Inventory control

INTRODUCTION

The term inventory means the value or amount of materials on hand.It includes raw materials,work in process,finished goods and stores and spares.

Inventory control is the process by which inventory is measured and regulated according to predetermined norms such as economic lot size for order,safety stock,minimum level,maximum level,order level etc..

Inventory control pertains primarily to the administration of established policies,system and procedures in order to reduce the inventory cost.

OBJECTIVES OF INVENTORY

  • To meet unforeseen future demand due to variation in forecast figures and actual figures.
  • To average out demand fluctuation due to cyclic variation.
  • To smoothen the production process.
  • To gain economic of production in lots.
  • To reduce loss due to changes in prices of inventory items.
  • To meet the time lag for transportation of goods.
  • To meet the technological constraints of production.
  • To balance various cost of inventory such as order cost or set up cost and inventory carrying cost.
  • To minimize losses due to deterioration,obsolescence,damage,pilferage etc.

FACTORS AFFECTING INVENTORY CONTROL

  • Type of product
  • Type of manufacture
  • Volume of production

BENEFITS OF INVENTORY CONTROL

  • Ensure an adequate supply of materials.
  • Minimizes inventory costs.
  • Facilitates purchasing economies.
  • Eliminates duplication in ordering.
  • Better utilization of available stock.
  • Facilitates cost accounting activities.

INVENTORY COST TYPES OF INVENTORY COST

  • Ordering cost
  • Inventory carrying cost
  • Out of stock cost
  • Other cost

ORDERING COST

It is the cost of ordering the item and securing its supply.

It includes:

  • Expenses from raising the indent.
  • Receipt and inspection of material.

INVENTORY CARRYING COST

Cost incurred for holding the volume of inventory and measured as a percentage of unit cost of an item.

It includes:

  • Capital cost
  • Obsolescence cost
  • Deteroriation cost
  • Taxes on inventory
  • Insurance cost

OUT OF STOCK COST

It is the loss which occurs or which may occur due to non availability of material.

It includes

  • Break down production
  • Lost sales
  • Back ordering

OTHER COSTS

  1. Capacity cost
  • Over time payment
  • Lay offs and idle time
  1. Set up cost
  • Machine set up
  • Start up scarp generated from getting a production run started.

Over stocking cost.

CLASSIFICATION OF INVENTORY CONTROL

1.ABC ANALYSIS (ALWAYS  BETTER CONTROL)

This technique divide inventory into three categories A B and C based on their annual consumption value.

It is also known as selective inventory control method.

ABC analysis has universal application for fields requiring selective control.

VED ANALYSIS

  • VED:vital,essential and desirable classification
  • VED classification is based on the critivality of the inventories.
  • Vital items-Its shortage may cause stop the work in organization.They are stocked adequately to ensure smooth operation.
  • Essential items-Here,reasonable risk can be taken.If not available,the plant doesn’t stop;but the efficiency of operation is adversely affected due to expediting expenses.They should be sufficiently stocked to ensure regular flow of work.
  • Desirable items:Its non availability does not stop the work because they can be easily purchased from the market as and when needed.They may be stocked very low or not stocked.It is useful in intensive industries,transport industries etc.
  • FSN analysis:Fast moving,slow moving,non moving.Classification is based on the pattern of issues from stores and is useful in controlling obsolescence.Date of receipt or last date of issue,whichever is later,is taken to determine the no. of months which have lapsed since the last transaction.The items are usually grouped in periods of 12 months.It helps to avoid investments in non moving or slow items.It is also  useful facilitating timely control.