Unit-1 INVENTORY CONTROL

Thus the basic motive of implementing inventory control methods is:

 To minimize wastage and over consumption

 To keep a good and even flow of the intake and issue of stock

The art of costing probably originated during the world wars, when war
profiteers realized that controlling an expenditure even before it is
incurred, is much more profitable and saves a lot of resources. This nature
of cost accounting has proved to be advantageous as it overcomes the
demerits of financial accounting, which aims at just recording transactions,
after they have taken place.

Methods of Inventory Control

The following are the primary stock control methods that are often used by
companies in their production operations. All these methods are well
established and have been used in production industry for quite a long
period of time.

Min-Max Plan: In min-max plan, the cost accountant who is in charge of

the inventory control, establishes two levels, the minimum and maximum
level of stock. When the items/materials/units, reach the minimum level,
the order to replenish the stock is placed. The maximum level is the level
that the stock quantity should not exceed, as it will put a considerable
strain on the finances of the company and will also create problems such as
storage, wastage and over consumption.

Two Bin System: The two bin system is used to establish a connection
between the order and reorder procedures. As mentioned above, from the
point of view of a producer, uneven supply of stock and odd consumption is
not very healthy. Such unevenness is sorted by two-bin system. In such a
system, the stock is sorted into two bins, or piles. The first stock (bin 1), is
the larger of the two and is used up between the time period that lasts
from purchase of stock till the reorder. The second stock (bin 2), can be
used from the time when the reorder is placed till the order is actually
received. The second stock, has a considerable amount of stand by that can
be used for emergencies.

Order Cycling System: This system is based upon a review timetable.

According to this system, a review of the entire inventory is done at regular
intervals, such as 30 days, 60 days or 90 days. After the review is done, the
cost accountant views stock items with low quantities that will not last up
to the next review interval. The purchase order for such a stock item is
placed immediately. The order cycling system is not exactly foolproof and
one requires a rather experienced cost accountant to efficiently conduct it.

ABC Analysis: Any stock is segregated into different different sections.

These items are classified into 3 sections, A, B and C. The logic of
segregating these items into sections is that section A consists of limited
number of items that are very expensive. Section B has items that are not
expensive and the number of units that is to be ordered is also not very
large. The section C consists of numerous items, that have a low monetary
value. The logic behind such segregation is that every section is viewed
differently by the cost accountant, due the difference in order time, reorder
time and delivery period. For example, though the unites in section A are
less, their monetary value is also high and so is their delivery period. The
ABC analysis is a simple and probably the most effective of all stock control
methods.
Definition of ABC classification: A sorting of the items in an inventory in
decreasing order of annual dollar volume or other criteria. This array is then
split into three classes, called A, B, and C. Class A contains the items with
the highest annual dollar volume and receives the most attention. The
medium Class B receives less attention, and Class C, which contains the low-
dollar volume items, is controlled routinely. The ABC principle is that effort
saved through relaxed controls on low-value items will be applied to reduce
inventories of high-value items.

"ABC classification (ABC ranking) is a method of ranking items held in

inventory enabling particular attention to be given to those that, if correctly
managed, will be most damaging to the effectiveness or the efficiency of an
operation. Items are categorized according to their value of usage, i.e. their
individual value multiplied by their usage rate."

" The ABC classification process is an analysis of a range of items, such as

finished products or customers into three categories: A - outstandingly
important; B - of average importance; C - relatively unimportant as a basis
for a control scheme. Each category can and sometimes should be handled in
a different way, with more attention being devoted to category A, less to B,
and less to C."

MANUFACTURING RESOURCE PLANNING (MRP II)

Manufacturing resource planning (MRP II) is defined by APICS as a method

for the effective planning of all resources of a manufacturing company.
Ideally, it addresses operational planning in units, financial planning in
dollars, and has a simulation capability to answer "what-if" questions and
extension of closed-loop MRP.

This is not exclusively a software function, but a marriage of people skills,

dedication to data base accuracy, and computer resources. It is a total
company management concept for using human resources more
productively

Benefits

MRP II systems can provide:

  Better control of inventories
 Improved scheduling
 Productive relationships with suppliers

For design / engineering:

 Improved design control

 Better quality and quality control

For financial and costing:

 Reduced working capital for inventory

 Improved cash flow through quicker deliveries
 Accurate inventory records

MATERIAL REQUIREMENTS PLANNING (MRP)

Material requirements planning (MRP) is a production planning and

inventory control system used to manage manufacturing processes. Most
MRP systems are software-based, while it is possible to conduct MRP by
hand as well.

An MRP system is intended to simultaneously meet three objectives:

 Ensure materials are available for production and products are

available for delivery to customers.
 Maintain the lowest possible level of inventory.
 Plan manufacturing activities, delivery schedules and purchasing
activities

The scope of MRP in manufacturing

The basic function of MRP system includes inventory control, bill of

material processing and elementary scheduling. MRP helps organizations to
maintain low inventory levels. It is used to plan manufacturing, purchasing
and delivering activities.

"Manufacturing organizations, whatever their products, face the same daily

practical problem - that customers want products to be available in a shorter
time than it takes to make them. This means that some level of planning is
required."

Companies need to control the types and quantities of materials they

purchase, plan which products are to be produced and in what quantities and
ensure that they are able to meet current and future customer demand, all at
the lowest possible cost. Making a bad decision in any of these areas will
make the company lose money. A few examples are given below:

 If a company purchases insufficient quantities of an item used in

manufacturing (or the wrong item) it may be unable to meet contract
obligations to supply products on time.

 If a company purchases excessive quantities of an item, money is

wasted - the excess quantity ties up cash while it remains as stock
and may never even be used at all.
 Beginning production of an order at the wrong time can cause
customer deadlines to be missed.

MRP is a tool to deal with these problems. It provides answers for several
questions:

 What items are required?

 How many are required?
 When are they required?

MRP can be applied both to items that are purchased from outside suppliers
and to sub-assemblies, produced internally, that are components of more
complex items.

The data that must be considered include:

 The end item (or items) being created. This is sometimes called
Independent Demand, or Level "0" on BOM (Bill of materials).
 How much is required at a time.
 When the quantities are required to meet demand.
 Shelf life of stored materials.
 Inventory status records. Records of net materials available for use
already in stock (on hand) and materials on order from suppliers.
  Bills of materials. Details of the materials, components and sub-
assemblies required to make each product.
 Planning Data. This includes all the restraints and directions to
produce the end items. This includes such items as: Routings, Labor
and Machine Standards, Quality and Testing Standards, Pull/Work
Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size,
Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other
inputs.

Outputs

There are two outputs and a variety of messages/reports:

 Output 1 is the "Recommended Production Schedule" which lays out

a detailed schedule of the required minimum start and completion
dates, with quantities, for each step of the Routing and Bill Of
Material required to satisfy the demand from the Master Production
Schedule (MPS).
 Output 2 is the "Recommended Purchasing Schedule". This lays out
both the dates that the purchased items should be received into the
facility AND the dates that the Purchase orders, or Blanket Order Release
should occur to match the production schedules.