Inventory Control

Inventory Control:Inventory control is a planned approach of determining what to order, when to order and how much to order and
how much to stock so that costs associated with buying and storing are optimal without interrupting production and sales. Inventory control basically deals with two problems: (i) (ii) When should an order be placed? (Order level) How much should be ordered? (Order quantity).77
These questions are answered by the use of inventory models. The scientific inventory control system strikes the balance between the loss due to nonavailability of an item and cost of carrying the stock of an item. Scientific inventory control aims at maintaining optimum level of stock of goods required by the company at minimum cost to the company.
Inventory Costs :Three basic costs associated with inventory management are: holding or inventory carrying cost, ordering or set-up cost, and shortage cost. Holding or carrying costs relate to having the items physically in storage. Costs include the cost due to interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, and warehousing costs (heat, light, rent, security). They also include opportunity costs associated with having funds which could be used elsewhere tied up in inventory. Note that it is the variable portion of these costs that is pertinent. The significance of the various components of holding cost depends on the type of item involved, although taxes, interest, and insurance are generally based on the dollar value of the inventory. Items that are easily concealed (e.g., pocket cameras, transistor radios, calculators) or fairly expensive (cars, TVs) are prone to theft. Fresh seafood, vegetables, meats and poultry products, and baked goods are subject to rapid deterioration and spoilage. Dairy products, salad dressings, medications, batteries, and film also have limited shelf lives. Holding costs are stated in either of the two ways: as a percentage of unit price or as a dollar amount per unit. In any case, typical annual holding costs range from 20 percent to 40 percent of the value of an item. In other words, to hold a $100 item for one year could cost from $20 to $40.
Ordering costs are the costs of ordering and receiving inventory. They are the costs that vary with the actual placement of an order. These include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage. Ordering costs are generally expressed as a fixed dollar amount per order, regardless of order size. When a firm produces its own inventory instead of ordering it from a supplier, the costs of machine setup (e.g., preparing equipment for the job by adjusting the machine, changing cutting tools) are analogous to ordering costs; that is, they are expressed as a fixed charge per production run or setup cost, regardless of the size of the run. Shortage costs result when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale, loss of customer good will, late charges, and similar costs. Furthermore, if the shortage occurs in an item carried for internal use (e.g., to supply an assembly line), the cost of lost production or downtime is considered a shortage cost. Such cost can easily run into hundreds of dollars a minute or more. Shortage costs are sometimes difficult to measure, and they may be subjectively estimated.
Inventory Control Techniques:ABC analysis:ABC stands for always better control. The items on hand are classified into A, B, and C types on the basis of the value in terms of capital or annual dollar usage (i.e., dollar value per unit multiplied by annual usage rate), and then allocates control efforts accordingly. Thus, the items with high value and low volume are kept in A-type, items with low value and high volume are kept in Ctype, and the items with moderate value and moderate volumes belong to the Btype. Once ABC classification has been achieved, the policy control can be formulated as follows: (a) A-Item: Very tight control, the items being of high value. The control need be exercised at higher level of authority. (b) B-Item: Moderate control, the items being of moderate value. The control need be exercised at middle level of authority.
(c) C-Item: The items being of low value, the control can be exercised at gross root level of authority, i.e., by respective user department managers.
Economic Order Quantity (EOQ):The materials can be either produced or purchased. In both situations, however, one needs to know the following: How much to produce in one time? How much to procure (order) in one time? The answer to this depends on the total-cost of production or total cost of purchase of items. There are three types of costs in purchasing: Material cost, Order placement cost or set up cost in production situation, Inventory carrying cost (it includes the cost of insurance, transportation, taxes, storage, obsolescence, etc. ). In this basic model we have the situation where the company orders from an outside supplier. The outside supplier delivers to the purchasing plant precisely the quantity it asks for; and it passes that stock onto its customers (either external customers, or internal customers within the same company (e.g. if ordering raw materials for use in the production process). This model makes the following assumptions: Stock is used up at a constant rate (R units per year). Fixed set-up cost Co for each orderoften called the order cost. No lead time between placing an order and arrival of the order (instantaneous replenishment). Variable stock holding cost Ch per unit per year. No safety stock is maintained. Then we need to decide Q, the amount to order each time, often called the economic order quantity (EOQ) or lot size.
For the first decisionhow much to order, there are two basic costs are considered namely, inventory carrying costs and the ordering or acquisition costs. As the quantity ordered is increased, the inventory carrying cost increases while the ordering cost decreases. The order quantity means the quantity produced or procured during one production cycle. Economic order quantity is calculated by balancing the two costs. Economic Order Quantity (EOQ) is that size of order which minimizes total costs of carrying and cost of ordering. i.e., Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost

Inventory Control

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Inventory Control:Inventory control is a planned approach of determining what to order, when to order and how much to order and

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