INVENTORY CONTROL.

Introduction, Different inventory

control techniques and other
relating terms.
Introduction

 Inventory means all the materials, parts,

supplies, equipments, tools and in
process or finished products, recorded
and kept in organization for some period
time.
 Inventory is essential part of every
organization/business/Manufacturing
unit.
Definitions.
 Inventory is a list of names, quantities
and /or monetary values of all or any
group of items.
 Inventory is a detailed list of those
movable items which are necessary to
manufacture a product and to maintain
the equipment and machinery in good
working order. The quantity and value of
every item is also mentioned in the list.
Definitions.

 Inventories are piles of raw materials

and finished goods in warehouse.
 All the materials, parts and in-process or
finished products recorded on the books
by an organisation and kept in its stores,
warehouses and plants are known as
inventories.
Characteristics/ Importance.

1. Inventories serves as cushions to

absorb shocks.
2. Inventory for any organisation is
necessary evil.
3. Inventories are result of many
interrelated decisions and policies of
an organisation.
4. Inventory provides production economy
Inventory Classification

 Classification of inventory according to

functions is as follows,
2. Transit Inventories.
3. Cycle Inventories.
4. Buffer Inventories.
5. Decoupling Inventories.
6. Inventory as per the nature of items.
Inventory Control

 Inventory control keeps track of

inventories. TOO MUCH, TOO LITTLE
or BADLY BALANCED inventory is
avoided as everything has a cost.
 Too much, leads to undue carrying
charges in form of taxes, insurance,
storage, obsolescence, depreciation and
undue blockage of capital.
Inventory Control
 Too little, involves frequent ordering,
loss of quantity discounts, higher
transportation costs, it may not fulfill the
future/emergency requirement.
 In today’s dynamic world, situations are
changing fast. Too little may become too
much very fast.
 To maintain the balance of too much and
too little is critical task and can be done
by implementing inventory control.
Definitions of Inventory Control.
 Inventory control is a system of
ordering based on the maintenance
of stock in a store using a re-order
rule based on stock levels.

 Inventory control is concerned with

various items stocked at pre-
determined level or within some
safety limits.
Definitions of Inventory Control.

 Stock control is often said to be an

exercise in the art of compromise
balancing the conflicting needs of
1. Economical Production.
2. Quick Delivery and
3. Low inventory value.
Factors Affecting.

 The decision on inventory leads an

impact on the whole organization. The
number of factors can be divided in the
following categories.
2. Characteristic of Manufacturing System
3. Amount of Protection against
shortages
4. Organizational factors
5. Other factors.
Factors Affecting.

 Characteristic of Manufacturing system

The nature of production process,
production planning, plant layout have
an effect on inventory policy.
1. Degree of specialization of product.
2. Process Capability and flexibility.
3. Production capacity and storage.
4. Quality reqts., shelf-life, obsolescence.
5. Nature of production system.
Factors Affecting.
 Amount of protection against shortage
Due to fluctuation in demand of the product,
there should be protection at supply end.
Buffer stocks helps to do achieve this.
1. Change in size and frequency of orders.
2. Unpredictability of sales.
3. Structure of distribution pattern.
4. Costs associated with failure to meet
demand
5. Accuracy of demand forecast.
Factors Affecting.

1. Organizational Factors:
These are certain factors, which are related
to policies, traditions and environment of org.
1. Organizational structure.
2. Amount of capital available for stock.
3. Rate of return on capital on the opportunity
cost.
4. Storage and warehousing policies.
Factors Affecting.

1. Other factors.
These are related to overall environment of
organizations in the specific region.
1. Inflation.
2. Strike situations.
3. Wars, or some other natural calamities like
floods, earthquakes, etc.
4. Differences between input and output.
Types of inventory analysis.
 Different organizations follow different
inventory analysis or inventory control
system. Some of them are;
2. ABC analysis.
3. HML
4. VED
5. SDE
6. FSN.
ABC Analysis.
 ABC (Always Better Control)
 It is based on the concept, “Thick on the best
and Thin on the Rest.”
 The objective of ABC control is to vary the
expenses associated with maintaining
appropriate control according to the potential
savings associated with a proper level of such
control.
 It is one of the widely used techniques of
inventory control.
ABC Analysis.
 The ABC approach is a means of categorizing
inventory items into three classes ‘A’ , ‘B’ and ‘C’,
according to the potential amount to be controlled.
 For this, annual consumption value is calculated by,
Annual Usage Value
= Annual Requirement X Per Unit Cost.
 The items of inventory are then categorized under
 Items functionally critical, no matter how little they
cost.
 Items important because their usage value is high.
 Items having average usage value.
 Items having low usage value.
ABC Analysis.
 The following procedure is suggested for
developing an ABC analysis:
2. List each item carried in inventory by number
or some other designation.
3. Determine the annual volume of usage and
rupee value of each item.
4. Multiply each item’s annual volume of usage
by its rupee value.
5. Compute each item’s percentage of the total
inventory in terms of annual usage in rupees.
ABC Analysis.
 Procedure (CONTD..)

3. Select the top 10% of all items which have

the highest rupee percentages and classify
them as ‘A’ items.
4. Select the next 20% of all items with the next
highest rupee percentages and designate
them as ‘B’ items.
5. The next 70% of all items with the lowest
rupee percentages are ‘C’ items.
HML Analysis.
 TheHML classification follows the same
procedure as is adopted in ABC
classification.
H = HIGH;
 M = MEDIUM;
 L = LOW.

 Onlydifference is that in HML, the

classification unit value is the criterion
and not the annual consumption value.
HML Analysis.
 The items of inventory should be listed in
the descending order of unit value and it
is up to the management to fix limits for
three categories.
 For examples, the management may
decide that all units with unit value of Rs.
2000 and above will be ‘H’ items, Rs.
1000 to 2000 ‘M’ items and less than Rs.
1000 ‘L’ items.
VED Classification.
 VED Classification
 While in ABC, classification inventories are
classified on the basis of their consumption
value and in HML analysis the unit value is the
basis, criticality of inventories is the basis VED
classification.
 The VED analysis is done to determine the
criticality of an item and its effect on
production and other services. It is specially
used for classification of spare parts.
VED Classification.
 VED Classification
 V= Vital;
 E= Essential;
 D= Desirable.

• If a part is vital it is given ‘V’ classification, if it

is essential, then it is given ‘E’ classification
and if it is not so essential, the part is given ‘D’
classification.
• For ‘V’ items, a large stock of inventory is
generally maintained, while for ‘D’ items,
minimum stock is enough.
FSN Classification

 FSN Analysis
 Here, classification is based on the
pattern of issues from stores and is
useful in controlling obsolescence.
 F = Fast moving slow moving and non-
moving.
 S = Slow Moving;
 N = Non Moving.
FSN Classification.
 To carry out an FSN analysis, the date of
receipt or the last date of issue, whichever is
later, is taken to determine the number of
months, which have lapsed since the last
transaction.
 The items are usually grouped in periods of 12
months.
 FSN analysis is helpful in identifying active
items which need to be reviewed regularly and
surplus items which have to be examined
further.
 Non-moving items may be examined further
and their disposal can be considered.
Codification
 THERE SHOULD BE A PLACE FOR
EVERYTHING AND EVERYTHING
SHOULD BE IN ITS PLACE.
 Depending on size and nature of
organization, the stores have variety of
items.
 It may not be possible to remember and
locate the items in stores easily.
 Proper identification of goods, helps
quick location of goods in the stores.
Codification

 Proper identification can be done by

simplified coding.
 Coding can be done by many ways,
some of them are;
3. Tagging with some piece of cloth/paper
4. Fixing of labels on items.
5. Embossing of Coded mark on goods
6. Painting or Color Coding of items.
Methods of Coding.

 Generally alphabets, numerals or

combination of two is used for coding.
 Some of the methods for coding are as
follows:-
3. Mnemonic Method.
4. Random Method.
5. Scientific Method.
Methods of Coding
 Mnemonic method:
Here the alphabets closely related to the
name of item are used.
 Random Method:

Here both alphabet or numerals are used

randomly. This is used at place of less items.
 Scientific Method:

Here items are first divided into group and

then they are further divided into sub-groups.
Method of Codification.
 Sometimes LOCATION coding is used
by the organization. The store is divided
into different blocks on longitude and
latitude method, and named.
 The location can also be identified by
number of warehouse, row number,
column number, rack number, shelf no.
etc.
 Location of any item inside the store can
be decided in 3 ways.
Method of Codification

1. Fixed Location.
Some fixed place is designated to each
class of item. The basis can be
 Supplier wise.
 Item wise.
 Utility wise.
3. Random location.
The items are placed as per the space
available at the time of receipt of goods.
Method of Codification

1. Zonal Location.
under this the whole inventory is
divided into 3 zones:-
 Bulk zones:- for bulky goods and raw
materials.
 Reserve stocks:- for reserve/emergency
items.
 Indirect Materials:- for spares and
consumable items.
Principles of Codification
 There must be a consistency in the point of view so
that, the basis of classification should remain
unchanged for all items.
 The system of classification must cover the entire
range of items for which, it is devised and at the same
time, allow reasonable scope for extension.
 The principle of mutual exclusiveness which means,
that there must be only one code number possible for
any item.
 The system developed should be simple enough to be
understood and easily adopted by the non-specialist
personnel.
Advantages of Codification.

 There are many advantages of

codification as it simplifies the work of
management. Some of them are
2. Facilitates quick identification.
3. Mechanized accounting is possible.
4. Eliminates chances of duplication of
items.