INVENTORY CONTROL

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Inventory control
Whether it is a manufacturing unit or a sale outlet, one of the pressing problem faced by the management is
the control of inventory.
• Many companies fail each year due to the lack of
adequate control of inventory in their stores. Whether it is raw material used for manufacturing a
product or products waiting for sale, problem arises when, too few or too many items are stored
in the inventory.
• If the number of items stored are more than what are required, it is a loss of investment
and wastage of storage space which again results in the loss of investments. In the case of excess
inventory, items may depreciate, deteriorate, or become obsolete.
• But if less number of items are kept in store, it can result in the loss of sale or reduction in the rate of
production, which ultimately results in the loss of business. In this case there will be loss of profit because of
loss of sale and loss of goodwill due to unfilled demand.
• Also stock has to be replenished frequently which involves replenishment cost. Then question arises, how
much to store in the inventory at a given span of time. This in turn depends on what is the annual demand and
how much time it takes to replenish the inventory by the supplier. There can be uncertainties, such as strike,
weather calamities, price hikes and so
on, in replenishment of inventory. While computing the inventory for storage, all these factors are
to be taken into account.
Thus basic problem in inventory control is to optimize the sum of the costs
involved in maintaining an inventory.
• Backordering is the case when inventory goes to zero and
orders are received for the sale of item, or raw material is
required for production.
• When fresh inventory arrives, first back orders are
completed and then regular orders are entertained. In this
case, raw material is required for production purpose and
inventory goes to zero, production stops, which is
• a loss to firm.
• But if inventory is of items, which are for the sale, goodwill
of customer is lost in his case and even there is a possibility
that customer will also be lost. Thus backordering case
should always be avoided
• Inventory models used with this approach can be
divided into two broad categories:
• deterministic models and stochastic models, according
to the predictability of demand involved.
• If the demand in future period can be predicted with
considerable precision, it is reasonable to use an
inventory policy that assumes that all forecasts will
always be completely accurate. This is the case
of known demand where a deterministic inventory
model would be used.
• However when demand can not be predicted very well,
then in this case stochastic inventory model will be
required to be used, where demand in any period is a
random variable rather than a known constant