INVENTORY CONTROL

& MANAGEMENT
By WISSEN HUB CIVIL
What is inventory ?
Inventory is an asset that is owned by a business that has
the express purpose of being sold to a customer. Inventory
refers to the stock pile of the product a rm is o ering for
sale and the components that make up the product.
Raw material and supplies: It refers to the un nished items which go in
the production process.
Work in Progress: It refers to the semi- nished goods which are not 100%
complete but some work has been done on them.
Finished goods: It refers to the goods on which 100% work has been done
and which are ready for sale.
What is inventory management
Inventory management is the practice overseeing and
controlling of the ordering, Storage and use of components
that a company uses in the production of the items it sells. A
component of supply chain management, inventory
management Supervises the ow of goods from
manufacturers to warehouses and from these facilities to
point of sale. Inventory control means e cient
management of capital invested in raw materials and
supplies, work- in – progress and nished goods.
Cost of Cost associated Storage and Absence of
purchasing with bringing keeping inventory inventory
inventory inventory item items within
within production production unit
unit
Objective of inventory management
The objective of inventory management is to maintain inventory at
an appropriate Level to avoid excess or shortage of inventory.
Inventory management systems reduce the cost of carrying
inventory and ensure that the supply of raw material and nished
goods remains continuous throughout the business operations
Operation objective
They are related to the operating activities of the Business
like purchase, production, sales etc.
a. To ensure continuous supply of materials.
b. To ensure uninterrupted production process.
c. To minimize the risks and losses incurred due to shortage of
inventory.
 d. To ensure better customer services.
e. Avoiding of stock out danger.
Functional objective
a. To minimize the capital investment in the inventory.
b. To minimize inventory costs.
c. Economy in purchase.
Apart from the above objectives, inventory management also emphasize to bring
down the adverse impacts of holding excess inventory. Holding excess inventory
lead to the following consequences
• Unnecessary investment of funds and reduction in pro t.
• Increase in holding costs.
• Loss of liquidity
• Deterioration in inventory.
 Techniques of inventory management
Inventory control refers to a process of ensuring that appropriate
amount of stock are maintained by a business, so as to be able to mee
customer demand without delay while keeping the costs associated
with holding stock to a minimum.These techniques are divided into two
categories – modern techniques and traditional techniques.
MODERN TECHNIQUES
1. EOQ ( HARRIS WILSON MODEL)
Ford Harris developed this method in 1915. R.H Wilson in 1943
popularized this method among researchers
The optimal size of an order for replenishment of inventory is called
economic Order quantity. Economic order quantity (EOQ) or
optimum order quantity is that Size of the order where total
inventory costs (ordering costs + carrying costs) are minimised.
Economic order quantity can be calculated from any of the following
two methods: 1. Formula method
2. Graphical method
1. FORMULA METHOD
It is also known as ‘SQUARE ROOT FORMULA’ or WILSON FORMULA’ as
given below:
R = annual requirement or
consumption in units
O = Ordering cost per order
C= carrying cost per order
No of order = R/EOQ
Robustness
Ratio of TOTAL inventory
cost at any point to the
total inventory cost
corresponding to EOQ

Total cost = Purchase cost + carrying cost+ Order cost

Total cost = (R× Unit Price) + (EOQ/2 × C) + (R/EOQ × O)
Assumptios
The rate of consumption of inventory is assumed to
be constant.
Costs will not change over time.
Lead time is assumed to be known and constant.
Per order cost, carrying cost and unit price are
constant.
Carrying or holding costs are proportionate to the
value of stock held.
Ordering cost varies proportionately with the price.
Ques 1. Demand of a particular mobile item is 100 unit/ year. Ordering
cost is 200 rs/order and handling charges is 4 rs/unit/year. Find EOQ
Ques2. Calculate the economic order quantity from the following
particulars
Annual requirement = 2000 units
Cost of material per unit = Rs 20
Cost of placing and receiving one order = Rs 40
Annual carrying cost of inventory 20% of inventory value
Ques 3. A company's annual demand is 18000 unit and cost price/unit
is Rs 4. Ordering cost Co = 120/order and inventory carrying cost is
12% per annum of unit cost value. Lead time = 10 working day and
total working day in year are 300 then determine
1) EOQ
2) Optimum number of order/year
3) Length of inventory cycle
Ques 4. Which one among the following
subsequent isn't an ordering cost?
Jkssb je 2021
(A) Transportation costs
(B) Unloading costs
(C) Inventory store costs
(D) O ce and administrative expenses related
to purchasing, accounting and receiving
Ques 5. The annual demand for window frames is 20,
000. Each frame costs Rs. 400 and the order cost is Rs.
600 per order. Inventory holding cost is Rs. 50 per
image per year.Calculate the economic order quantity.
Jkssb je 2021
A) 670 units
(B) 643 units
(C) 605 units
(D) 683 units
2. Re-order point
After determining the optimum quantity of purchase order, the next problem is to
specify the point of time when the order should be placed. Re-order level is that
level of inventory at which an order should be placed for replenishing the current
stock of inventory. The determination of re-order point depends upon the lead
time, usage rate and safety stock.
Lead time Lead time refers to the time gap between placing the
order and actually receiving the items ordered.
It refers
Usage rate per day. to the rate of consumption of raw material
Usage Rate = Total annual consumption / No. of days in a Year
It is the minimum quantity of inventory which a rm
Safety decides to maintain always to protect itself against the risk And
stock losses likely to occur due to stoppage in production and loss of sale,
due to non- availability of inventory.
 Re order point = (lead time × usage rate) + safety stock
3. Fixing stock levels
Fixing of the stock levels is necessary to avoid increased
cost on account of high Inventory levels and to avoid
loss of sales or stoppage of production due to low level
of inventory. Therefore, e orts should be made to keep
the inventory level within the speci ed minimum and
maximum limits.
Availability of ample storage space.
Lead time involved i.e. time required in receiving the goods
ordered.
Availability of working capital to meet the routine expenses.
Average rate of consumption of material
4. Selective Inventory control
Maintaining varied types of inventories involve di erent costs
associated with them. Some inventory items are low priced, some
are medium priced and some are very expensive. Thus, inventory
costs has to be looked into rst before Deciding the type of control to
be exercised on it. The costs associated with inventory include the
purchase cost, ordering cost and the holding cost.
A) ABC ANALYSIS ALWAYS BETTER CONTROL
The Pareto Principle is developed by Vilfredo Pareto (1848 - 1923).
According to Pareto Analysis, critical few is separated from the
trivial many. Pareto principle is also known as the 80/20 rule.
Pareto principle is based upon the theory that 20% of the
population owns 80% of the nation’s wealth,
most of the businesses get 80%of their sales revenue from 20% of the
customers, 80% of the problems are cased because of 80% of the
employees and 20% of the items accounts for 80% ofthe rms
expenditure.
ABC analysis classi es the raw materials based on their consumption
during a particular time period (usually one year).
XYZ analysis is more used in relation of the customer demand for
nished goods.
A10%class
items
BNearlyclass C class
15% items Nearly 75% items
accounts for 75 accounts for 15% accounts for only
capital invested in cost invested in 10% of the cost
inventory inventory invested in
• A class items are ordered frequently but in SMALL
number
• More e orts are made to reduce the lead time of A class
item
• Statistical sampling is generally useful to control B class
item
• Moderate e ort to reduce time of B class item
Que.Which of the following inventory items is examined most
frequently in the ABC inventory control system?
Jkssb je 2021
(A) Expensive, frequently used and high-cost inventory
items with short delivery times.
(B) Expensive, frequently used items with high shipping
costs and long deliverY times
(C) Out-of-stock items are inexpensive, used frequently,
low cost With long delivery time.
(D) Expensive, frequently used and low-cost inventory
items with short delivery times.
Ques. Which one of the following is
NOT a project management
technique? Jkssb je 2021
1. CPM
2. PERT
3. ABC ANALYSIS
4. BAR CHART
Ques Which of the following statements
about ABC analysis is false?
a. ABC analysis is based on the presumption that
controlling the few most important items produces the
vast majority of inventory savings.
b. In ABC analysis, Ques
"A" Items are tightly controlled, have
accurate records, and receive regular review by major
decision makers.
c. ABC analysis is based on the presumption that all
items must be tightly controlled to produce important cost
savings.
d. In ABC analysis, "C" Items have minimal records,
periodic review, and simple controls
Ques Classifying items in A, B and C
categories for selective control in inventory
management is done by arranging items in
the decreasing order of: UPPSC AE 2019
1. Total inventory costs
2. Item value
3. Annual usage value
4. Item demand
Ques. ABC analysis, as an input,
requires UPPSC AE 2013
1. Annual usage and cost of the items
2. Cost and criticality of the items
3. Criticality and availability of the items
4. Availability and annual usage of items
Ques. In ABC analysis, A
item requires
1. No safety stock
2. Low safety stock
3. Medium safety stock
4. High safety atock
2. VED Analysis Descending order of their criticality
VED stands for Vital, Essential and Desirable.
Highest control is over vital items, medium control is exercised over
essential items and least control is inferred over desirable items.
Those items which when required are
vital they make the whole system inoperative not available,
Essential Those items which when demanded are not
available reduce the e ciency of the system are
called essential items
Desirable Desirable items are such that even if they are not
available they neither stop the system nor
reduces it's e ciency but it will be good if they are
present in the system
3. SDE Analysis
SDE stands for Scarce, Di cult and Easy. Highest
control is over scarce items, medium control is exercised
over di cult items and least control is inferred over easily
available items
4. FSND analysis
The items can also be classi ed into categories according to
descending order, of their usage rate or movement
F - FAST MOVING , S - SLOW MOVING , N - NON MOVING AND D -
DEAD
FNSD analysis is particularly useful yo combat obsolete items
4. XYZ Analysis
The XYZ analysis is a way to classify inventory items according to
variability of their demand.
• X – Very little variation: X items are characterised 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 uctuations are caused by known
factors, such as seasonality, product lifecycles, competitor action
or economic factors. It's more di cult to forecast demand
accurately.
• Z – The most variation: Demand for Z items can uctuate
strongly or occur sporadically. There is no trend or predictable
causal factors, making reliable demand forecasting impossible.
5. GOLF analysis
The GOLF classi cation of inventory items is done considering the
nature of suppliers. As the source of supply of di erent items are
di erent, with a view to determining the lead time, order quantities,
safety stock and terms of purchase and payment.
G = Government controlled supplies
O = Open market supplies
L = Local supplies
F = Foreign market supplies.
6. SOS ANALYSIS
This analysis is based on the nature of suppliers and period of their
availability. This is useful for deciding the time of purchase or
procurement, so that the cost of materials and the holding cost may
be balanced.
Traditional techniques
Traditional techniques refers to those techniques which are
prevalent before the evolution of the modern techniques. These
techniques were derived with the working practice and are based
on experience and ease of usage by the workers and the small
business enterprises
1. Inventory control ratio
Ratios related to inventory are calculated and further used as
a measure of control.
Stock Turnover = Cost of goods sold / Average Stock
2. Two bin method
Under two bin system, all the inventory items are stored in two separate bins. Bin
means container of any size. In the rst bin, a su cient amount of inventory is
kept to meet the current requirement over a designated period of time. In the
second bin, a safety stock is maintained for use during lead time. When the stock
of rst bin is completely used, an order for further stock is immediately placed.
The material in second bin is then consumed to meet stock needs until the new
order is received. On receipt of new order, the stock used from the second bin is
restored and the balance is put in the rst bin. Therefore, depletion of inventory in
the rst bin provides an automatic signal to re-order. Thus, this technique is
traditional yet logical and can be used by illiterate workers also without using any
formula.
 Bin 1 Bin 2
3. Perpetual inventory System
Perpetual inventory system is de ned as the method of recording
stores balance after each receipt and each issue to facilitate regular
checking of inventory. It is also known as continuous stock checking.
 The application of perpetual inventory control system involves –
(i) Attaching bin cards with bins.
(ii) Continuous stock taking to compare the actual stock.
Bin cards refers to the cards attached to every bin in which the
details regarding the quantity of material received, issued and
balance left in that bin is recorded hand to hand. Under this system,
statement of material, follow up actions, monitoring etc. can be
smoothly carried out.
4. Periodic order system
Under this system, the stock levels of all types of inventories held,
are reviewed after a xed time interval. Time interval may be
weekly, fortnightly, monthly, quarterly etc. depending upon the
criticality of the item.
Critical items may require a short review cycle and on the
other hand, lower cost and non-moving items may Require
long review cycle. Therefore, for di erent items di erent time
intervals Should be used. After the review, the items which
are less than the required level, order is placed to replenish
their exhausted level.
 Break even analysis
Fixed cost (FC) remain the same, regardless of your output. Rent,
insurance, and base salaries are examples of xed
costs.
Varriable cost (VC) change with the number of units produced
or sold. Examples are materials, sales
commissions, and direct labor costs. Therefore,
total variable costs (TVC) equal the variable
costs multiplied by the number of units, or TVC
= n x VC, where n is the number of units.
equal total xed costs
Total cost TC = FC + (n x VC). plus total variable costs:
Total revenue
is the price charged per unit
multiplied by the number of units
produced or sold: TR = n x P,
where P equals the unit price.
TC = TR
FC + (n x VC) = n x P
n( FC/ n + VC) = n × P
FC/n = P - VC
n = FC / (P- VC )
If FP ⬆ BEP ⬆
if VC ⬆ BEP ⬆
If selling price ⬆ BEP ⬇
Que. Break Even point represents
1.Pro t
2.Loss
3.No Pro t and No Loss
4.None of these
Ques Break-even point shows that
1. sales revenue > total cost
2.sales revenue < total cost
3.sales revenue = total cost
4.variable cost = xed cost
Ques. Break-even analysis chart is drawn
between
1. overhead cost and xed cost
2.volume of production and income
3.material cost and labour cost
4.none of these
Ques .The di erence between actual
sales and breakeven point is known as
1.Margin of safety
2.Price-cost margin
3.Contribution
4.Pro t
Ques. A toy manufacturing factory has an annual
capacity of 12,000 toys. If the xed costs are rupees 1
lakh/year, variable cost rupees 20 per unit, and selling
price rupees 40 per unit, the quantity to break-even is
______ units.
1. 5000
2. 300
3. 2500
4. None of these