Inventory Control &

Management

ACW - 201

T.Guru Aarat

What is inventory ??

• Inventory is stocks of material. It can stored for future use of production .

• It is tomorrow’s production.• Semi-finished goods waiting in the line for use

in the next process of for that matter finished goods waiting for shipment is form of inventory.

• Inventory includes TOOLS, RAW MATERIAL,WORK IN PROCESS & FINISHED GOODS.

• Inventory is stocks of material. It can stored for future use of production .

• It is tomorrow’s production.• Semi-finished goods waiting in the line for use

in the next process of for that matter finished goods waiting for shipment is form of inventory.

• Inventory includes TOOLS, RAW MATERIAL,WORK IN PROCESS & FINISHED GOODS.

What is inventory control ?What is inventory control ?

• Inventory control is planning , ordering and scheduling of material used in manufacturing.

• It means right quantity of material is available in right time.

• It means systematic control over the purchasing, storing and using of material.so as to minimize possible cost.

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Re-ordering level

• It is the point at which if stock of the material in store approaches, the store keeper should initiate the purchase requisition for fresh supply of material.

• This level is fixed some where between maximum and minimum level.

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Economic Order Quantity

• It is also known as standard order quantity , optimum quantity or economic lot size.

• By definition economic order quantity that size of order for which the total cost is minimum.

Computation of EOQ

• The widely used formula is

EOQ =√{2RCp/Ch}

Where ,R= Annual quantity to be used in units.Cp=Cost of placing an Order.Ch= cost of holding one unit for one year.

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Minimum stock level

• This represents the quantity below which stocks should not be allowed to fall .

• The level is fixed for all items of stores and the following factors are taken into account:

1.Lead time- 2. Rate of consumption of the material

during the lead time.

Maximum stock level

• Quantity of inventory above which should not be allowed to be kept. This quantity is fixed keeping in view the disadvantages of overstocking;

Factors to be considered:• Amount of capital available.• Godown space available.• Possibility of loss.

Techniques of material control

Inventories are necessary evil.

Main techniques in selective inventory control

• ABC Analysis• VED Analysis• FSDN Analysis• JIT Analysis• HML analysis

Let us define ABC

• A- significant few, items few in number contributing high

proportion of value of inventories B- not few, not too many neither very cheap nor very costly

C- Insignificant many relatively large no. of items normally inexpensive

Graphical presentation

Advantages of ABC Analysis

1. Strict control is exercised

2.Investment in inventory is

reduced

3. Storage cost is reduced

4. Management time is saved

Just in time inventory:• Because of larger carrying

cost of inventory in the stores & godowns , manufacturers now interested in Just in time purchasing.

• JIT purchasing is the purchase of material or goods in such a way that delivery of purchased items is assured before their use or demand.

Advantages of JIT

1. Investment in inventory is reduced.

2.Carrying cost is reduced.

3. A reduction in number of suppliers to dealt with is possible.

4. Minimum possible wastage

Perpetual Inventory System:

• It is a system of records. • It reflects the physical movements of

stocks & their current balance.• Bin cards & the stock ledger help the

management in maintaining this system.• Records of all issues and balances.

Also includes

• Continuous stock taking • Surprise checks

Merits:

• Provides better control• Acts as an internal check

mechanism• Assures minimum of

investment at least cost

Timely detection of errors & discrepancies.

Preparation of final accounts at any time is possible.

Demerits:

• Not suitable for small units• More paper work• Actual stock taking may not be

possible in true sense

VED Analysis:VED- vital, essential &

desirable- analysis is used primarily for control of spare parts. The spare parts can be divided into 3 categories-

1-Vital2-Essential3-DesirableDepending upon their

criticality for production.

Continue….

• Cost of maintaining stores; • Likely fluctuation in prices;• Seasonal nature of supply of material;• Restriction imposed by Govt.;• Possibility of change in fashion and habit.

V - The spares, the stock-out of which even for a short time will stop production for quite sometime are vital spares.

E - The spares, the absence of which cannot be tolerated for more than few hours or a day & which are essential for the production to continue, are essential spares.

D - The desirable spares are those spares which are needed but their absence for even a week or so will not lead to stoppage of production.

FNSD Analysis:FNSD analysis divides the items of stores into 4

categories in the descending order of importance of their usage rate.

‘F’ stands for fast moving items that are consumed in a short span of time.

‘N’ stands for normal moving items which are exhausted over a period of a year or so.

‘S’ indicates slow moving items which are not issued at frequent intervals & are expected to be exhausted over a period.

D’. means dead items & the consumption of such items is almost nil.

HML Classification:

– The HML classification is similar to the ABC classification, except for the fact that instead of consumption values of

items, their units values are considered.Items are classified on the basis of their unit value into:

H= High value items

M= Medium value items

L=Low value items

XYZ Classification:

• Based on the closing inventory value of different items.

• Such classification is done every year at the time of annual stock taking .

• Items having highest inventory valuation are classified as X, while with low investment are termed as z. Other items are the y items whose inventory value is neither too high not too low.

Perpetual Inventory system

• Maintenance of records of all physical movements of stock

• Continuous stock -taking • Surprise checks

Let us recaptualise

• ABC - emphasizes % value of consumption• JIT - purchase only when demanded• VED - criticality for production• FSDN - frequency of use• HML – unit value of stock• XYZ – closing value of different items