INVENTORY CONTROL

INVENTORY MANAGEMENT

According to the American production and inventory society (APIS). “Inventory management is the branch of business management concerned with planning and controlling the inventory”.

Inventory means all the materials, parts, supplies, tools and in process or finished products recorded in the books by the organization and kept in its stock, warehouses or plant for some period of time.




Classification of inventory

1. Direct inventory: Direct Inventories are those items that play a direct role in the manufacturing of goods and services. Direct inventory includes – raw material, work in progress and finished goods.

2. Indirect Inventories: its cover those items that are not the part of finished products but are necessary in the process of production. Following are the different types of indirect inventories.

(a) Transit or Pipeline Inventory: These are the pipeline inventory and required to transport from one point to another. Longer the distance between two points, longer is the transit inventory e.g. work in the process is a transit inventory. Size of the transit inventory is determined by the plant layout and plant design.
(b) Buffer Inventory: Buffer stocks are the inventory that help in preventing the stock out condition that may occur due to demand and supply fluctuation i.e. buffer inventory help in handling the situation when actual demand of certain item exceed their original demand.
(c) Lot size Inventory : These are the inventories that help in reducing the ordering and setup cost by placing the order in lots. Such a policy can help in availing discounts from the supplier.
(d) Decoupling Inventories: Those inventories that serve the function of decouple operation in a production system. These inventories help to perform various production activities independently we don’t want to depend on the schedule of other production activities.

3. Maintenance repair and operating inventories and services: This category includes office and general supplies i.e. Xerox paper, pen, towel, and light bulb.

INVENTORY CONTROL

It is the technique of maintaining the size of inventory at some desired level keeping in view the best economic investment of an organization. It ensures that the amount of inventories should not be too high or too low. Too high inventory will result in wastage of money and too low inventories can cause the problem of stock out.

Objectives of Inventory control

1. Protection against fluctuation in demand.
2. Better use of man, material & machine.
3. Reduction in cost.
4. Control of stock value.
5. Production against inflation.
6. Continuity in sales.
7. Protection against wastage pilferage.
Factors affecting inventory Control policy

1. The rate of Inventory turnover: The time period within which inventory complete the cycle of production and sales is termed as the rate of inventory turnover. When inventory turnover rate is high, investment in inventory tends to be low and vice-e-versa.

2. Type of Production: A company can produce durable or perishable products. Durable products can be stored for a long period but perishable goods can’t be stored for long period due to the risk of spoilage. So in case of durable goods the organization can maintain high level of inventory and vice-e-versa.

3. Management Trends: Market conditions such as prices, demand of the product and government policies also affect the inventory related decisions e.g. in case of falling prices the company can store in advance.

4. Cost Involve: There are certain costs such as carrying cost, salvage cost, ordering cost, cost of capital, opportunity cost, spoilage cost& cost of loss of sale due the stock out. So all these costs should be considered white taking inventory control decisions.

5. Lead Time: The lead time is that time required for placing the orders and receiving of material from supplier or in case of zero lead time there is no need of inventory. If it is not zero then we have to maintain certain level of inventory.

6. Financial Position: Financial Position of the company has significant bearing or inventory level. A financially strong company may afford to buy material in bulk and hold them for future use. But a firm with a shortage of funds will store only emergency inventory.

Various Tools of Inventory Control

1. EQO Model: FW Harris first developed the EOQ model in 1913 and later RH Wilson performed in depth analysis of this model. Therefore this model is also called Wilson EOQ model. EOQ is that point at which the sum of ordering cost and carrying cost e.g. becomes minimum and ordering cost and carrying cost becomes equal. EOG can be determined with the help of following formula.















______
EOQ = Ö2DCO Where D = Demand, CO= Ordering Cost per Order
CC CC= Carrying cost per unit per year.
Y
X
O EOQ

There are two types of cost consider under EOQ model which are given below:

1. Ordering Cost; It is the cost associated to make a new order it includes transportation cost, freight, order reading and telephone expenses etc. this cost includes following elements:-

(a) Cost of the employees appointed for ordering the goods.
(b) Expenses incurred on transportation.
(c) Cost of stationary, banking, postage etc.
(d) Inspection of incoming material.
(e) Cost of placing and processing of a purchasing order.


2. Carrying Cost: This is the cost of holding and handling the material. It includes following elements:-

(a) Cost of capital invested in inventory.
(b) Interest on capital lockup in inventory.
(c) Cost of storage.
(d) Wages of the store keeper.
(e) Insurance cost.
(f) Loss of material due to spoilage, damages and depreciation.
(g) Loss of sale due to stock out.

Assumptions of EOQ model

1. Supply of goods is static.
2. The quantity to be purchased is certain.
3. Price are stable etc.

Total cost under EOQ model can be calculated as follows:

TC = D×P+ × Co+ EOQ × Cc
2
_________
VC = × Co+ EOQ × Cc or VC = Ö2DCO Cc
2

Q. The company has annual demand of 10000 units the cost of material is Rs. 10. the cost of placing the order is Rs. 50 per order. The holding cost of inventory is 20% of inventory value.
(a) Calculate EOQ level in units & in Rs and also find total cost.
(b) If the management decides to make an order of 1000 units at a time what will be the effect on TC and what would you suggest to the management? If the company is receiving 10% discount on price.









1. Cost of Material; It is the purchase price of material after adjusting discount etc some time it also include transportation charge.

2. Stock out Cost; This is the loss of sale due to temporary increase in demand or supply.
3. Ordering Cost; It is the cost associated to make a new order it includes transportation cost, freight, order reading and telephone expenses etc. this cost includes following elements:-

(a) Cost of the employees appointed for ordering the goods.
(b) Expenses incurred on transportation.
(c) Cost of stationary, banking, postage etc.
(d) Inspection of incoming material.
(e) Cost of placing and processing of a purchasing order.

4. Carrying Cost: This is the cost of holding and handling the material. It includes following elements:-

(a) Cost of capital invested in inventory.
(b) Interest on capital lockup in inventory.
(c) Cost of storage.
(d) Wages of the store keeper.
(e) Insurance cost.
(f) Loss of material due to spoilage, damages and depreciation.
(g) Loss of sale due to stock out.


Re-ordering Level: When the quantity of material in the stock go down to a certain level then a fresh order is placed to the supplier that certain level is known as reorder level. The reorder level is determined in between minimum and maximum stock level of material. It is calculated with the help of the following formula:-

Reorder level = max usage × lead time
Or
= Average daily consumption of material × lead time in days

Q. Calculate the reorder level of an item when its annual consumption is 2400 and lead time is 15 days.


ABC Analysis: It is a new chapter of Japanese Technique used to control the inventory of spare parts. As the name suggest this techniques is based on three level that are A, B & C. According to this technique items are divided into three parts i.e. A, B & C category. Category A belongs to highly expensive material) cost material, B category includes moderate cost material C cat include the lowest cost material. The degree of control should not be equal for all three categories. Type A category requires high level of control. B category requires moderate level of control and category C requires low level of control.



TBULATION OF ABC ANALYSIS

Category % Total items % of total cost
A 20 - 25 % 15% 60 – 80% 60%
B 25 – 60% 30% 40 - 60% 30%
C 60 – 80% 55% 20 – 25% 10%

Steps in ABC Analysis:

1. Prepare the list of items.
2. Find their unit price.
3. Find the consumption in Rs. (Unit × Price).
4. Organize the items in descending order in respect of cost and divide the items in three category i.e. ABC.

Advantage of ABC Analysis

1. It ensures closure control on costly items.
2. It helps in developing in scientific method of controlling inventories.
3. It reduces the work of supervision.
4. It helps in achieving the main objective of inventory control at minimum possible cost.


WORK STUDY

Work study is primarily concerned with discovering the best ways of doing the job and with establishing standards based upon time and motion study methods. It is the analysis of work into smaller part followed by re-arrangement of these parts to give higher productive efficiency at lesser cost.









1. Method Study; Initially FW Taylor developed the concept of method study. It is the examination of the methods employed by an organization in the production process. It is concerned with the rearrangement of methods or developing new techniques so that same results can be achieved with lesser cost and efforts. We try to remove the weaknesses of the existing methods and employ the best one. The following are the steps/process of method study:-

(a) Gaining information about the process carrying out, machinery installed position of tolls & equipments and working conditions.
(b) Analyzing performance of men, machine and their movements.
(c) Checking out improved alternative methods that are acceptable, employees, employers and management.
(d) Evaluating each suitable alternative on the basis of time, cost, profitability and acceptability.
(e) Selection and implementation of new work methods to rectify the previous loopholes.
(f) Re-evaluation and following of new methods.

Benefits/Advantages of Method Study

1. Decrease in cost.
2. Increase in profit.
3. Increase in productivity.
4. Satisfaction to the workers.
5. Modernization in the system.

2. Work Measurement: It is the application of techniques designed to establish the time for a qualified worker to carryout a specified job at a defined level of performance. This time is called as standard time or allowed time. Previously it was known as time study.

Functions/Objectives of Work Measurement

1. To analysis the operations in terms of time.
2. To control machines and labor utilization after assessing plant and men capacity accurately.
3. It helps in studying the standard time which ultimately becomes the basic far wages payment.
4. It provides basic for incentive payment.
5. It helps in labour and machine budgeting.

Standard Time: It is that time required to perform a job by an operator of average skill.

Std Time = Normal Time + Fatigue allowances + Time far personal adjustment.