INVENTORY CONTROL

Meaning of Inventory Control: Inventory control means to monitor the stock of goods used for
production, distribution and consumption. For a specific time period, stock of goods is placed at some
particular location. Stock of goods includes raw-materials, work in progress, finished goods, packaging,
spares, components, etc. It means maintaining the inventory at a desired level. The desired-level keeps
on fluctuating as per the demand and supply of goods.
According to Gordon: "It is the process whereby the investment in materials & parts carried in stocks
is regulated, with pre-determined limits accordance with inventory policy established by management."
Objectives:
1. To minimise capital investment in inventory by eliminating excessive stocks;
2. Ensure availability of needed inventory for continuous production & meeting consumer demand;
3. To provide a scientific basis for planning of inventory needs;
4. To tiding over the demand fluctuations by maintaining reasonable safety stock;
5. To maintain necessary records for protecting against thefts, wastes leakages of inventories.
Methods and Techniques of Inventory Control
1. ABC analysis: Always Better Control analysis is the classification & identification of different
types of inventories, for determining the degree of control required for each. In many firms it is
found that they have stocks which are used at very different rates. So items are classified under three
broad categories A, B and C, on the basis of usage, bulk, value, size, durability, utility, availability,
etc.; and should be controlled with due weightage to differential characteristics.
• The items included in group A involve largest investments and the inventory control should be most
severe to these items.
• C group consists of inventory items which involve relatively small investments although the number
of items remains large. These items deserve minimum attention of control.
• In B group that items are included which are neither of A nor C. This method can be explained by the
following exhibit.
Classification of Inventory Items:

Class No. of Items (per cent of total) Value of Items (per cent of total)

A 20 85
В 30 10
С 50 5
Total 100 100
It can be observed that there are comparatively few items in A but they constitute a large proportion of
the total rupee value; B items are in the intermediate range and C items are numerous but inexpensive.
A Items B Items C Items
1. Control Tight Moderate Loose
2. Requirements Exact Exact Estimated
3. Postings Individual Individual Group
4. Check Close Some Little
5. Expediting Regular Some None
6. Safety Stocks Low Medium Large

2. Economic order quantity: The basic decision in (EOQ) is to determine the amount of stock to be
ordered, at a particular time so that the total of ordering & carrying costs may be reduced to a
minimum point. A firm should place optimum orders & neither too large nor to small. It is the level
of inventory order that minimizes the total cost with inventory. It is based on four assumptions:
i. A firm has a steady and known demand of D units each period for a particular input.
ii. The firm consumes the input at a uniform rate.
iii. The costs of carrying stocks are a constant amount C per unit per period.
iv. The ordering costs inputs are a fixed amount O per order. Orders are delivered instantly.
A useful formula for calculating the optimum order quantity is:
EOQ = √2DO/ C
Whereas, D = Annual Demand, O = Ordering Cost and C = Carrying Cost
A firm has an annual inventory requirement of 10,000 units. The Ordering costs with placing an order
come to Rs. 200 per order & the carrying costs of stocks are expected to be Rs. 4 per unit.
Hence, D=10,000 units 0=Rs. 200 C=Rs. 4
EOQ = √2 x 10,000 x 200/ 4
= √10,00.000
= 1,000 units
3. Re-ordering level: It is also known as ‘ordering level’ or ‘ordering point’ or ‘ordering limit’. It is a
point at which order for supply of material should be made. This level is fixed somewhere between
the maximum level and the minimum level in such a way that the quantity of materials represented
by the difference between the re-ordering level and the minimum level will be sufficient to meet the
demands of production till such time as the materials are replenished. Reordering level: Re-order
level =Maximum Rate of consumption x maximum lead time
a) Maximum Level: Maximum level is the level above which stock should never reach. It is also
known as ‘maximum limit’ or ‘maximum stock’. It is to avoid unnecessary blocking up of capital in
inventories, losses on account of fall of materials, extra overheads & temptation to thefts etc.
Maximum Stock level = Reordering level + Reordering quantity - (Minimum Consumption X
Minimum re-ordering period)
b) Minimum Level: It represents the lowest quantity of a particular material below which stock should
not be allowed to fall. It must be maintained at every time so that production is not held up due to
shortage of any material. It this fresh order must be placed to replenish the stock.
Minimum Level = Re-ordering level - (Normal rate of consumption x Normal delivery period)
c) Average Stock Level: Average stock level is determined by averaging the minimum and maximum
level of stock. Average level =1/2 (Minimum stock level + Maximum stock level)
4. Just in Time (JIT): It is a production and inventory control system in which materials are
purchased and units are produced only as needed to meet actual customer demand. In just in time
manufacturing system inventories are reduced to the minimum and in some cases is zero.
• It is continuous improvement of non-value-adding activities identified & removed for the purposes
of reducing cost, improving quality & performance, improving delivery and adding flexibility.
• JIT originated in Japan. Its introduction as a recognized technique is generally associated with the
Toyota motor company, JIT being initially known as the “Toyota Production System”.
• In today’s competitive world shorter product life cycles, customers rapid demands & quickly
changing business environment is putting lot of pressures on manufacturers for quicker response
and shorter cycle times.
• Moreover, the company would have no goods still in process at the end of the day, and all goods
completed during the day would have been shipped immediately to customers.
• It focus having the right material, at the right time, at the right place, and in the exact amount.
Advantages of JIT: The main benefits of JIT system are:
a) Funds that were tied up in inventories can be used elsewhere.
b) Areas previously used, to store inventories can be used for other more productive uses.
c) The flows of goods from warehouse to shelves are improved.
d) Employees who possess multiple skills are utilized more efficiently.
e) Better consistency of scheduling and consistency of employee work hours.
f) Increased emphasis on supplier’s relationship.
g) Setup times are significantly reduced in the factory.
h) Defect rates are reduced, resulting in less waste and greater customer satisfaction.
5. V.E.D. Analysis: This classification is applicable only for spare parts and is based on criticality. In
general, criticality of a spare part can be determined from the production downtime loss, due to spare
being not available when required. The VED analysis is done to determine the criticality of an item
and its effect on production and other services.
• Vital (V): A spare part will be termed vital, if on account of its non--availability there will be
very high loss due to production downtime and/or a very high cost will be involved if the part is
procured on emergency basis.
• Essential (E): A spare part will be considered essential if, due to its non -availability, moderate
loss is incurred.
• Desirable (D): A spare part will be desirable if the production loss is not very significant due to
its non-availability. Most of the parts will fall under this category. The VED analysis helps in
focusing the attention of the management on vital items.
6. FSN Analysis: FSN classification is based on frequency of issues/use. F, S and N stand for fast
moving, slow moving and non-moving items. This classification identifies the items frequently
issued; less frequently issued for use & the items which are not issued for longer period, say, 2 years.
• Fast Moving (F): Items that are frequently issued say more than once a month.
• Slow Moving (S): Items that are issued less than once a month.
• Non-Moving (N): Items that are not issued\used for more than 2 years.
7. SDE Analysis: This classification is carried out based on the lead time required to procure the items.
• Scarce (S): Items which are imported & those items which require more than 6 months’ lead time.
• Difficult (D): Items which require more than a fortnight but less than 6 months’ lead time.
• Easily (E): Items which are easily available; mostly local items, i.e. less than a fortnights’ lead
time.
This classification helps in reducing the lead time required at least in case of vital items.
8. HML Analysis: The cost per item (per piece) is considered for this analysis. The items of inventory
should be listed in the descending order of unit value and it is up to the management to fix limits for
these categories. High cost items (H), Medium Cost items (M) and Low Cost item (L) help in
bringing controls over consumption at the departmental level. This classification is as follows:
• High Cost items (H): Items whose unit value is very high
• Medium Cost items (M): Items whose unit value is of medium value.
• Low Cost items (L): Items whose unit value is low.
This type of analysis helps in exercising control at the shop floor level i.e., at the use point.