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Inventory
control and
management

Deepak Gupta
M.Pharm (Pharmaceutics)
Jamia Hamdard, SPER
New Delhi

 

– Every organization is supposed to maintain their supply of material, man power, spares, stock
material etc. for working efficiently and smoothly.

– If there is any shortage of above mentioned things, they can cause havoc and can temporarily stop
the work of the organization.

– For maintaining the supply of material, spares and stock material etc. in the
organization, INVENTORY CONTROL AND MANAGEMENT plays an important role.

– Many distributors don’t have control of their inventory. From stock outs to too much of the same
product, from not knowing what is in stock, to not being able to find items in their own
warehouses, distributors of all sizes struggle when it comes to achieving “effective inventory
management and control

 

– A physical resource that a firm holds in stock with the intent of selling it or transforming it into a
more valuable state.

What is an Inventory System ?

– A set of policies and controls that monitors levels of inventory and determines what levels should
be maintained, when stock should be replenished, and how large orders should be placed.

 

 

Items carried in an inventory store /Types of
inventories:-

– Raw materials(Basic inputs that are converted into finished product through the
manufacturing process).

– Purchased parts ,Components and sub-assemblies (plant materials which do
not directly enter into production but are necessary for production process )

– Work-in-process (Semi-manufactured products which need some more work
before they become ready for sale)

– Finished goods(products completely manufactured and ready for sale)

 

Benefits of inventory control and
management:-

– Proper planning, acquisition, supply & control of materials.

– Ensures an adequate supply of materials to facilitate uninterrupted production.

– Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes

– wastage and shortage is minimized .

– Minimizes inventory costs.

– Eliminates duplication in ordering. Better utilization of available stocks.

– Provides a check against the loss of materials.

– Locates & disposes inactive & obsolete store items

– reduce investment.

– Smoothen production.

– Adequate and smooth supply of the finished products at the right time and in the right quantity (to meet
costumer requirement).

– Protect against stock out .

 

Inventory control

– Inventory Control is the process by which 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.

– Inventory control pertains primarily to the administration of established
policies, systems & procedures in order to reduce the inventory cost.

 

Classification of Inventory

Always Better Control (ABC) Analysis
– This technique divides inventory into three categories A, B & C based on their annual consumption value.

– It is also known as Selective Inventory Control Method (SIM)

– ABC analysis has universal application for fields requiring selective control.

– Considers only money value of items & neglects the importance of items for the production process or assembly or
functioning

 Procedure for ABC Analysis-

1)Make the list of all items of inventory.

2)Determine the annual volume of usage & money value of each item.

3)Multiply each item’s annual volume by its rupee value.

4)Compute each item’s percentage of the total inventory in terms of annual usage in rupees.

5)Select the top 10% of all items which have the highest rupee percentages & classify them as “A” items.

6)Select the next 20% of all items with the next highest rupee percentages & designate them “B” items.

7)The next 70% of all items with the lowest rupee percentages are “C” items.

 

VED Analysis
– VED: Vital, Essential & Desirable classification

– VED classification is based on the criticality of the inventories.

– Vital items – Its shortage may cause havoc & 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 does not stop; but the efficiency of
operations 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 & when needed. They may be stocked very low or not stocked.

– VED analysis can be better used with ABC analysis.

 

FSN Analysis
– FSN: Fast moving, slow moving & non moving.

– Classification is based on the pattern of issues from stores & is useful in controlling obsolescence.

– Fast Moving – Items which are frequently issued from inventory which are more than once for a specific
time period.

– Slow Moving – Items which are less frequently issued which might be once in a specific time period.

– Non Moving – Items which are not issued from the inventory at all in a specific time period.

– The period of consideration & the limiting number of issues vary from organization to organization.

 

Inventory management

– The act or manner of managing, handling, directing or
controlling the flow of inventory.

– Effort should be made to place an order at the right time with
right source to acquire the right quantity at the right price and
right quality.

 

Types of costs

– An optimum inventory level involves three types of costs

– Ordering costs:- Quotation or tendering ,Requisitioning ,Order placing ,Transportation, Receiving,
inspecting and storing Quality control, Clerical and staff

– Stock-out cost:- Loss of sale, Failure to meet delivery commitments

– Carrying costs:- Warehousing or storage ,Handling Clerical and staff, Insurance, Interest ,Deterioration,
shrinkage, evaporation and obsolescence ,Taxes ,Cost of capital

 

 

Models

– Inventory model is a mathematical model that helps business in determining
the optimum level of inventories that should be maintained in a production
process, managing frequency of ordering, deciding on quantity of goods or raw
materials to be stored, tracking flow of supply of raw materials and goods to
provide uninterrupted service to customers without any delay in delivery.

– A major objective in controlling inventory is to minimize total inventory costs.

– Fixed Reorder Quantity System

– Fixed Reorder Period System.

 

– Fixed Reorder Quantity System.

– Fixed Reorder Quantity System is an Inventory Model, where an alarm is raised
immediately when the inventory level drops below a fixed quantity and new
orders are raised to replenish the inventory to an optimum level based on the
demand. The point at which the inventory is ordered for replenishment is
termed as Reorder Point. The inventory quantity at Reorder Point is termed as
Reorder Level and the quantity of new inventory ordered is referred as Order
Quantity.

 

– Fixed Reorder Period System.

– Fixed Reorder Period System is an Inventory Model of managing inventories,
where an alarm is raised after every fixed period of time and orders are raised
to replenish the inventory to an optimum level based on the demand. In this
case replenishment of inventory is a continuous process done after every fixed
interval of time.

 

EOQ MODEL

– EOQ Model The Economic Order Quantity (EOQ) model is one of the oldest and most
commonly known inventory control techniques.

– This technique is relatively easy to use, but it makes a number of assumptions .

– Basic EOQ Assumptions:-

– Demand is known and constant.

– The lead time – that is, the time between the placement of the order and the receipt of the
order – is known and constant.

– The receipt of inventory is instantaneous. In other words, the inventory from an order arrives
in one batch, at one point in time.

– Quantity discounts are not possible.

– The only variable costs are the cost of placing an order, ordering cost, and the cost of holding
or storing inventory over time, carrying, or holding, cost.

 

With these assumptions, inventory usage has a sawtooth
shape.
In the graph, Q represents the amount that is ordered.

If this amount is 500 units, all 500 units arrive at one time
when an order is received.
Thus, the inventory level jumps from 0 to 500 units. In

general, the inventory level increases from 0 to Q units
when an order arrives.
Because demand is constant over time, inventory drops at a
uniform rate over time. Another order is placed such that
when the inventory level reaches 0, the new order is
received and the inventory level again jumps to Q units,
represented by the vertical lines. This process continues
indefinitely over time.

 

As the value of Q increases, the total number of orders placed
per year decreases. Hence, the total ordering cost decreases.
However, as the value of Q increases, the carrying cost
increases because the firm has to maintain larger average
inventories.

The optimal order size, Q*, is the quantity that minimizes the
total cost. Q* occurs at the point where the ordering cost
curve and the carrying cost curve intersect.