INVENTORY CONTROL

TECHNIQUES
Definition of inventory control

Inventory control is the

of maintaining the size of the
technique
inventory at some desired
keeping in view the best economic
level
interest of an organization.
OBJECTIVES OF INVENTORY CONTROL

 To reduce investment in inventories and made

effective use of capital investments.
 To supply drugs in time.
 Efforts are made to procure goods at minimum price
without bargaining the quality.
 To avoid stock out and shortages.
 Wastages are avoided.
 Inventory management is essential to maintain a
large size inventory for efficient and smooth
production and also for sales operation.
Benefits of Inventory Control
 Ensures an adequate (enough) supply of materials
 Minimizes inventory costs
 Facilitates purchasing economies
 Eliminates duplication in ordering
 Better utilization of available stocks
 Provides a check against the loss of materials
 Facilitates cost accounting activities
 Enables management in cost comparison
 Locates & disposes inactive & obsolete store items
 Consistent & reliable basis for financial statements
Techniques of inventory control
 Inventory control techniques are the tool
available for smooth running of the
business enterprises.
 The inventories should be maintained at
a level lying between the excessive
and the inadequate. This level is known
as the “OPTIMUM LEVEL” of
inventories.
The common and widely used techniques are:
 ABC ANALYSIS (Always Better Control)
 VED ANALYSIS (Vital, Essential, Desirable)
 EOQ (Economic Order Quantity)
 Lead Time
 Buffer stock
 Perpetual inventory control system
 SDE classification
 HML Classification
 FSN Classification
 SOS classification
 XYZ Classification
 ABC ANALYSIS
 In this technique the materials are divided
into 3 groups. A,B,C according to the cost of
the materials and money value.
 A items - A few costly items come under this
category these items require proper
storage and handling, overstock is avoided.
 B items - These are neither costly nor
cheap.
 C items - Cheaper in cost.
 It is also known as Selective Inventory
Control Method (SIM).
ABC ANALYSIS
A ITEMS B ITEMS C ITEMS

 it covers 10% of  It covers 20% of the  It covers 70% of the

the total total inventories. total inventories.
inventories.
 It consumes about  It consumes about It consumes about 10%
70% of the total 20% of the total of the total expenditure
budget budget.
 It requires very strict  It requires moderate  It may require low
control control. control.

 It requires either no  It requires low safety  It requires high

safety stock or low stock. safety stock.
safety stock.
 It needs maximum  It requires periodic  It needs close follow
follow up follow up up
 It must be handled  It can be handled by  It can be handled by
by senior officers. middle management. any official of the
management
Procedure for ABC Analysis
 Make the list of all items of inventory.
 Determine the annual volume of usage & money
value of each item.
 Multiply each item’s annual volume by its rupee
value.
 Compute each item’s percentage of the total
inventory in terms of annual usage in rupees.
 Select the top 10% of all items which have the
highest rupee percentages & classify them as “A”
items.
 Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
 The next 70% of all items with the lowest rupee
percentages are “C” items.
ABC Analysis

A
Percent of annual dollar usage

80 –
Items
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory items

VED ANALYSIS
 VITAL,ESSENTIAL, DESIRABLE
 It is based on the importance of the item and
its effects.

 VITAL DRUGS – Such drugs are categorised

as vital whose absence (no stock) cannot be
tolerated even for an single day. That means
in their absence the work of hospital or
wards or patient care to come standstill.
VED ANALYSIS
 ESSENTIAL Drugs – These are the drugs
without which a hospital can function but may
affect the quality of service to some extent but
not to a very serious extent.
 DESIRABLE Drugs - These are the drugs
whose absence will not affect the functioning
of hospital or ward or department or patient
care.
VED ANALYSIS
 The motive of this system is to reduce
investment in inventories. The drugs
which are fast moving , ie which are in
great demand should be stocked more
than drugs occasionally demanded and
lastly the drugs which are rarely
demanded should be stocked in
minimum quantity.
ECONOMIC ORDER QUANTITY

 It is the most effective technique for

determination of the quantity.
 It is defined as the quantity of materials to
be ordered at one time which minimises
the lost.
 The basic objective of EOQ is to have an
ideal order quantity for any item and to
economise on the cost of the purchase.
Computation of EOQ
 The widely used formula is

EOQ =√{2D×S/H}
Where ,
D=Annual or periodic requirement
S=Ordering cost
H=Carrying cost
FSN Analysis:
 The abbreviation for FSN in “Fast moving, Slow
moving and Non moving”.
 Here in this analysis, the date of receipt or the last date
of issue, which ever is later, to determine the no. of
months which have lapsed from last transaction.
 FSN is helpful in identifying active items which need to
be reviewed regularly and surplus items and non-
moving items are examined.
SDE Classification:
 The SDE is based upon the availability of items.
 Here ‘S’ refers to ‘Scarce’ items
 ‘D’ refers to ‘Difficult’ items
 ‘E’ refers to ‘Easy to acquire’
 This is based on problems faced in procurement,
were some strategies are made on purchasing.
SOS Analysis:
 ‘S’ stands for Seasonal items and ‘OS’- Off Seasonal
items.
 In general it is merit to seller to buy seasonal items at
lower price and keep inventory and sell them at high
price during Off seasons.
 If not the seller has to buy the goods at higher
prices during Off seasons.
 Decisions are taken based on the fluctuations
and availability.
 XYZ Analysis
 This classification is based on the value of inventory of materials
actually held in stores at given time.
 This helps to control the average inventory model value.
 ‘X’ items which are 10% of no.of items stored, but accounting for
70% of the total inventory value.
 ‘Y’ items are 20% of no.of items stored and account for 20% of total
inventory value.
 ‘Z’ items are 70% of no.of items stored and account for 10% of the
total value.
 This analysis focuses on efforts to reduce the inventory of these items.
XYZ Classification
The XYZ analysis is a way to classify inventory items according to
variability of their demand.
X – Very little variation: X items are characterized by steady
turnover over time. Future demand can be reliably forecast.
Y – Some variation: Although demand for Y items is not steady,
variability in demand can be predicted to an extent. This is
usually because demand fluctuations are caused by known
factors, such as seasonality, product lifecycles, competitor action
or economic factors. It's more difficult to forecast demand
accurately.
Z – The most variation: Demand for Z items can fluctuate
strongly or occur sporadically. There is no trend or predictable
causal factors, making reliable demand forecasting impossible.
FORMULAE AND STEPS of XYZ CLASSIFICATION

For XYZ analysis the following calculations have to be done.

1. Sum of Squares,
2. Variances and
3. Standard Deviation (SD).
4. Co-efficient of Variation (CV)

=
σ=
 σ is Standard Deviation
 xi are individual values,
 x̅ is the average Value
 N is the total number of observations
CV= σ / x̅ (σ is S.D. and x̅ is
Mean)
 Example 1
S No Product Feb13 Mar13 Apr13 Std Dev Average CV Rank
1 Prod 41 40 40 39 0.47140452 39.66666667 0.01188415 58
2 Prod 21 30 30 22 3.77123617 27.33333333 0.13797205 59
3 Prod 24 7 7 0 3.29983165 4.66666667 0.70710678 60
4 Prod 2 0 1 1 0.47140452 0.66666667 0.70710678 60
5 Prod 4 0 40 40 18.85618083 26.66666667 0.70710678 60 E
6 Prod 6 0 10 10 4.71404521 6.66666667 0.70710678 60
Q
7 Prod 9 0 1 1 0.47140452 0.66666667 0.70710678 60
8 Prod 15 0 2 2 0.94280904 1.33333333 0.70710678 60 U
9 Prod 20 0 6 6 2.82842712 4.00000000 0.70710678 60 A
10 Prod 25 0 2 2 0.94280904 1.33333333 0.70710678 60
11 Prod 3 1 1 0 0.47140452 0.66666667 0.70710678 60 L
12 Prod 21 1 0 1 0.47140452 0.66666667 0.70710678 60 Coeff.
13 Prod 1 2 2 0 0.94280904 1.33333333 0.70710678 60 Of
14 Prod 7 2 0 2 0.94280904 1.33333333 0.70710678 60 Varian
15 Prod 10 2 2 0 0.94280904 1.33333333 0.70710678 60 ce
16 Prod 5 5 5 0 2.35702260 3.33333333 0.70710678 60
17 Prod 23 10 10 0 4.71404521 6.66666667 0.70710678 60
18 Prod 64 10 0 7 4.18993503 5.66666667 0.73940030 75

√
Product41/1 2 2 2
(40 −39.666) +(40 −39.666 ) +(39 −39.6666)
σ=
3 (40+40+39)
=39.666 ( x )̅
 Average unit
Example 2: ABC-XYZ classification price
Item no. Item 8/2015 (x1) 9/2015 (x2) 10/2015 Annual demand Average demand
(x3) 150 (x
1 Full nitrogen cylinder 205 180 250 635 211.67
300
2 Dummy bar bolt 205 180 225 610 203.33
120
3 Tundish nozzle 13mm 200 120 145 465 155
4 Coupling pin bush BC-3 200 120 100 420 60 140
5 Oxygen cylinder fitted 150 60 140 350 210 116.67
6 Slide gate plate 25mm 60 150 100 310 30 103.33
7 Collector nozzle 25mm 50 135 100 2851500 95
8 Ladle nozzle 25mm 50 120 50 220 30 73.33
9 A.C. sheet 3MTR 110 40 50 200 66.67
6000
10 Full argon gas cylinder 10 12 31 53 17.67
50
11 MPCB 4-6 AMP 6 22 28 36 12
12 Coupling type F-80 6 16 4 26 8.67
13 Cabin fan 5 14 4 23 7.67
14 LPG regulator 11 4 2 17 5.67
15 Oxygen regulator 11 4 2 17 5.67
16 Seating well block 2 3 10 15 5
Item no. Item Annual demand Average demand S.D. C.V. Category
1 Full nitrogen cylinder 635 211.67 35.47 0.1676 X
2 Dummy bar bolt 610 203.33 22.54 0.1108 X
3 Tundish nozzle 13mm 465 155 40.9268 0.2640 X
4 Coupling pin bush BC-3 420 140 52.915 0.378 Y
5 Oxygen cylinder fitted 350 116.67 49.329 0.4228 Y
6 Slide gate plate 25mm 310 103.33 45.0924 0.4364 Y
7 Collector nozzle 25mm 285 95 42.7200 0.4497 Y
8 Ladle nozzle 25mm 220 73.33 40.4145 0.5511 Y
9 A.C. sheet 3MTR 200 66.67 37.86 0.57 Z
10 Full argon gas cylinder 53 17.67 11.59 0.65 Z
11 MPCB 4-6 AMP 36 12 8.72 0.73 Z
12 Coupling type F-80 26 8.67 6.43 0.7415 Z
13 Cabin fan 23 7.67 5.508 0.72 Z
14 LPG regulator 17 5.67 4.726 0.8334 Z
15 Oxygen regulator 17 5.67 4.726 0.8334 Z
16 Seating well block 15 5 4.36 0.87 Z
Average unit price

150
300
120
60
210
30
1500
30
6000
50
The following table summarizes the characteristics of the nine different
material classes after combining the ABC-Analysis with the XYZ-Analysis.

A B C
high value, medium value, low value,
X high predictability high predictability high predictability continuous
continuous demand continuous demand demand

high value, medium value, low value,

Y medium predictability medium predictability medium predictability
fluctuating demand fluctuating demand fluctuating demand

high value, medium value, low value,

Z low predictability low predictability low predictability
irregular demand irregular demand irregular demand
 A B C

X low inventory low inventory low inventory

Y low inventory medium inventory high inventory

Z medium inventory medium inventory high inventory

 Example 2: XYZ
S No Product Feb13 Mar13 Apr13 Std Dev Average CV Rank
1 Prod 41 40 40 39 0.47140452 39.66666667 0.01188415 58
2 Prod 21 30 30 22 3.77123617 27.33333333 0.13797205 59
3 Prod 24 7 7 0 3.29983165 4.66666667 0.70710678 60
4 Prod 2 0 1 1 0.47140452 0.66666667 0.70710678 60
E Q
5 Prod 4 0 40 40 18.85618083 26.66666667 0.70710678 60 U A L

6 Prod 6 0 10 10 4.71404521 6.66666667 0.70710678 60 Coeff. Of

7 Prod 9 0 1 1 0.47140452 0.66666667 0.70710678 60 Variance

8 Prod 15 0 2 2 0.94280904 1.33333333 0.70710678 60

9 Prod 20 0 6 6 2.82842712 4.00000000 0.70710678 60
10 Prod 25 0 2 2 0.94280904 1.33333333 0.70710678 60
11 Prod 3 1 1 0 0.47140452 0.66666667 0.70710678 60
12 Prod 21 1 0 1 0.47140452 0.66666667 0.70710678 60
13 Prod 1 2 2 0 0.94280904 1.33333333 0.70710678 60
14 Prod 7 2 0 2 0.94280904 1.33333333 0.70710678 60
15 Prod 10 2 2 0 0.94280904 1.33333333 0.70710678 60
16 Prod 5 5 5 0 2.35702260 3.33333333 0.70710678 60
17 Prod 23 10 10 0 4.71404521 6.66666667 0.70710678 60
18 Prod 64 10 0 7 4.18993503 5.66666667 0.73940030 75
 LEAD TIME : It is the time taken between the
placing of order and receipt of drug to the
department. The longer the lead time the larger
is the safety stock, resulting in excess of
investment in inventories.

 BUFFER STOCK : The quantity of stock kept

as reserve to guarantee against un fore seen
demands is known as buffer stock. This stock
protects against variation in demand and
procurement period. It is used in emergencies.
COMMENT ON THERAPY
• V