Inventory control

Inventory:

detailed list of moveable goods such as raw

materials, materials in process, finished products,
general supplies and equipments, etc. and gives the
quantity and value of each item.
 Definition of inventory control:

“It is defined as the systematic location, storage

and recording of goods in such a way that
desired degree of service can be made to the
operating shops at minimum ultimate cost”
 Need for inventory control

• To maintain reserve (store) of goods

• To manufacture based on production plan
• To have low cost of products
What happens if material is not found in time?
• Machine is shut down
• Sales is postponed
• Factory losses money
What is the solution?
• Proper quantity of material on hand for smooth
operation of plant.
 Functions of IC

• To run the stores effectively

• To ensure timely available of materials
• Technical responsibility for the state of materials
(storing method, maintenance procedures,
studies of deterioration, etc)
• Stock control system (physical verification
(stock taking), records, ordering policies, etc).
• Maintenance of component parts
• Pricing of all materials supplied to the shop
 Essential steps in IC

Basic principle:
Necessary materials shall be on hand and no more
store shall be carried than is necessary.
• Quantity standards:
1. Maximum store
2. Minimum store
3. Standard order (EOQ)
4. Ordering point
5. Lead time (procurement time)
 EOQ

Reasons of inventory build-up:

• Excess order of items
• Slow rate of using as compared to receiving
Is it required?
Economic Order Quantity (EOQ)
To identify EOQ, evaluate costs such as
(1) procurement/buying cost
(2) inventory carrying cost
 Procurement cost/buying cost

• Calling quotations
• Processing quotations
• Placing purchase order
• Receiving and inspection
• Verifying and payment of bills, etc
• Setup cost in case of manufacturing which
includes: setting up equipment, scrap in new
operation, planning production and control,
machine idle time during setup.
 Inventory carrying cost

• Insurance
• Storage and handling
• Depreciation
• Deterioration
• Taxes
• Interest
Inventory carrying cost varies between 10 – 20 %
of the product cost.
 Basic Condition for EOQ
• EOQ is obtained by the quantity whose
procurement cost is equal to inventory carrying
cost.
Let A = total items consumed per year
P = procurement cost per order
C = annual inventory carrying cost per item
And Q = economic order quantity
Procurement cost per year = No. of orders placed
in a year x cost per order
= (A x P) / Q …….…………. (1)
 EOQ…

Inventory carrying cost per year =

= average value of inventory in a year x annual
inventory carrying cost per item
= Q/2 x C ………………………. (2)

Total of inventory carrying and procurement cost,

Total cost = A x P / Q + Q x C / 2
= AP / Q + QC / 2
 EOQ…
Total cost will be minimum when
AP/Q = QC/2 ……………… (3)

Q.Q.C = 2AP
Q = SQRT (2AP/C) …………(4)