INVENTORY CONTROL.

Introduction, Different inventory control techniques and other relating terms.

Introduction
 Inventory

means all the materials, parts, supplies, equipments, tools and in process or finished products, recorded and kept in organization for some period time.  Inventory is essential part of every organization/business/Manufacturing unit.

Definitions.
 Inventory

is a list of names, quantities and /or monetary values of all or any group of items.  Inventory is a detailed list of those movable items which are necessary to manufacture a product and to maintain the equipment and machinery in good working order. The quantity and value of every item is also mentioned in the list.

Definitions.
 Inventories

are piles of raw materials and finished goods in warehouse.  All the materials, parts and in-process or finished products recorded on the books by an organisation and kept in its stores, warehouses and plants are known as inventories.

Characteristics/ Importance.
Inventories serves as cushions to absorb shocks. 2. Inventory for any organisation is necessary evil. 3. Inventories are result of many interrelated decisions and policies of an organisation. 4. Inventory provides production economy
1.

Inventory Classification
 2. 3. 4. 5. 6.

Classification of inventory according to functions is as follows, Transit Inventories. Cycle Inventories. Buffer Inventories. Decoupling Inventories. Inventory as per the nature of items.

Inventory Control
 Inventory

control keeps track of inventories. TOO MUCH, TOO LITTLE or BADLY BALANCED inventory is avoided as everything has a cost.  Too much, leads to undue carrying charges in form of taxes, insurance, storage, obsolescence, depreciation and undue blockage of capital.

Inventory Control
 Too

little, involves frequent ordering, loss of quantity discounts, higher transportation costs, it may not fulfill the future/emergency requirement.  In today’s dynamic world, situations are changing fast. Too little may become too much very fast.  To maintain the balance of too much and too little is critical task and can be done by implementing inventory control.

Definitions of Inventory Control.
 Inventory

control is a system of ordering based on the maintenance of stock in a store using a re-order rule based on stock levels. control is concerned with various items stocked at predetermined level or within some safety limits.

 Inventory

Definitions of Inventory Control.

Stock control is often said to be an exercise in the art of compromise balancing the conflicting needs of
1. 2. 3.

Economical Production. Quick Delivery and Low inventory value.

Factors Affecting.

2. 3. 4. 5.

The decision on inventory leads an impact on the whole organization. The number of factors can be divided in the following categories. Characteristic of Manufacturing System Amount of Protection against shortages Organizational factors Other factors.

Factors Affecting.

Characteristic of Manufacturing system

The nature of production process, production planning, plant layout have an effect on inventory policy.
1. 2. 3. 4. 5.

Degree of specialization of product. Process Capability and flexibility. Production capacity and storage. Quality reqts., shelf-life, obsolescence. Nature of production system.

Factors Affecting.

Amount of protection against shortage
Due to fluctuation in demand of the product, there should be protection at supply end. Buffer stocks helps to do achieve this. 1. Change in size and frequency of orders. 2. Unpredictability of sales. 3. Structure of distribution pattern. 4. Costs associated with failure to meet demand 5. Accuracy of demand forecast.

Factors Affecting.
1.

Organizational Factors:

These are certain factors, which are related
to policies, traditions and environment of org. 1. Organizational structure. 2. Amount of capital available for stock. 3. Rate of return on capital on the opportunity cost. 4. Storage and warehousing policies.

Factors Affecting.
1.

Other factors.

These are related to overall environment of
organizations in the specific region. 1. Inflation. 2. Strike situations. 3. Wars, or some other natural calamities like floods, earthquakes, etc. 4. Differences between input and output.

Types of inventory analysis.

2. 3. 4. 5. 6.

Different organizations follow different inventory analysis or inventory control system. Some of them are; ABC analysis. HML VED SDE FSN.

ABC Analysis.
 ABC

(Always Better Control)  It is based on the concept, “Thick on the best and Thin on the Rest.”  The objective of ABC control is to vary the expenses associated with maintaining appropriate control according to the potential savings associated with a proper level of such control.  It is one of the widely used techniques of inventory control.

ABC Analysis.

The ABC approach is a means of categorizing inventory items into three classes ‘A’ , ‘B’ and ‘C’, according to the potential amount to be controlled. For this, annual consumption value is calculated by, Annual Usage Value = Annual Requirement X Per Unit Cost. The items of inventory are then categorized under  Items functionally critical, no matter how little they cost.  Items important because their usage value is high.  Items having average usage value.  Items having low usage value.

ABC Analysis.

The following procedure is suggested for developing an ABC analysis:

2. 3. 4. 5.

List each item carried in inventory by number or some other designation. Determine the annual volume of usage and rupee value of each item. Multiply each item’s annual volume of usage by its rupee value. Compute each item’s percentage of the total inventory in terms of annual usage in rupees.

ABC Analysis.

Procedure (CONTD..)

3.

4.

5.

Select the top 10% of all items which have the highest rupee percentages and classify them as ‘A’ items. Select the next 20% of all items with the next highest rupee percentages and designate them as ‘B’ items. The next 70% of all items with the lowest rupee percentages are ‘C’ items.

HML Analysis.
 The

HML classification follows the same procedure as is adopted in ABC classification.
H

= HIGH;  M = MEDIUM;  L = LOW.
 Only

difference is that in HML, the classification unit value is the criterion and not the annual consumption value.

HML 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 three categories.  For examples, the management may decide that all units with unit value of Rs. 2000 and above will be ‘H’ items, Rs. 1000 to 2000 ‘M’ items and less than Rs. 1000 ‘L’ items.

VED Classification.
 VED

Classification  While in ABC, classification inventories are classified on the basis of their consumption value and in HML analysis the unit value is the basis, criticality of inventories is the basis VED classification.  The VED analysis is done to determine the criticality of an item and its effect on production and other services. It is specially used for classification of spare parts.

VED Classification.
 VED

Classification

V= Vital;  E= Essential;  D= Desirable.

If a part is vital it is given ‘V’ classification, if it is essential, then it is given ‘E’ classification and if it is not so essential, the part is given ‘D’ classification. For ‘V’ items, a large stock of inventory is generally maintained, while for ‘D’ items, minimum stock is enough.

FSN Classification
 FSN

Analysis  Here, classification is based on the pattern of issues from stores and is useful in controlling obsolescence.  F = Fast moving slow moving and nonmoving.  S = Slow Moving;  N = Non Moving.

FSN Classification.
 To

carry out an FSN analysis, the date of receipt or the last date of issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction.  The items are usually grouped in periods of 12 months.  FSN analysis is helpful in identifying active items which need to be reviewed regularly and surplus items which have to be examined further.  Non-moving items may be examined further and their disposal can be considered.

Codification
 THERE

SHOULD BE A PLACE FOR EVERYTHING AND EVERYTHING SHOULD BE IN ITS PLACE.  Depending on size and nature of organization, the stores have variety of items.  It may not be possible to remember and locate the items in stores easily.  Proper identification of goods, helps quick location of goods in the stores.

Codification
  3. 4. 5. 6.

Proper identification can be done by simplified coding. Coding can be done by many ways, some of them are; Tagging with some piece of cloth/paper Fixing of labels on items. Embossing of Coded mark on goods Painting or Color Coding of items.

Methods of Coding.
  3. 4. 5.

Generally alphabets, numerals or combination of two is used for coding. Some of the methods for coding are as follows:Mnemonic Method. Random Method. Scientific Method.

Methods of Coding
 Mnemonic

method: Here the alphabets closely related to the name of item are used.  Random Method: Here both alphabet or numerals are used randomly. This is used at place of less items.  Scientific Method: Here items are first divided into group and then they are further divided into sub-groups.

Method of Codification.
 Sometimes

LOCATION coding is used by the organization. The store is divided into different blocks on longitude and latitude method, and named.  The location can also be identified by number of warehouse, row number, column number, rack number, shelf no. etc.  Location of any item inside the store can be decided in 3 ways.

Method of Codification
1.

Fixed Location. Some fixed place is designated to each class of item. The basis can be
  

Supplier wise. Item wise. Utility wise.

3.

Random location.
The items are placed as per the space available at the time of receipt of goods.

Method of Codification
1.

Zonal Location. under this the whole inventory is divided into 3 zones:  

Bulk zones:- for bulky goods and raw materials. Reserve stocks:- for reserve/emergency items. Indirect Materials:- for spares and consumable items.

Principles of Codification

There must be a consistency in the point of view so that, the basis of classification should remain unchanged for all items. The system of classification must cover the entire range of items for which, it is devised and at the same time, allow reasonable scope for extension. The principle of mutual exclusiveness which means, that there must be only one code number possible for any item. The system developed should be simple enough to be understood and easily adopted by the non-specialist personnel.

Advantages of Codification.
There are many advantages of codification as it simplifies the work of management. Some of them are 2. Facilitates quick identification. 3. Mechanized accounting is possible. 4. Eliminates chances of duplication of items.