International Journal of Engineering Research & Technology (IJERT)

ISSN: 2278-0181
Vol. 4 Issue 12, December-2015

Analysis of Inventory Control Techniques and

Abstract— This paper aims to review the basic principles of  Maximum Level- As the name suggests it is that level
inventory control and reduction in material handling costs by above which the stock should reach or it the level above
discussing traditional techniques and parameters which which no more investments in stocking of goods or goods
influence them. It aims to define the relationship between is required. It ensures the losses due to obsolescence,
production and distribution and the use of technology to serve theft, deterioration of materials etc are minimized.
this relationship better. It also aims elucidate various flaws in
the typical techniques and provides solutions to the same. It  Minimum Level- It is the minimum level of stock
introduces RFID technology as a realistic technical tool which necessary to ensure that the sales do not stop due to lack
can help serve the supply chain more efficiently, with better of goods. It is the lowest level of inventory necessary for
balancing of resources and by acting as a continuous source of continuous and smooth operation of the production chain.
information. It also outlines the importance of customer
feedback on the sales and reputation of the company and its  Average Stock Level- It simply is the average of the
goods. With better visibility in a supply chain, several positive maximum stock level and the minimum stock level, i.e.,
changes can be brought which can redefine the operations and ½(Maximum stock+ Minimum stock).
investments involved.
 Danger Level- The danger level is that level under the
Keywords— Inventory; Control; Sorting; Techniques; Rfid; stock must never fall in any condition. It lies a little below
Customer; Satisfaction; the minimum stock level and in any case it does occur,
the company must try to bring up the produce
I. INTRODUCTION instantaneously.
With globalization, the world has observed a growth in
almost all spheres of life- population, technology and industry.  Economic Order Quantity (EOQ)- On considering the
With the growing competition and the rising unpredictability various costs such as order carrying costs, holding costs
of the demands, the pressure of designing a supply chain as and ordering costs, the optimum order quantity obtained
such to maximize cost effectiveness has risen exponentially. per order is called the economic order quantity. This
With uncalled and unpredicted demands, there comes an quantity finds a balance between the two major costs-
additional pressure on inventory. A well balanced firm is one Procurement cost and carrying cost. When the material is
which has struck a perfect balance between its production and ordered frequently in small lots, the procurement cost
its sales, thus causing no undue expenditure. For the same, one incurred increase. When larger lots are ordered, the order
of the major factors is the balance and control of the carrying costs increase. Since these two costs counteract
inventory. Inventory simply refers to the stocking of goods for each other, the balance is achieved at a specific point
the purpose of distribution and sales. Inventory plays a known to be the EOQ. It is directly proportional to the
significant role in deciding the company’s investment and demand of the product, its reordering cost and inversely
operational costs. Since the concept of “Just in Time” related to the carrying cost.
manufacturing cannot be applied everywhere, it is practical
and convenient to store to finished goods until it is ready for II. TRADITIONAL SORTING PRACTISES
shipping. The biggest question that now arises is, “How much Every business philosophy, Supply Chain Management
to store?” and “Where to store? [1].To understand this let us (SCM), Lean Manufacturing and others work to minimize the
first understand the basics of inventory control. costs involved. This reduction is best done by the adopting a
policy which reduces logistics costs and handle the inventory
Inventory control refers to the planned approach for
better. When the inventory share in the company’s assets is
determining what to order, when to order and how much to
from 15% to a quarter of a cent of total assets and costs
order so that the costs associated with buying and storing are
associated with inventory holding are from 10 to 20% of the
optimal without stalling the production and interrupting the
total cost, inventories represent a significant source of
sales [1]. To answer these questions, the various levels in an
financial savings [2]. Thus for a better management of
inventory that have to be considered are as follows:
inventory, the items are usually grouped and stacked in order
 Re-ordering Level- This is also known as the ordering of their significance, costing, speed of movement and some
limit. It lies somewhere between the maximum level and others. Depending on which parameter is of the highest
minimum level of storage. This quantity is such that it priority, we have the following as the most prominent types of
represents the quantity sufficient to meet the demands of sorting techniques:
consumers until new produce is made available. It is used
to refer as to when a order should be placed.

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 International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 4 Issue 12, December-2015

A. ABC Analysis inventory every year. Under this classification, we have a few
All the materials cannot be given the same attention and types:
some minor overlooking could prove costly. To correct this  Fast moving inventory- The target is to keep the
human error and for the sake of practicality, a company needs stocks of such goods high.
to divide the goods in an order of their significance. ABC  Middle moving inventory- The target is to keep a
analysis which is primarily based on the Pareto Principle, moderate level of stock and gradually to change them
which states that “Majority of the problems are caused due to into a fast moving inventory.
a minority of the total factors in the ratio of 80:20  Slow moving inventory- The target is to keep these
respectively” This we can simply interpret this as, not all stocks minimalistic yet increase their turnover to
factors weigh equally on a system and for this reason, it would increase optimization.
be advisable for a form to sort their inventory according to the  Non moving inventory- The target is to eliminate such
impact that item serves upon the parameter under study. inventories and thus reduce the undue loss caused by
it.
ABC analysis (Pareto principle) groups the items into
3 categories, namely A, B and C. This categorization is done D. Statistical Analysis
on the basis of how much the item impacts a set parameter. If not analyzed by the above methods, the next most common
The items covered in the A category are those which ad historical method is the statistical method. This method
correspond to the highest turnover and their storage stocks are involves the study and analysis of the previous sales and
kept minimum. These goods can take a longer time to order distribution cycles. The consumption over the years is studied.
but correspond to the highest percentage in terms of costs and It consists in the processing of complex time series of storage
are thus kept in low volumes. The next category is the B inputs, consumption and inventories of material items [3].
category. The items in this category represent a moderate and Because of the exclusion / confirmation of seasonality, it is
a moderate storage costs. They are maintained in optimum appropriate to choose a time horizon within 1-2 years. The
quantities and have a lesser impact on the turnover percentage goal of this step is to evaluate the actual item consumption and
than the items in the A category. Finally, in the C category, we some basic statistical parameters: average, standard deviation,
have the maximum quantity of goods. These goods have the trend or seasonality [4]. The process involves statistically
highest stock levels though they have least impact on turnover determining a demand and then based on that demand, we find
and the costs. the basic parameters for the set up of the inventory (safety
Thus to summarize the ABC analysis, the items are stock, minimum stock level etc). Followed by the
sorted in groups of three depending upon the impact they determination of the basic parameters, we move onto the
cause. Type A items have the least inventory and maximum replenishment processes and the design of the conceptual
impact, Type B have a moderate quantity corresponding to a model which includes working on parameters such as delivery
moderate impact and lastly Type C have the largest inventory times, management of daily supplies and other. The last step
yet the smallest cost. Thus maximum attention is paid to type includes the comparison of real time model against the
A items followed by B and then C. conceptual model formed. Various other real times factors
such as changing order costs, new services, coverage level and
B. XYZ Analysis others are included and finally the best suited model is
XYZ analysis is another technique adopted to sort out adopted.
goods. The basis of this technique is to sort the goods
according to the pattern of the demand or consumption. Along III. INCLUSION OF TECHNOLOGY- RFID TECHNOLOGY
with ABC analysis, this practice forms the basic frame for any AS NEWER METHOD.
inventory control and aids in optimization. XYZ analysis also The biggest drawback of any system working on any of
has 3 categories: the above principles is the fact that the above systems do not
provide for any source of information visibility. This is
 Group items X- These are those items whose demand can because the data accounted for at every step is forwarded
be forecasted easily. These goods are said to have a ahead in a cyclic form and any miscalculation can cause
stationary demand pattern. havoc. Thus, the basic and simplistic techniques for inventory
 Group items Y- These are goods with a variable demand handling are no longer predominant. If a charge sheet or an
and their demand might vary seasonally. Hence their Excel sheet is passed around for inventory data, several
forecasting is not completely accurate but moderately obvious factors can cause the flow of incorrect information.
accurate. Firstly, as stated earlier any miscalculation would be passed
 Group items Z- These are goods with a sporadic demand ahead for the remaining calculations which would cause a
and forecasting with special methods needs to be applied difference in the calculated result and the actual result. Since
here. the inventory helps decide the demand and the demand
Thus we can obtain a division of items according the decides the costs, a big difference will be caused by a small
forecasting capability and the demand of the item. human error. Apart from this, when large inventories are
handled by sheets, the workers responsible for the inventory
C. Inventory Turnover Analysis will not be able to circulate the information around. This again
The goal of the inventory control technique is to separate will cause a disturbance in the cycle. Due to the lack of
out the slow moving inventories and the obsolete inventories sufficient control, thefts and misdemeanor can step in causing
from a particular supply chain. The items are segregated an unhealthy work environment.
according to their rate of movement in and out of the

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 International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 4 Issue 12, December-2015

Since all these issues provide the solution for more Customer satisfaction is also important because it has an
information; clarity into the demands and better flow of impact on the reputation of the company and its market image.
information at every stage will lead to better management. A study conducted showed a five percent increase in loyalty
How can we ensure a better flow? By the use of ever growing can enhance profitability by 25 to 85 percent (Cacioappo,
technology, life has been made easier. By continuously 2000). Similarly, other studies have suggested and proved that
updating information provided in the real time will give a on average, four percent of the customers tend to be
more accurate insight into the events and eventually lead to a dissatisfied or complain about the product or service involved
better planning and control. The inclusion of technology for and at times both as well, and such dissatisfied customer
the ease of controlling inventories is popularizing and Radio
would probably tell nine other people a bad review, while a
Frequency Identification (RFID) is a popular enabler for the
satisfied customer would tell five people about the goodness
same. RFID integrated with sensors is also gaining demand
since it can read information from a distance thereby of the company (Cacioappo). This reference draws the
increasing the number of points that serve as sources of importance to another theory of the perfect order. Edward
information. This would increase the speed at which Marien, from the University of Wisconsin defines perfect
information is received and updated. This proves to be more order as that order when a customer finds the right product at
beneficial than a typical barcode system which does not have an appropriate destination in good condition with the proper
this unique feature. Bar-coding is tool used for creating documentation and at the least cost. The need for perfect order
visibility, innovation and control. Another electronic tool rooted the needs for tools which can assist this process.
being developed for applications is the Electronic Product
While understanding the customers’ needs there must be a
Code (EPC) which like the other tools would aid in the
clarity of what is required and how much is required. Surveys
development of a source of information, knowledge and
solutions to tackle the problems of the supply chains. Tajima and statistical analysis should be done using modern tools of
(2007) claims that this method of inventory handling will help analysis based on technology. Technology is important for the
realize process automation, solutions for information that proper flow of information. Any miscommunication can lead
requires processing which will in turn create visible and to change in standards and priorities which help a firm rate
innovative environment and cause a change in organizational and set their goals. Once again, technology which would be
and supply chain practices. According to Chao (2007), we are more reliable than manual gathering of knowledge would
currently at the beginning of integration of RFID into business serve as a quicker and less erroneous tool. However, the
workflows and supply chains of companies. biggest question to be asked is that “How does the collection
of this information play a role in the working of an
IV. BETTER INFORMATION LEADING TO SATISFIED organization and its customers?”
CUSTOMERS The surveys and statistical studies are crucial for the
According to retail historian, Robert Spector, a finance interpretation of the demand. This theoretical demand plays a
deciding factor for retailers is that they have a good and direct role in the inventory and the costs associated with it. If
controlled inventory system. Not having a good inventory the company can provide goods on time and in the best quality
system, retailers or suppliers will not be able to forecast at the best price then it would gain favors in terms of customer
demands with any kind of accuracy which would in turn result satisfaction. This would in turn lead to a positive impression
running out of stock frequently (Levinson, 2005). Customer of the company in the market causing an increase in
satisfaction is crucial because it serves as the best way to customers. However, if any insufficiency in terms of quantity
understand what a company should target in the market. It or quality are realized, the reputation of the company would
provides an insight into what should be their policies and be tarnished. Thus customer satisfaction would in turn help
services to ensure a streak of success from happy clients. determine the futuristic demand and the inventory needed for
Satisfaction can be subjectively defined from person to the same. These miscalculations can cause heavy losses and
person. For some clients, satisfaction would mean on time thus must be carefully examined.
delivery while to others it could be easy returns or heavy
discounts. However, as the seller one must take into V. CONCLUSION
considerations all the possible definitions of customer This paper provides us with a few concepts that one can
satisfaction. This is because a certain company’s loyalty and work with to create an ideal inventory model for the future.
We must understand the basic existing concepts and principles
product repurchase comes from achieving a good and
that are used in the designing of these current inventory
consistent customer satisfaction. The measurement of
models. Once we understand their pros and cons, we can start
customer satisfaction cannot be exact since this science is working on parameters that can strengthen the cons and
highly subjective. It is crucial to establish a link between determine ways to minimize the costs incurred in the pros.
customer satisfaction and the calculated results since customer
satisfaction is not a measurable quantity by nature, it requires The importance of inventory control in a company is vital.
sampling and statistical analysis. Additionally there is a gap Any shortages or the excess of production can lead to a
between expectations and actual performance perceptions success or a failure of a firm or the product. For the same, if
when qualitatively measuring customer satisfaction more reliable methods which would accurately give out the
number or the counts rather than a mismanaged manual
system, control over an inventory would be more convenient.
Sensor technology, RFID technology and bar-coding are some
techniques that are being used and continuous research to

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 International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 4 Issue 12, December-2015

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