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Inventory Control.

It refers to generating maximum profits with minimum inventory investment,


without affecting customer satisfaction levels. It is also about knowing where all your stock is
and ensuring everything is accounted for at any given time. Also, it involves keeping track of the
stock that is already in the warehouse, such as what products are being stocked and how much
of a particular item is available. It also involves aspects of warehousing design, such as knowing
where anything is and ensuring that the products that the products are stored well. Measuring
and regulating inventory according to predetermined norms such as economic lot size for order
or production, safety stock, minimum level, maximum level, order level etc is the process of
inventory control. Inventory control pertains primarily to the administration of established
policies, system and procedures in order to reduce the inventory cost. Also a method of
maintaining of stock at a level at which purchasing and stocking costs are at the lowest possible
without interference with the supply.

According to Geda (2014), inventory control system has helped companies form preventing
inventory from becoming too high, or dwindling to levels that could put the operation of the
company to jeopardy. With inventory control system, the proper relationship between sales and
inventory can be well maintained. An effective inventory control uses two key elements to be
properly implemented: modern software program and physical engineering components. He
also pointed out the ignorance that the inventory can be costly. Furthermore, some
organizations re still using the manual inventory tracking when they should already be using the
automated one. This led to the automated inventory management which became the most
critical aspects of the business. It is also an effective way for monitoring and tracking different
materials that are transferred in and out of a company’s warehouse or establishment usually for
accounting purposes. It is important for a company to monitor all the transactions and
movement of materials every time it is transferred in and out of the room.

Geda, R. T., (2014). Inventory Planning and Control. Inventory Management, 14-18.

ABC Analysis

According to Hadi-Vencheh (2010), inventory classification using ABC analysis is one of the most
widely used techniques in organizations. ABC classification allows an organization to separate
stock keeping units (SKUs) into three groups: A the most important; B, important; C, the least
important the purpose of classifying items into groups is to establish appropriate levels of
control over each item [1, 2]. The major advantage of ABC analysis is the easiness of use and
simplicity to understand. The items are classified according to the annual use value, which is the
product of annual demand and the average unit price [3]. The classification of items into A,B,
and C groups has generally been implemented according to one criterion. For inventory items,
the criterion is frequently the annual dollar usage of the item. However, it has been generally
recognized that the traditional ABC analysis has a serious drawback that may inhibit the
effectiveness of the procedure in some situations.
Hadi-Vencheh, A. (2010). An improvement to multiple criteria ABC inventory classifcation.
European Journal of Operational Research, 201(3), 962-965.

Gulsen and Ozkan (2013) treat ABC analysis as a clustering problem in which the inventory items
that have to be categorized are partitioned into three "fuzzy" clusters by minimizing some
appropriate clustering function. Fuzzy clustering is the appropriate technique to use given that it
is possible for some inventory items to belong to more than one cluster. The center of a cluster
is described by an n-dimensional vector, where n is the number of criteria to be used for the
ABC analysis. Each inventory item is similarliry an n-dimensional vector. Membership of the
clusters is indicated by a membership value that is between 0 and 1. The objective to be
minimized is the distance between the current centers of each cluster and each inventory item
weighted by the membership value modified by a "fuzzifier". The algorithm starts with initial
values for the cluster centers, followed by calculating a membership value for each inventory
item. This allows recalculation of the cluster centers. If the new cluster centers are within some
(?) of the current cluster centers, the algorithm stops; otherwise, the next iteration begins with
the new cluster centers. Once the stopping rule has been met, the output of the algorithm is the
membership value for each item for each cluster. An item is assigned to a clustee based upon
the highest of its membership values. Thus, at the end of the process, three (for three
categories) clusters will have been identified. The next step is to label the clusters appropriately.
Labeling is done on the basis of the average criterion value within a cluster. This is calculated by
adding all the criterion values for all items within a cluster and dividing by the number of items
in the cluster. The cluster with the highest average criterion value is labeled A, the next highest
as B, and the last one as C. In actual application of the method, it is suggested that item scores
on each criterion be rescaled to a 0-1 scale using a simple linear transform.

Economic Order Quantity. This is used to identify the order size that will minimize the annual
cost of holding inventory and the ordering cost. This is based on the assumptions that the unit
price of the item is not included in total cost. It is not affected by the order size unless the
quantity discount is involved in one of the factors. If the holding cost is specified as a percentage
of the unit cost, then the unit cost is indirectly included in the total cost. The need for the
purchase of such materials calls for some decision regarding the number of units of a particular
material. How much to order and when to order, and the time of the delivery are crucial
decisions that are faced by those in the procurement units.

Ordering more materials would avoid the possibility of stock-outs that will cause disruption of
production schedule and lost customer orders, we have to balance the cost involved with the
other cost that is associated with more materials in inventory. The balancing process requires
careful analysis of the production schedules, the market demand and the availability of material
inputs that would be necessary to meet those demands. The analysis will be done by the help of
documents in written or by system that included all necessary information about a company’s
stock like what is the most demand product, quantity needed, and price of the product
(Bowersox, 2013)

Bowersox, D.J., (2013). Economic Order Quantity: Safety Stocks. Supply Chain Logistic
Management, 154-161 Book

Tracking materials would avoid the possibility of overstock that will cause depreciation of
products, lost items, inefficiently used resources, and other problems that lead to higher costs.
It’s always a good idea to look for costs in your organizations that can be reduced without
sacrificing the quality of your product. (Lockard, 2013)

Lockard, R., (2013). How to Manage Inventory: Economic Order Quantity, 26-27 Book

The economic order quantity is framed for analyzing the effect of variable ordering costs with
deteriorated items. The objective of this model is to maximize the net profit so as to determine
the order quantity. For any given number of replenishment cycles the existence of a unique
optimal replenishment schedule can be obtained and further the concavity of the net profit
function of the inventory system in the number of replenishment is established. The numerical
analysis shows that an appropriate policy can be benefit the retailer and is important especially
for the deteriorating items. (Pattnaik, 2014)

Pattnaik, M., (2014). Deteriorated Economic Order Quantity (EOQ) Model with Variable
Ordering Costs, 17-19 Unpublished Theses

According to Pontius (2017), inventory control refers to all "aspects of managing a company's
inventories: purchasing, shipping, receiving, tracking, warehousing and storage, turnover and
reordering." Inventory control is such a critical piece of an organization's operations and bottom
line that it is too important to leave to human error or antiquated systems. That is why so many
companies opt to invest in inventory control systems, so that allof the components of inventory
control are managed by one integrated system.

Pontius, N. 2017. Asset Management

Reorder point. The reorder point is a signal that tells you when to place an order. Calculating
the reorder point requires knowledge of the lead time between order and receipt of
merchandise. It may be influenced by the months of supply or total peso ceilings on inventory
level you should place an order to reduce inventory costs and have an adequate stock of goods
with which to satisfy customer orders.

According to Choo (2015), reorder point control or reorder level control is the inventory level of
an item which signals the need of replenishment order. The reorder point is classically viewed as
the sum of lead demand plus safety stock. At a more fundamental level, the reorder point is
quantile forecast of the future demand. The calculation of an optimized reorder point typically
involves the lead time, service level, and the demand forecast. The reorder point is an important
not only for inventory optimization but for inventory automation as well.

Choo, S., (2015). Reorder point control. Supply Chain Management, 215 Book

Song (2012) said that ordering capacity refers to the upper limit imposed on the order quantity
when making replenishment decisions. Another closely related concept is the storage or
warehouse capacity for storing materials. When the order sizes are constrained by bounds, it is
called bounded/limited inventory problem.

*Song, D. (2012). Optimal control and Optimization of Stochastic Supply Chain Systems

Safety stock. When there is uncertainty in demand, safety stock must be considered. Safety
stock are extra inventory held to protect against randomness in demand or lead time. Safety
stock is needed to cover the demand during the replenishment lead time in case actual demand
is greater than expected demand. (Benton, 2010)

Benton, Jr. W.C., (2010). Safety Stocks. Purchasing and Supply Chain Management, 85-91 Book

No matter how closely you manage your product operations, some factors can always remain
outside of your control. Certain occurrences like a damaged or lost package of the fulfillment of
an incorrect order could always throw your business for an unexpected loop. By closely
monitoring your inventory levels and sales forecasts, you can properly anticipate these
happenings by keeping an effective amount of safety stock on hand at your warehouse. This
safety stock could also some prove beneficial in the event of a product shortfall due to demand
having sharp increase and the manufacturer being unable to get the desired product to your
warehouse within the promised delivery time. Safety stock provides your business with
increased flexibility.

According to Kumar et al. (2011) , the most important variable to consider in deciding how much
of an item to keep in stock is the variance in demand from one time period to another. The
larger the variance in demand, the larger should be the safety stock that should be kept for that
item to prevent a stock-out when there is an upsurge in demand. Most retailers keep extra
inventory for those items whose average sales are higher and not for those items whose
average sales are lower but variance in demand is higher. The onlu variable to be considered in
deciding upon a safety stock or extra stock over and above the average demand is the variance
in demand between time periods.

Kumar, A. Meenakshi, N. (2011). Marketing Management, 2nd Edition

Glenday et al., (2014) Between the lower limit and zero stock is what is known as safety stock.
With batch logic, safety stock is calculated based on various considerations like production lead
time and reliability, sales forecasting accuracy, and service-level targets. The safety stock is
there because there is a set amount of time, called lead time, between production triggered by
the reorder point and when the product is actually received.

Glenday, I. F., Sather, R. (2014). Lean RFS (Repititive Flexible Supply) : Putting the Pieces
Together

Research Literature

In the study of De Chavez et. al (2015) attempt to assess the effectiveness of inventory control
on Auto Parts retail business in Lipa City using descriptive survey method. The respondents of
the study were 38 auto parts retail business in Lipa City. Based on the results obtained by the
study, different aspects of inventory planning had been found very effective by the selected
respondents were ranked as follows (1) “monitoring the arrival of goods,” (2) inspecting all
supplies that arrived in the business area in terms of quantity and quality,” (3) “guidelines for
processing or receiving supplies were strictly followed by the employees as evident,” (4) “having
a complete and updated inventory list,” and (5) checking of all goods prior to shipping” were
also effective. It also indicated in the study that the cash flow improvements also case from
purchasing the lowest cost inventory save the company but it also allows companies to develop
a cost advantage in the economic market.

De Chavez, J. L., Castro, P.H., (2015). “Assessment of Inventory Control on Auto Parts retail
business in Lipa City”.

The study of Flores et al (2017) entitled “Effectiveness of Inventory Planning and Control of
National Food Authority Warehouse in Batangas” used the descriptive method of research with
a total of 43 respondents which are involved and knowledgeable in the practice of inventory
planning and control. Based on the results obtained by the study, different aspects of inventory
planning had been found very effective by the selected respondents were ranked as follows: (1)
customer’s satisfaction, (2) forecasting needs, (3) successful storage, and (4) controlling cost.

Flores, J. A., Maranan, R., (2017). “Effectiveness of Inventory Planning and Control of National
Food Authority Warehouse in Batangas”.

In the study of Arellano et al., (2017) entitled “Extend of utilization of Inventory Management of
Selected Multi-purpose Cooperatives in Batangas”, the scope was multipurpose cooperative
within top 10 places in Batangas Province. It was found out that the extent of utilization of
inventory management in terms of inventory counting system, demand forecasts, and lead time
information and cost information had significance differences when grouped according
capitalization but no significant differences were find out when this variable were grouped
according to number of employees. On the other hand, classification system was shown to have
significant difference to number of employees but no significant difference when grouped
according to capitalization. The proposed action plan was provided for each variable to improve
the overall utilization of inventory management and it includes some practices that would guide
and help multi-purposes to effectively utilize their inventory management.

Arellano et al., (2017). “Extend of utilization of Inventory Management of Selected Multi-


purpose Cooperatives in Batangas”. Batangas State University.

The study of Makalintal et al., (2015), entitled “Risk Inventory Management of Imported raw
materials encountered by JG Summit Petrochemical Corporation, basis for Inventory
Management” has no significant relationship between the assessment of the respondents and
their variable in terms of frequency, costs and severity. The researcher of the study conducted
the study to present deeper understanding of the inventory management of imported raw
materials encountered by JG Corporation. The study used descriptive method and the
participants were from the different department involved in inventory management of raw
materials. The proposed inventory management was mainly on how to lessen the risk
encountered on the inventory management of raw materials and how to improve the inventory
management practices of the company.

Makalintal et al., (2015). “Risk Inventory Management of Imported raw materials encountered
by JG Summit Petrochemical Corporation, basis for Inventory Management”. Batangas State
University.

The study entitled “Analysis of Inventory Control System: A Case Study at Air Processing Ghana
Limited” by Nicholas Yamoah (2012), has an objective developing an economic order quantity
model that will be used to determine number of units to be order at the time and the reorder
point, that Is the level to which stocks are allow to fall before ordering for the various imported
gases. The study used secondary data from Air Processing Ghana Limited. The researcher
recommended that in order to manage inventory effectively, the management of Air Processing
Ghana Limited needs to employ inventory control model such as Economic Order Quantity
Model to obtain optical ordered quantities for its gases.

Yamoah, N., (2012). Analysis of Inventory Control System: A Case Study at Air Processing Ghana
Limited”.

Synthesis

The study of De Chavez entitled “Assessment of the Effectiveness of Inventory Control on Auto
Parts Retail Business in Lipa City” is related in the study of the present researchers since it shows
how effective the inventory planning. Since the study is about control which is one of the
subjects of the present study, it can be reliable source that may be used in making questionnaire
and so on. The study of De Chavez contains the different aspects of inventory planning which is
found very effective and efficient. The study shows that it depends on the cost of inventory to
determine the economic level.
The study of Makalintal et al. (2015) is related to the present study because it used descriptive
type of research. However, the study is concerned with the frequency, costs and severity, while
the present study focus on assessing the inventory control system of rice retailers in terms of
safety stock, reorder point, economic order quantity and ABC analysis.

Meanwhile, the study of Arellano et al. (2017) is similar to the present study because it was
revealed that the respondents have similar responses when grouped according to profile
variable.

The present study shows similarly with the study of Nicholas Yamoah because it both assessed
inventory management of certain business. The present study aims to develop action plan
regarding the inventory control system of rice retailers while the latter study aims to develop an
inventory model that will benefit the Air Processing Ghana.