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Inventory Cost Control Techniques

Inventory Cost Control Techniques

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Published by bakerybazar
Inventory cost locks lots on finances in manufacturing . thus reducing inventory to reduce cost of inventory are major cost reduction strategies for companies
Inventory cost locks lots on finances in manufacturing . thus reducing inventory to reduce cost of inventory are major cost reduction strategies for companies

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Published by: bakerybazar on Aug 16, 2011
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Inventory cost control techniques
Listed below are few important tools and techniques to control inventory cost
 ABC Analysis 
ABC analysis is a important tools in hand of purchase manager who has to handlethousands and lakhs of items of any manufacturing units as per scale . Purchase manager can ask for ABC analysis for items for the unit and can put greater control or do more value analysis for the items which are categorised A , other categoriesare B and C . These categories can be made by analyzing annual consumption of items in terms of volumeand cost done in descending order and calculating the % contribution of items on total cost. Results would throw items which taken in account would constitute 70- 80% of the totalvalue , these items would fall in categoryA , Balance which contributes to 25% would be putinto CategoryB where as balance items can be classified into categoryC . Importance of these Categories Category A items : Frequently ordered items with minimum of stock .Weekly controlstatements . Centralised purchasing and storage for any manufacturing unit . Materialplanning runs should accurately predict the quantity to be procured . Reduce the lead timefor such items . Eg Bearings in any light engineering unit. To be handled by senior procurement executive . Category B items: These items are moderately controlled and orders issued would bemaximum up to four or five . Periodic follow up and estimates done on annual consumption . Category C items: These items can be stocked for larger period and can be ordered in bulkwith one or two purchase order . Controls are least for such items and can be handled by junior executives . 
 Though most of the items which may fall in category C are of low volume and low cost butsometimes become critical if not monitored . For eg Belts in any light engineering unit . Stockout situation can occur if stocks are not monitored . For such instance one should have ageneral vendors which can supply these items on a sort notice even though one have to paysome premium for such service.
 Standardisation and Codification 
Any manufacturing unit have several items which are procured for prodction it can be rawmaterial , packaging , engineering items , stationeries , misc items ,chemicals , generalequipments etc , spare parts etc . All these items need to be tracked for annual consumptionand last price , stock hand , price compariso between two sources , po . Codification andstandardisation helps in getting all this information through ERP software which are nowalmost installed in every organisation . As these software requires codes for ordering ,issuance and despatch. Even finished good are codified for price variance , materialvariance , records , invoices and other datas related to production . Codification is a process of representing each item by a where by the digits indicates agroup , subgroup , location , nature of item etc . It could be numerical as well as alphabetnumeric . Each code should be unique and represent one item . Easy to understand . Codificationshould be concise , compact and consistent. 
 Popular systems for Codification are Kodak System Brisch System 
Standardisation is necessiated by the fact that the one cannot have numerous items for same usage hence standards are set for each items . It can be arrived upto by discussing itwith user s and vendors who can give enough insights on the most common standards used
in industry . Hence each items is defined by correct specifications such as length , wt ,density , thickness , power , capactites ,so on The process of Standardisation can help in simplyfing procurement process and varietyreduction . It would result in reducing unnecessary varieties and stadardising into mosteconomical size , grades , shapes ,colors , types etc. Thus Stadardisation helps in reducing inventory , better communication to vendors andusers .
 EOQ - Economic Order Quantity
Conventional order system relied on annual and monthly consumption pattern henceincreasing inventory level in stores , more large companies and organisation now have putsome sort of mathematical equation in there materials module purchase system where in onecannot order than more the economic order quantity .Its mathematical value arrived with anequation where values for cost of ordering , carrying cost, annual total demand and unitprice is taken into account to arrive at EOQ . 
Some of the definitions of EOQ 
EOQ is a mathematical formula designed to minimize the combination of annual holding costsand ordering costs. There is a lot of hype about just in time inventory systems (JIT), whichachieve smaller inventories through very frequent orders, but frequent ordering can oftenresult in an over-spending on ordering costs. Even though companies often miscalculatetheir ordering costs, which makes frequent ordering seem costly, EOQ is an important tool for determining what inventory should be.sourcewww.industrysource.com EOQ stands for Economic Order Quantity. EOQ is basically a level of inventory which will

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