AN

ASSIGNMENT
ON
OPERATIONS RESEARCH
INVENTORY CONTROL

SUBMITTED BY:HITESH R. SHARMA

ISBE-A/SS/2010-12
ROLL NO:-11

SUBMITTED TO:PROF. YASH SHRIDHAR

Inventory Control
Inventory is tangible property or assets held
for sale in the ordinary course of business or
in the process of production for sale or
for consumption in the production of goods or services for sale
including maintenance supplies and consumables other than
machinery spares
Inventory comprises of raw materials, stores & spares, work-inprocess and finished goods
Inventory control includes planning, organizing and controlling
purchase and storage to ensure availability in terms of quantity,
quality, timeliness at least cost
Monitoring level of inventory with respect to production and
sales
Releasing material in a systematic manner to ensure quality at
least cost and reduce wastage / obsolescence
Analyze inventory levels and suggest optimal and alternate uses
of material including value engineering
Ensure physical stock taking to avoid pilferage
Provide information for inventory valuation

Techniques of Inventory Control

ABC Analysis
Economic Order Quantity (EOQ)
Stock Levels minimum, maximum, reorder level, reorder
quantity
Inventory Turnover Ratio
Slow and Non-Moving Items
Purchase, Storage and Issue Procedure
Two Bin System
Perpetual Inventory Records and Continuous Stock Verification
Budgetary System

ABC Analysis
A: 70% value, 10% items
B: 20% value, 20% items
C: 10% value, 70% items
Ensures control on high value items
Saves time and cost of monitoring
Reduces total investment in inventory
Facilitates faster decision making
Better utilization of resources

Better physical control of stock

Economic Order Quantity (EOQ)

Level at which the ordering and carrying costs are minimum. At
EOQ, the ordering and carrying costs are equal.
Ordering Cost includes costs for placing an order, transportation,
receiving goods and inspecting goods
Ordering Cost reduces with order size
Carrying Cost includes costs for storage space, handling
materials, insurance, obsolescence and personnel.
Carrying Cost increases with order size
Dependent on periodicity and annual material consumption
EOQ determines quantity to be ordered at a given time

EOQ Technique
Assumes prior knowledge of annual usage, constant usage rate,
constant ordering cost, constant carrying cost and zero lead /
delivery time
EOQ can be determined by graphical, tabular or formula method
Find the level at which total of ordering and carrying cost is
least or ordering cost equals carrying cost
EOQ = (2AO / C) where A = Annual Consumption, O =
Ordering Cost per order and C = Carrying Cost per order
EOQ = (2AO/IP) where I = Inventory or Stock Holding Cost
(as % of average stock value) and P = Price per unit
Economic Order Frequency (in days) = 365 / (Number of orders
per year)
Total annual ordering and carrying cost at EOQ = (2AOC)

Stock Levels
Maximum Stock Level is the maximum stock level that can be
held in store.
It avoids cost of over-stocking such as costs for storage,
investment, insurance and risk of obsolescence
Dependent on reorder level, reorder quantity, rate of
consumption, reorder period, availability of funds and storage
space, cost of storage, insurance, obsolescence, price fluctuation,
etc
Formula: Maximum Level = Reorder Level + Reorder Quantity
(Minimum Consumption x Minimum Reorder Period)
Minimum Stock Level is the level below which the stock should
not be allowed to fall
Dependent on reorder level, rate of consumption and reorder
period
Formula: Minimum Level = Reorder Level (Normal
Consumption x Reorder Period)
Reorder Level is the level of stock at which fresh replenishment
order should be placed
Dependent on consumption rate, reorder period and minimum
level

 Formula: Reorder Level = Maximum Consumption x Maximum

Reorder Period OR Minimum Level + (Normal Consumption x
Reorder Period)
Average Stock Level = Minimum Level + Reorder Quantity
OR (Minimum Level + Maximum Level) / 2
Danger Level is the level at which only emergency material
issue is done (normal material issue is stopped)
It is a level at which urgent ordering action is required
If Danger Level is below Minimum Level, urgent corrective
action is required
If Danger Level is above Minimum Level, it calls for preventive
action
Dependent on rate of consumption and reorder period
Formula: Normal Consumption Rate x Maximum Reorder
Period for emergency purchases

Inventory Turnover Ratio

Indicates the speed with which inventory is consumed
A high ratio indicates fast moving stock, low ratio indicates
slow moving stock
Inventory Turnover Ratio = Materials Consumed / Average
Stock Held expressed in times
Materials Consumed = Opening Stock + Purchases Closing
Stock
Average Stock = (Opening Stock + Closing Stock)
Days of Inventory = 365 / Inventory Turnover Ratio
Can be computed for stock categories to determine fast moving,
slow moving, dormant or obsolete stock
Ideal level is determined with reference to level of other firms or
the industry average

Other Techniques
Two Bin System Bin has two parts, the smaller one for reorder
stock level and the other for the remaining material
Issues are made from the larger bin, fresh order placed when it
become empty, material used from smaller bin till replacement
received and filled
Periodic Inventory System Physical stock taking done
periodically, requiring shut down
Records then physically reconciled
Perpetual Inventory System Records updated at every receipt
and issue
Done using bin cards and stores ledger
Continuous stock taking done by random checks of the bin cards
and stores ledger
Releasing material in a systematic manner to ensure quality at
least cost and reduce wastage / obsolescence
Analyze inventory levels and suggest optimal and alternate uses
of material including value engineering
Ensure physical stock taking to avoid pilferage
Provide information for inventory valuation