INVENTORY CONTROL

BY
BY
Venkadesh
Venkadesh JJ
Gokul
Gokul RR
Rishikesh
Rishikesh SS SS
Barath
Barath T
T
WHAT IS INVENTORY ?
Inventory is an accounting term that refers to good
that are in various stages of being made ready for sale,
including: Finished goods (that are available to be sold)
Work-in-progress (meaning in the process of being
made) Raw materials (to be used to produce more
finished goods)
 WHAT IS INVENTORY CONTROL?
Inventory control is the process by inventory is measured and regulated
according to predetermined norms such as economic lot size for order or
production, safety stock, minimum level, maximum level, order level, etc.
IMPORTANCE OF INVENTORY MANAGEMENT

Inventory control paves for competitive ability


Inventory planning improves service level


Inventory planning and management reduces storage cost


High inventory turnover brings revenues


You can utilize warehouse space better


Inventory control makes cost accounting activities easier


Inventory control is consistent with safety and economic

advantage  
Cont...
 Regular supply at reasonable prices builds customer
confidence
 Inventory holding results in effective utilization of human
and equipment
 Effective inventory control enhances market share

 Inventory control improves product quality

 Effective inventory control brings the potential saving

 Inventory control avoids costly interruptions in operation

 Inventory control strategy facilitates purchase economies

COSTS IN INVENTORY MANAGEMENT
TYPES OF COSTS IN INVENTORY MANAGEMENT

ORDERING COST
 Clerical costs of preparing purchase orders
 Cost of finding suppliers and expediting orders
 Transportation costs
 Receiving costs
 Cost of electronic data interchange (EDI)

HOLDING COST
 Inventory financing costs
 Opportunity cost of the money invested in inventory
 Storage space costs
 Inventory services costs
 Inventory risk costs
Cont..

Shortage Cost
 Disrupted production
 Emergency shipments
 Customer loyalty and reputation
This video shows the entire process of Inventory Management
INVENTORY MODELS
 Lot Size & Economic Ordering Quantity (EOQ) or
Economic Lot Size (E.L.S.)
The amount of material procured or quantity produced during one production run by an enterprise is known as lot size.

The quantity to be ordered depends upon a number of factors. It is evident that with increase in inventory size,

expenditure on storage, deterioration and spoilage of goods obsolescence etc. is likely to increase whereas expenditure on

setting up of the plant, procurement of materials etc. will decrease.

Thus with lot size, there are two sets of factors having opposite contributions towards the expenditure i.e. one encourages

the lot size and other discourages.

The total cost related with particular lot size is a combination of expenditures on all these factors as is illustrated in Fig.

Total Cost = Materials Cost + Cost due to factors whose cost increases with lot size + Cost due to factors whose cost

decreases with lot size.

The lot size for which the total cost per period is minimum is known as economic lot size.
Different cost and lot size
 Reorder level
In management accounting, reorder level (or reorder point) is the inventory level at which a company would place a
new order or start a new manufacturing run.

Formula

 Reorder level depends on whether a safety stock is maintained.

 If there is no safety stock, reorder level can be worked out using the following formula:

 Reorder Level = Average Demand × Lead Time

 Both demand and lead time must be in the same unit of time i.e. both should in in days or weeks, etc.

 If a company maintains a safety stock, reorder level calculation changes are follows:

 Reorder Level = Average Demand × Lead Time + Safety Stock

 Economic Order Quantity
Economic order quantity (EOQ) is the order size that
minimizes the sum of ordering and holding costs related to raw
materials or merchandise inventories. In other words, it is the
optimal inventory size that should be ordered with the supplier
to minimize the total annual inventory cost of the business.
Other names used for economic order quantity are optimal order
size and optimal order quantity.
The two significant factors that are considered while determining
the economic order quantity (EOQ) for any business are
the ordering costs and the holding costs.
ORDERING COST HOLDING COST
 Economic Order Quantity
Economic order quantity formula
The following formula is used to determine the economic order quantity (EOQ)
Where
D = Demand per year
Co = Cost per order
Ch = Cost of holding per unit of inventory
Example - 1
The material DX is used uniformly throughout the year.
The data about annual requirement, ordering cost and
holding cost of this material is given below:
• Annual requirement: 2,400 units
• Ordering cost: $10 per order
• Holding cost: $0.30 per unit
Find EOQ, no. of orders per year, ordering cost,
Holding cost and combined carrying and holding cost
at EOQ
 Economic Ordering Quantity
Number of orders per year
= Annual demand/EOQ
= 2,400 units/400 units
= 6 orders per year
Ordering cost
= Number or orders per year × Cost per order
= 6 orders × $10
= $60
Holding cost
= Average units × Holding cost per unit
= (400/2) × 0.3
= $60
Combined ordering and holding cost at economic order quantity (EOQ):
= Ordering cost + Holding cost
= $60 + $60
= $120
 Economic batch quantity
The Economic Batch Quantity is very similar to Economic order Quantity. But, there is only one difference i.e. Economic
Batch Quantity is calculated to fix the level of production at minimum cost but Economic Order Quantity is calculated
to fix the level for ordering the purchase of raw materials, stores and spares.
The following points are considered while fixing the Economic Batch Quantity.

1. Annual demand for the product.

2. Setting up of cost.
3. Manufacturing cost.
4. Rate of consumption.
5. Storage costs.
6. Interest on capital.
7. Times lag between production and consumption of product.

If the machines are set up for production frequently, certainly, the set up cost will be high. If the size of batch is large,
automatically, the storage cost will be high. Hence, there is a need of Economic Batch Quantity.
 Economic batch quantity
FORMULA TO FIND ECONOMIC BATCH QUANTITY
The following formula is used to calculate Economic Batch Quantity is as follows
Economic Batch Quantity =
Where,
D = Demand for a period A = Demand of components in a year
S = Set up cost O = Setting up cost per batch
I = Interest Rate C = Cost of capital and storage (carrying cost)
per unit per annum
C = Cost per unit of manufacture.
Economic batch quantity
 Q – model (Fixed Order Quantity model)
In Q model, the order is placed whenever the inventory level reaches a certain level.
This is also called continuous review system, where the inventory level is regularly
monitored. The order is triggered when inventory level reaches reorder point.

The order quantity (Q) is fixed and depends on the ordering cost and the holding cost.
The reorder point (ROP) depends on the lead time for replenishment and demand rate.

In the illustration below, we can see that the time intervals between the orders are not
equal.
Q model of inventory / fixed quantity model
P system / fixed period inventory model
 P system / fixed period inventory model

P-model in inventory control is also known as fixed-period system. That means, the
orders are placed after a fixed interval of time. It could be once in a day, once in
every 2, 3 or 5 days, once in a week, once in a fortnight, once in a month and so and
so forth.
Once the order interval is fixed, the only other decision left will be to decide the quantity
of the order, which depends on the rate of demand/consumption and the lead time for
replenishment (LT).
The maximum inventory level depends on the average daily demand rate (DR) during
the review period (RP) and the safety stock (SS)
As we can see, the time between each order is same, but the order quantity varies in
every order placed
 Material requirement planning(MRP)

Material Requirements Planning, or MRP, is used to generate production schedules for the
manufacture of complex products. MRP takes the demand schedule for a finished product and
the lead times to produce the finished product and all the various subcomponents that go into
the finished product, then works backwards to come up with a detailed just-in-time production
schedule that meets the demand schedule.
MRP's main focus is finding a feasible just-in-time production schedule that meets demand. MRP
does not, however, attempt to optimize the production schedule to minimize total production
costs. In many cases, the problems solved by MRP are so complex optimization would be
prohibitive.
 Just in time (JIT)
Just in time (JIT) is an inventory management method whereby materials, goods, and
labor are scheduled to arrive or be replenished exactly when needed in the
production process.
JIT works best for companies using repetitive manufacturing functions; hospitals, small
companies, and other entities may not find JIT feasible.

3 Reduce 4 Reduce
lot Size Setup Costs

1 Reduce
Reliability
 Enterprise Resource Planning (ERP)

ERP inventory management, short for enterprise resource planning

inventory management, refers to an integrated approach to business planning and
operations, in which businesses can manage all their finances, logistics,
operations, and inventory in one place.

Benefits of ERP inventory management

 Increased efficiency
 Cost savings
 Accurate data collection and reporting
 Enables business expansion
 Cont..
Typical features of an ERP inventory management system:
ERP inventory management systems are designed to empower businesses to manage not just
inventory, but all business operations from a single location. Some of the standard features of
an ERP inventory management system include:
 Stock tracking and management
 Sales and purchase order management
 Warehouse management and stock transfers
 B2B e - Commerce functionality
 Payment gateway functionality
 Integrations with e - Commerce, accounting, shipping and other operational tools
 Intelligence reports and analytics
Classification of Inventory
Classification of Inventory
 ABC Classification
 HML Classification
 FSN Classification
 VED Classification
 SDE Classification
 XYZ Classification
 ABC Classification
• ABC analysis provides a mechanism for identifying items that will have a
significant impact on overall inventory cost
• The ABC analysis suggests that inventories of an organization are not of
equal value. 
• Thus, the inventory is grouped into three categories (A, B, and C) in order of
their estimated importance.
Cont...
There are no fixed threshold for each class, different proportion can be applied based on
objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items
will typically account for a large proportion of the overall value but a small percentage of the
number of items.

Examples of ABC class are

• "A" approximately 10% of items or 66.6% of value
• "B" approximately 20% of items or 23.3% of value
• "C" approximately 70% of items or 10.1% of value
 FSN Analysis

• FSN analysis is an inventory management

technique. The items are classified according to
their rate of consumption.
• The items are classified broadly into three groups:
 F – means Fast moving
 S – means Slow moving
 N – means Non-moving
 HML Classification
In this analysis cut-off-lines are then fixed by the management of the organization to classify the
inventory items.
Percentage based classification on the H, M and L classes.
 H-class item: These are the costly item and are generally 10-15% of total
item.
 M-class item: These items are low cost item as compared to H class items,
this are generally 20-25% of total item.
 L-class item: These items are low class item and generally 60-70% of total
items.
HML Classification

Particulars H-class item M-class item L-class item

Control High Intermediate Low

Requirement Low Intermediate High

Check Tight Intermediate No

Safety stock High Low Rare

 XYZ Classification
The XYZ analysis is most commonly used technique in an organization. In XYZ analysis the
items are classified into X, Y and Z classes based on demand variability. The variability is
measured by the coefficient of variation (C.V.) the cut off line is depends on organization.

1) X-Class: X class material has a fixed size of need, and it is characterized by small periodic
fluctuations, which provides high accuracy of forecasting, and their daily demand
variability is about low (CV ≤ 0.3).
2) Y-Class: Y class material has moderate fluctuations in need, which allows for an Average
(D) accuracy of forecasting, and daily demand variability is generally intermediate (0.3< CV
≤ 0.56).
3) Z-Class: Z class material has irregular demand need, which allows for low accuracy of fore-
casting and daily demand variability is about high (CV > 0.56).
XYZ classification
 VED Classification
In VED classification the degree of criticality can be stated as whether the material is
vital to the process of production, or essential to the process of production or
desirable for the process of production.
 V stands for vital
 E stands for essential
 D stands for desirable items.
 Case Study
PEARL HARBOR
INVENTORY MANAGEMENT
 When a submarine arrives at Pearl harbour naval shipyard (PHNSY), it undergoes a well-
planned schedule of maintanence, overhaul, repairs and upgrades.

 On-time completion of these and other maintanence- type operations play a major role
in maintaining the readiness of submarines in the pacific.

 To ensure these critical deadliness are met, PHNSY relies on skilled mechanics in three
shifts a day and some weekends.

 According to Iris Seiki, PHNSY Supply System Analyst, not having inventory readily
available for the mechanics on all three shift and weekends has a direct impact on the
project and on other people’s job.
 PROBLEMS
 Stores tooling, personel protective equipment(PPE) and consumable products in centrally
located tool rooms.

 With the expectation of the occasional walk and wait time to and from the waterfront tool
room, getting the needed items for the task at hand was generally a simple process.

 Because the tool room was staffed for the first shift only, getting materials was somewhat
more complicated for the other shifts.

 If the mechanic from the previous shift didn’t turn over the materials to the next shift,
he/she would have to submit an item request for the needed materials for the task at the
hand.

 The materials came 24 hours later.

Problems:

 Work stoppage due to inefficient process.

 Wasted time walking to and from tool room.

 Inventory shrinkage.
 SOLUTIONS

 PHNSY looked to WinWare,Inc.., the makers of Cribmaster to provide a solution.

 CribMaster is a set of inventory solutions used in military and other industrial type
environments.

 In their search for a storage system thet offered flexibiiity, PHNSY chose a suite of
TOOLCUBE™ point of use device.

 Located them dockside where the submarines undergo maintanence.

 The ToolCube™ is a large, heavy-guage steel constructed cabinet that contains drawers and
compartments of various sizes.
Tasks performed by Toolcube™

 The mechanic simply scans his/her badge and selects the item requested.

 Cribmasters then provide access to only the approved quantity of the exact item requested.

 With the Toolcube™ unique storage system of configurable drawers, PHNSY could
accommodate many different types of inventory.

 The capability of adding more devices as their operation grew and controls needed to be
tightened.
Benefits gained by implementation

 Stock-outs in their consumable materials have been gently reduced.

 The min/max feature on the software ensures optimum inventory levels by sending an
email alerting someone when replenishment is needed.

 More importantly from the mechanics point of view, they enjoy having the right material at
the right time 24 hours a day, 7 days a week.

 This has allowed them to do their job regardless of which shift they are working and
allowed PHNSY to control material usage all at the same time.
Thank You