted to
finished goods in a manufacturing
operation, components and parts are
assembled into finished goods in an
assembly operation.
Maintenance, repair and operating These include parts, supplies, and
materials used in or consumed by routine
maintenance and repair of operation
equipment, or in support of operations.
In- process goods These are goods in the process of
manufacturing and only partially
completed. They are usually measured for
accounting purposes in between
significant conversion phases. In-process
inventories provide the flexibility
necessary to deal with variations in
demand between different phases of
manufacturing
Finished goods These represent the completed
conversion of raw materials into the final
product. They are goods ready for sale
and shipment.
Capital goods These are items (such as equipment) that
are not used up or consumed during a
single operating period, but have
extended useful lives and must be
expensed over multiple operating
periods.
Objectives of Inventory control
• Protection against fluctuations in demand.
• Better use of men, machines and material.
• Protection against fluctuations in output.
• For production economics.
• Control of stock volume.
• Control of stock distribution.
• Maximum customer service.
• Low-cost of plant operation.
What if.. No inventory!!!!?
• Though Inventory is a blocked capital, in the sense that
it is not being used in the present, it plays a distinct
role in the life of any organization for a smooth and
efficient running of business. For example, if a firm
does not have any inventory then as soon as it receives
a supply order it will look for raw material to
manufacture the items and thus the customers shall be
kept waiting. It alone may cost the firm its customers
who may not like to wait.
• Further, all the internal agencies shall have to work in
emergency for getting the material, completing the
production etc. if there is no inventory. Inventories
decouple individual phases of the total operation.
Thus the functions of inventory are to :
• Protect against unpredictable fluctuations in
demand and supply.
• Take the advantage of price discounts through
bulk purchases.
• Take the advantage of batches and longer
production run.
• Provide flexibility to allow changes in
production plan in view of changes in demands
etc.
• Facilitate intermittent production
• To keep the inventories as low as possible to be
consistent with the market conditions.
• To minimize the ‘out of stock’ danger that results in
crash purchase at uneconomical rates.
• To maintain a sufficient stock of the finished products
and to meet the reasonable expectations of customers
for a prompt delivery of goods.
• To maintain proper records so as to supply an accurate
and regular material reports to the managements.
• To forecast the market and economic conditions of
supply as regards the availability of the materials.
Techniques to control inventory
1. ABC analysis
2. Economic order quantity.
3. VED (Vital Essential Desirable) analysis
4. Perpetual inventory system.
5. Review of slow and non moving items.
6. Input-output ratio analysis.
7. Setting of various levels.
8. Materials budgeting.
9. Establishing an effective purchase procedure.
The ABC analysis
The ABC analysis is a business term used to define an
inventory
categorization technique often used in material
management. It is
also known as "Selective Inventory Control. " Policies
based on
ABC analysis:
• A ITEMS: very tight control and accurate records
• B ITEMS: less tightly controlled and good records
• C ITEMS: simplest controls possible and minimal records
• The ABC analysis provides a mechanism for
identifying items that will have a significant
impact on overall inventory cost, while also
providing a mechanism for identifying different
categories of stock that will require different
management and controls.
• The ABC analysis suggests that inventories of an
organization are not of equal value. Thus, the
inventory is grouped into three categories (A, B,
and C) in order of their estimated importance.
• A items are very important for an organization.
Because of the high value of these A items,
frequent value analysis is required.
In addition to that, an organization needs to choose
an appropriate order pattern (e.g., "Just- in- time")
to avoid excess capacity.
• B items are important, but of course less
important, than A items and more important
than C items. Therefore, B items are intergroup
items.
• C items are marginally important.
Summary of various categories of items.
A B C
1. Consumes 10% of total inventories 20% 70%
2. Consumes 70% of total budget. 20% 10%
3. Requires very strict control Moderate control Loose control
4. Either no/low safety stocks less than 2 Large safety stocks High safety stocks -
weeks Up to 2-3 months > 3 months
5. Needs maximum follow up Periodic follow up Close follow up
6. Handled by senior officers Middle Any official of the
management management
7. Keeps records of receipts and use Keeps records of No records kept
receipts and use
8. Frequent ordering Less frequent Bulk ordering
The following is an example of the Application of Weighed Operation based
on ABC class in the electronics manufacturing
company with 4,000 active parts.
Uniform Purchase: When you apply equal purchasing policy to all 4,000
components, example weekly delivery and re-order point (safety stock) of
two-week supply assuming that there are no lot size constraints, the factory
will have a 16,000 delivery in four weeks and the average inventory will be 2.5
weeks supply.
Weighed Purchase: In comparison, when weighed purchasing policy applied
based on ABC class, example C class monthly (every four weeks) delivery with
re-order point of three-week supply, B class Bi-weekly delivery with re-order
point of two week supply, A class weekly delivery with re-order point of one
week supply, total number of delivery in four weeks will be (A 200x4=800)+(B
400 x2=800) + (C 3400x1=3400)=5000 and average inventory will be (A
75%x1.5weeks)+(B 15%x3weeks)+ (C 10%x3.5weeks)= 1.925 week supply.
By applying weighed control based on ABC classification, required man hours
and inventory level are drastically reduced.
Advantages of ABC analysis
• Investment in the inventory can be regulated
and funds can be utilized in the best possible
manner.
• Closer and strict control on those items which
represent a major portion of total stock value.
• Helps in maintaining enough safety stock of C
categories of items.
• Scientific and selective control helps in the
maintenance of high stock turnover rate.
Application of ABC analysis
• Information of items which require higher
degree of control
• To evolve useful re-ordering strategy.
• Stock records.
• Priority treatment to different items.
• Determination of safety stock limits.
• Stores layout
• Value analysis.
VED analysis
• This system is based on the utility of the material.
• Useful in the drug store in controlling and
maintaining the stock of various types of
formulations of a particular group of drugs.
• The older the brand, the greater will be its
requirement.
• Thus, the best way to classify the different brands
into any one of the following categories.
• V=vital, E= essential and D= Desirable items
For example,
• Quinine is available as quinine sulphate,
quinine hydrochloride, quinine ethyl
carbonate and quinine bisulphate.
• Then, quinine sulphate is vital (more demand),
Quinine hydrochloride is essential (less
demand) and quinine ethyl carbonate is
desirable ( very less prescriptions).
• Therefore, maximum inventory of quinine
sulfate should be kept.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) models are the
most basic models of inventory management.
The approach in EOQ models is essentially to
trade-off various relevant costs and derive an
order quantity and time for placing an order
such, that the total costs are minimized. This
note discusses the basic EOQ model and the
sensitivity of costs in EOQ model to various
parameters.
The following costs are considered
• Ordering cost.
• Inadequate inventory or stock out cost.
• Inventory carrying cost.
Methods for determining EOQ
• Graphical method.
• Tabular determination of EOQ
• Algebraic formula.
Perpetual inventory system
It is a method of recording the store balance after every
receipt and issue to facilitate a regular checking and to
prevent the closing down for stocktaking. After every
receipt and issue, the entry is made in the bin card and
the balance is adjusted. Thus, the bin card becomes a
perpetual inventory record and the store balance is
recorded continuously after every receipt and issue. All
errors detected are adjusted both in the bin card as well
as in the stores ledger under proper authority
Thus, perpetual inventory system comprises of- bin card,
store ledger and continuous stocktaking
Review of slow and nonmoving items
• Inventory is an important constituent of the total cost
and as such a proper system of inventory control leads
to a significant economy in the total cost of production.
So a proper system must be enforced to detect and
control the slow moving items, obsolete items and
dormant stocks. Slow moving items- moving at slow
rates ( valued at cost, replacement price or net
realizable value, whichever is less).
• Obsolete items- that have become useless due to a
change in design, method of manufacture, product or
process.
Following steps to be taken to detect slow and
non moving items.
• Periodic report
• Obsolete items
• Moving ratios
