Inventory control definition

Inventory control, also known as stock control, is regulating and maximizing your company’s warehouse inventory. The goal of inventory
control procedures is to maximize profits with minimum inventory investment, without impacting customer satisfaction levels.

Inventory control involves warehouse management. This includes:

• Barcode scanner integration
• Reorder reports and adjustments
• Product details, histories, and locations
• Comprehensive inventory lists and counts
• Variants, bundles and kitting
• Syncing stock on hand with sales orders and purchase orders

Inventory is the collection of unsold products waiting to be sold. Inventory is listed as a current asset on a
company's balance sheet. Inventory is the life blood of the industries. But an excess or shortage of inventory is
harmful. It is the most important component of working capital.
The term inventory is used to denote the stock on hand at a particular time comprising raw materials, goods in
the process of manufacture and finished goods. An inventory has a primary significance for accounting
purposes to ascertain the correct income for a particular period. Inventory plays a very important part in the
determination of profit of a business.
Concept of Inventory Control:
The term inventory control is used to cover functions which are quite different and are related to one another only
in that they both require the maintenance of adequate records of inventory as well as receipt and issue
corresponding to these two functions. It is interpreted as accounting control and operating control.
Accounting control of inventories is concerned with the proper recording of the receipt and consumption of the
material as well as the flow of goods through the plant into finished stock and eventually to customers.

Methods of Inventory Control:

• Inventory control is concerned with the periodic review of materials in stock to detect those not required for
planned production or for other purposes not required and whether obsolete materials continue to occupy
storage space until removed from stores.
• The inventory control methods give us a means for determining an optimal level of inventory as well as how
much should be ordered and when. There are several methods suggested for inventory controls.
In the financial sector, inventory is defined as “the sum of the value of raw materials, fuels and lubricants, spare
parts, maintenance consumables, semi-processed materials and finished goods stock at any given point of time”.
S.E. Walters states, “The term inventory refers to the stockpiles of the product a firm is offering for sales and the
components that make up the product”.
James H. Green observed, “An inventory refers to the movable articles of the business which are eventually expected
to go into the flow of trade.”
 6.2 Need and Classification of Inventory

Inventory Classification
• Inventory classification can help a company control its inventory by reducing the amount of stock they have on
hand and by increasing the inventory turnover ratio.  Both of which make a company’s distribution network
more efficient and lower its overall cost. Usually inventory items are classified into three categories by following
the ABC approach. The ABC approach provides a way of categorize items that will have a big impact on overall
inventory cost. It also provides a way for Supply Managers for identifying items that require different controls
and oversight. These categories are:

• Class A:  These are high revenue products that account for 80% of annual sales and 20% of inventory
• Class B: These are products account for 15% of annual sales
• Class C:  These are products account for 5% of annual sales. These are low volume sales items
• Another recommended breakdown of ABC classes: [1]
• Class A: approximately 10% of items or 66.6% of value
• Class B: approximately 20% of items or 23.3% of value
• Class C: approximately 70% of items or 10.1% of value
• Classifying inventory will allow the Supply Manager to set up a review schedule to check inventory levels to
establish inventory control. With Class A items they should have a high-frequency review schedule and strict
controls. With Class B items they should have a periodic review schedule to establish moderate control utilizing
EOQ and Reorder Point Analysis. Class C items should have moderate controls too because keeping high stock
levels of these products is costly, takes up space and reduces the turnover ratio.
Classification of Inventory:
The inventory may be classified into the following categories:

(a) Raw Materials Inventory:

This consists of basic materials that have not yet been committed to production in a manufacturing firm. Raw
materials that are purchased from firms to be used in the firm’s production operations. The aim of maintaining
raw material inventory is to uncouple the produc­tion function from the purchasing function so that delays in
shipment of raw materials do not cause production delays.
(b) Stores and Spares:
This includes those products which are accessories to the main products produced for the purpose of sale.
Examples of stores and spares are bolts, nuts, clamps, screws, etc. These spare parts are generally bought from
outside.
(c) Works in Process Inventory:
This includes those materials that have been committed to the production process but have not been
completed. The more complex and lengthy the production proc­ess, the larger will be the investment in work in
process inventory.
(d) Finished Goods Inventory:
These are completed products awaiting sale. The purpose of finished goods inventory is to uncouple the
production and sale functions so that it is no longer neces­sary to produce the goods before a sale can occur.
On the basis of functions, inventory may be classified into the following four types:
(i) Lot-size Inventories:

(ii) Fluctuation Inventories:
Because of the demand and supply factors, the market for certain commodities or raw materials generally
fluctuates. This fluctuation is marked in respect of agro-based products. When the availability of raw materials
is seasonal, bulk stocks are purchased and stocked throughout the year in order to meet the high demand
during the season. Since demand fluctuates over time and cannot be forecasted accurately, some reserve
stocks are necessary. Those safety stocks are fluctuation inventories.
(iii) Transportation Inventories:
iv) Anticipation Inventories:

Need for Inventory:

• A businessman needs inventory to carry on the day-to-day operations of his business. Now busi­ness activity
has increased and the problem of inventory has also become more complex. The business­man needs more
cash to conduct his daily business activities. Therefore, the higher the level of inven­tory, the lower the level
of cash.
• One of the causes for the failure of a business is a huge inventory. The existence of large quantities of
inventories is naturally a cause for alarm. The need for inventory must be balanced against the preference
for liquidity. If we can stock the required inventory well in advance, we are able to save the cost of idle time
of machinery and the cost of idle time of men.

6.3 Advantages and disadvantages of holding inventory:

Inventory Control: Benefits of Holding Inventories
• Inventory management is primarily about specifying the shape and percentage of stocked goods. It is
required at different locations within a facility or within many locations of a supply network to precede
the regular and planned course of production and stock of materials.
• The intent of inventory management is to continuously hold optimal inventory levels. The benefits of
holding inventories are;
1. Avoiding Lost Sales

2. Gaining Quantity Discounts

The other benefits of holding inventories is your company can make bulk purchase on raw materials and gain
quantity discounts. The suppliers of raw materials are willing to give generous discounts by reducing the price
of  supplies and components parts if it is purchase in bulk. As a business owner who are willing to place a large
order of certain materials from regular suppliers may allow your company to receive discounts on regular
prices, thus it will lower your cost and achieve competitive price in your market. These discounts will reduce
the cost of goods and increase profits earned on sale.
3. Reducing Order Cost
By ordering in large numbers, your business will reduce the cost it incurs. Some of the cost involves when
making an order is forms that must be completed, approvals need to be obtained, and the goods arrive must be
accepted, inspected and counted. Then, an invoice must be issued and payment must be made. The cost of
receiving materials may be vary according to the numbers of orders made. By making bulk orders, the number
of orders will reduce and lessen the cost involved.
4. Achieve Efficient Production Runs
Start up Cost incurred when a company sets up its labor/manpower and machines to produce goods. The cost then absorbed when production begins. The cost will reduce to begin the
production of the goods if the process of producing run longer.
Take this as an example; let say it cost $10,000 to setup machinery and assembly line to produce sofa chair. If 1000 sofa chairs are produced in a single-three day run, the cost of absorbing
the start-up expenses is $10 per unit (10,000/1,000). If the run could be doubled to 2000 units, the absorption cost will would drop to $5 per unit (10,000/1,000).
When your company frequently setting up its production line, it will increase its start-up cost. Holding an inventory to make sure the production line will never ran out of raw materials will
ensure longer run in your production line, hence lower the start-up cost.

5. Reducing risk of production shortages

An inventory is needed to stored large amount of raw materials and unprocessed components. Manufacturing
companies deals with thousands, if not millions of components. If one single component ran out of stock, the
entire production line could be halted. Just imagine million dollars of machinery and manpower halted in the
production line just because a shortage of nuts and bolts in the component stock, your company are at risk of
losing tons of money!
To avoid that risk, your company must equip itself with its own inventory management system. The system will
prevent the shortage of vital raw materials and components needed to produce goods. The system will manage
and notify any shortages before it’s materialized. The inventory management system are suitable to 
maintaining large quantities of stocks

The Disadvantages of Holding Too Much Inventory on Hand

• Proper inventory management is a key part of helping retail and manufacturing businesses operate
efficiently. Inventory is the largest asset for many of these businesses. They might hold excess inventory for
many reasons, such as guarding against shortages, ensuring bulk purchasing discounts and dealing with
shifts in customer demand. While there are advantages to holding too much inventory on hand, there are
also disadvantages that companies must consider when implementing an inventory control plan.
Storage Capacity and Fees
Storage capacity and the related storage fees are a concern for companies holding more inventory than is
needed. It takes space and resources to hold inventory. Companies lose profit by paying labor for maintaining
the storage space, organizing the stock and transporting the stock from one place to another. Companies that
rent storage space lose additional profit by paying rental fees to store unused stock.

Obsolete Stock
Companies that keep up with buying trends might find overstocking inventory to be a disadvantage. Consumer
tastes change quickly and products can become outdated if they sit around in inventory for a few months,
particularly when it comes to clothing and other fashion items. In these cases, a warehouse full of trendy
product quickly becomes a warehouse full of devalued product.
Perishable Products
Overstocking perishable items often results in the items sitting in storage past the recommended “use by” date.
For example, food businesses cannot sell out-of-date products because of the risk to the health and safety of
customers. In these cases, overstocking results in items that must be thrown out, meaning they are a total loss.
Discounts
A business owner who overstocks often finds himself in the position of needing to sell the inventory at deeply
discounted prices in order to clear up space for new inventory. By selling discounted stock the business suffers
low margins and profits.
Cost
A major disadvantage to holding too much inventory on hand is the negative cost implications. Purchasing any
type of inventory or product ties up the funds of the company and prohibits those funds from being used
elsewhere in the business. Holding too much inventory ultimately affects the cash flow of the business,
especially when the inventory is sitting in storage and is not being sold for profit.
 
6.4 Various Levels of Inventory:
Stock Level: Type # 1. Minimum Level:
This represents the quantity which must be maintained in hand at all times. If stocks are less than the minimum level,
then the work will stop due to shortage of materials.

Following factors are taken into account while deciding minimum stock level:
• (i) Lead Time:
A purchasing firm requires some time to process the order and time is also required by the supplier/vendor to
execute the order. The time taken in processing the order and then executing it is known as lead time. It is
essential to maintain some inventory during this period to meet production requirements.
• (ii) Rate of Consumption:
It is the average consumption of materials items in the industry. The rate of consumption will be decided on the
basis of past experience and production plans.
• (iii) Nature of Material:
The nature of material also affects the minimum level. If a material is required only against special orders of the
customer then minimum stock will not be required for such materials.
• (iv) Re-ordering Level:
When the quantity of materials reaches a certain level then fresh order is sent to procure materials again. The
order is sent before the materials reach minimum stock level.
Reordering level is fixed between minimum level and maximum level. The rate of consumption, number of days
required to replenish the stocks, and maximum quantity of materials required on any day are taken into
consideration while fixing reordering level.
 6.5 SCOPE of INVENTORY CONTROL

7 Main Scopes of Inventory Control and Management

1. Determination of economic order quantity:

• Economic order quantity or economic lot size refers to that number ordered in a single purchase or
number of units should be manufactured in a single run, so that the total costs — ordering or set up costs
and inventory carrying costs are at the minimum. So, the determination of E.O.Q. is also within the scope
of inventory control.
2. Formulation of policy:
• The policies of investment procurement, storage, handling, accounting, storages and stock outs,
deterioration, obsolescence etc. are to be formulated under the scientific system of inventory control.
What, when and how much of purchasing and fixation of minimum and maximum levels is also to be
determined for a given period of time.
3. Determination of lead time:
By lead time is meant the time that lapses between the raising of an indent by the stores and the receipt of
materials by them. Lead time is of fundamental importance in determining inventory levels.
4. Effectiveness towards running of store:
• The deter­mination of policies of the location, layout and materials and storage handling equipments
certainly help in the effective working of stores organisation.
5. Organisation structure:
• After determining of inventory policy, the next step is to decide the location, layout and types of
storehouse. It facilitates the movement of materials and thus minimise the storage and handling cost of
stores.
6. Determination of safety stock:
Safety stock is defined as the difference between the amount stocked to sati.sfy demand during a certain time interval and
the mean expected demand for that period. It is for the purpose of providing protection against depletion. If demand
remained constant and lead tin-; is invariable, there would be no fear of shortages and no need for safely stocks.

The exact quantity of safety stock of an item depends upon its lead time, usage value, and variability of lead
time demand, carrying charges and the importance of its stock out cost. Again, determination of buffer stock
reserve stock is included in the management of inventory.
7. Minimum material handling and storage cost:
• Stores organisation activities are arranged in such a manner that the east of bringing in the store house
and issuing from the store house if the various stores, will minimise the storage and materials handling
cost of stores.
 6.6 Various Elements of Inventory Costs:

- Inventory Planning
Businesses must plan their inventory. Running out of high-demand items leads to lost sales and lost customers. In an
ideal inventory-control situation, new inventory should come in at the same time old inventory is depleted.
Accomplishing this requires accurate, up-to-date shipping and receiving data; inventory is not only what is held in stock
but also items that are in transit or are being sold on consignment. By maintaining good shipping and receiving records,
including data on when items are ordered, received, purchased or shipped, a business can better understand its
turnover rate and avoid long-term shortages.
- Establishing Order Cycles
Many businesses have busy seasons throughout the year where particular items have increased demand for a number
of weeks or months. These seasonal items are a boon to business but carry the risk of encouraging excess inventory
that is difficult to move when the busy season ends. To avoid either an inventory glut or an inventory shortage,
inventory-control methods must include a balance of ordering enough stock to meet demand without exceeding
predicted turnover. Even beyond seasonal sales, being able to predict order cycles is the best way for a business to stay
ahead of the stocking curve.
- Balancing Stock
Inventory control means balancing inventory between keeping high-demand items in stock and preventing less-
desirable merchandise from becoming obsolete. Many businesses apply an "ABC" method to ordering; using the
principle that 80 percent of a company's profits comes from 20 percent of its products, merchandise is categorized into
three rough priorities -- A, B or C. The "A" items are those 20 percent, regardless of unit price, that have the biggest
impact on a company's dollar value. These items receive highest priority in ordering, with "B" and "C" items each
receiving proportionately less reordering priority to maintain manageable levels.
Proper inventory management is a necessary component of any business that carries stocked items. Much
of a business's capital is tied up in its inventory, and it effectively represents sitting money until it sells. Quick
stock turnover is key to business profits, and tight inventory control is needed to see stock turnovers happen.

Tracking Inventory
All the points rely on having accurate data from which to pull information. Without regularly maintained
inventory counts, extrapolating such data is impossible; thus, the most pivotal aspect of inventory control is
maintaining an accurate count of available inventory. There are two main methods -- periodic and perpetual.
Periodic inventory systems involve only taking inventory at particular times, such as at the end of the year, at
which point inventory account balances are brought up to date. Periodic systems are seldom used outside of
companies that sell small numbers of high-ticket items per year. Perpetual systems keep stock year-round,
tracking items as they are sold, purchased or returned to maintain a real-time count of what is available. This
can be done manually through cycle counting, where partial inventories are done of different items on a
constant basis to keep numbers accurate, but inventory management is increasingly being handled
electronically through point-of-sale systems that can automatically scan an item and then remove or add it into
inventory in a single step.
 6.7 Inventory Control Systems:
An inventory control system is a system the encompasses all aspects of managing a company's inventories; purchasing,
shipping, receiving, tracking, warehousing and storage, turnover, and reordering. In different firms the activities
associated with each of these areas may not be strictly contained within separate subsystems, but these functions must
be performed in sequence in order to have a well-run inventory control system.

Computerized inventory control systems make it possible to integrate the various functional subsystems that
are a part of the inventory management into a single cohesive system.

Inventory control systems are technology solutions that integrate all aspects of an organization’s inventory
tasks, including shipping, purchasing, receiving, warehouse storage, turnover, tracking, and reordering. While
there is some debate about the differences between inventory management and inventory control, the truth is
that a good inventory control system does it all by taking a holistic approach to inventory and empowering
organizations to utilize lean practices to optimize productivity and efficiency along the supply chain while
having the right inventory at the right locations to meet customer expectations.
That being said, there are two different types of inventory control systems available today: perpetual inventory
systems and periodic inventory systems. Within those systems, two main types of inventory management
systems – barcode systems and radio frequency identification (RFID) systems – used to support the overall
inventory control process:
• Main Inventory Control System Types:
– Perpetual Inventory System
– Periodic Inventory System
• Types of Inventory Management Systems within Inventory Control Systems:
– Barcode System
– Radio Frequency Identification (RFID) System
  Inventory control systems help you track inventory and provide you with the data you need to control and
manage it. No matter which type of inventory control system you choose, make sure that it includes a system
for identifying inventory items and their information including barcode labels or asset tags; hardware tools for
scanning barcode labels or RFID tags; a central database for all inventory in addition to the ability to analyze
data, generate reports, and forecast demand; and processes for labeling, documenting, and reporting inventory
along with a proven inventory methodology.

Perpetual Inventory System

When you use a perpetual inventory system, it continually updates inventory records and accounts for additions
and subtractions when inventory items are received, sold from stock, moved from one location to another, picked
from inventory, and scrapped. Some organizations prefer perpetual inventory systems because they deliver up-to-
date inventory information and better handle minimal physical inventory counts. Perpetual inventory systems
also are preferred for tracking inventory because they deliver accurate results on a continual basis when
managed properly. This type of inventory control system works best when used in conjunction with a database of
inventory quantities and bin locations updated in real time by warehouse workers using barcode scanners.

There are some challenges associated with perpetual inventory systems. First, these systems cannot be
maintained manually and require specialized equipment and software that results in a higher cost of
implementation, especially for businesses with multiple locations or warehouses. Periodic maintenance and
upgrades are necessary for periodic inventory systems, which also can become costly.
Another challenge of using a perpetual inventory system is that recorded inventory may not reflect actual
inventory as time goes by because they do not use regular physical inventory counts. The result is that errors,
stolen items, and improperly scanned items impact the recorded inventory records and cause them not to
match actual inventory counts.

Periodic Inventory System

• Periodic inventory systems do not track inventory on a daily basis; rather, they allow organizations to know
the beginning and ending inventory levels during a certain period of time. These types of inventory control
systems track inventory using physical inventory counts. When physical inventory is complete, the balance
in the purchases account shifts into the inventory account and is adjusted to match the cost of the ending
inventory. Organizations may choose whether to calculate the cost of ending inventory using LIFO or FIFO
inventory accounting methods or another method; keep in mind that beginning inventory is the previous
period’s ending inventory.
• There are a few disadvantages of using a periodic inventory system. First, when physical inventory counts
are being completed, normal business activities nearly become suspended. As a result, workers may hurry
through their physical counts because of time constraints. Errors and fraud may be more prevalent when
you implement a periodic inventory system because there is no continuous control over inventory. It also
becomes more difficult to identify where discrepancies in inventory counts occur when using a periodic
inventory control system because so much time passes between counts. The amount of labor that is
required for periodic inventory control systems make them better suited to smaller businesses.
Barcode Inventory Systems
Inventory management systems using barcode technology are more accurate and efficient than those using
manual processes. When used as part of an overall inventory control system, barcode systems update inventory
levels automatically when workers scan them with a barcode scanner or mobile device.
The benefits of using barcoding in your inventory management processes are numerous and include:
- Accurate records of all inventory transactions
- Eliminating time-consuming data errors that occur frequently with manual or paper systems

- Eliminating manual data entry mistakes

- Ease and speed of scanning
- Updates on-hand inventory automatically
- Record transaction histories and easily determine minimum levels and reorder quantities
- Streamline documentation and reporting
- Rapid return on investment (ROI)
- Facilitate the movement of inventory within warehouses and between multiple locations and from receiving to
picking, packing, and shipping

Radio Frequency Identification (RFID) Inventory Systems

• Radio frequency identification (RFID) inventory systems use active and passive technology to manage
inventory movements. Active RFID technology uses fixed tag readers throughout the warehouse; RFID tags
pass the reader, and the movement is recorded in the inventory management software. For this reason,
active systems work best for organizations that require real-time inventory tracking or where inventory
security has been an issue. Passive RFID technology, on the other hand, requires the use of handheld
readers to monitor inventory movement. When a tag is read, the data is recorded by the inventory
management software. RFID technology has a reading range of approximately 40 feet with passive
technology and 300 feet with active technology.
RFID inventory management systems 
have some associated challenges. First, RFID tags are far more expensive than barcode labels; thus, they typically are used for
higher value goods. RFID tags also have been known to have interference issues, especially when tags are used in environments
with a lot of metal or liquids. It also costs a great deal to transition to RFID equipment, and your suppliers, customers, and
transportation companies need to have the required equipment as well. Additionally, RFID tags carry more data than barcode
labels, which means your system and servers can become bogged down with too much information.

When choosing an inventory control system for your organization, you first should decide whether a perpetual inventory
system or periodic inventory system is best suited to your needs. Then, choose a barcode system or RFID system to use
in conjunction with your inventory control system for a complete solution that will enable you to have visibility into your
inventory for improved accuracy in scanning, tracking, recording, and reporting inventory movement.
Complete Mobile RFID Inventory System

Full-bodied RFID system helps hotelier

manage wine inventory.
RFID tags make short work of stocktaking
at Tokyo resort hotel.
 6.8 INVENTORY CONTROL MODELS

The Three Inventory Control Models:

the three inventory control models and the driving factor in each model. Provide examples for each one
using current companies.
The three inventory control models and their driving factors are:
• 1. Economic order quantity - this inventory control model is used to determine that order size that will
help in minimizing the ordering costs and the carrying costs. All other costs are assumed to be constant.
The average level of inventory is order quantity/2. The driving factor for this model is the need to minimize
the ordering costs and the carrying costs.
• For example, Procter and Gamble (P&G) uses EOQ as an inventory optimization and control model. It tries
and minimizes its ordering and carrying costs for various SKUs (stock keeping units) through this m
• 2. ABC analysis - This inventory control model analyses which items in inventory are more important and
which items are less important. An organization's inventory is divided into three groups - A, B, and C. The A
group has the items that are critical to the functioning of the organization. Items in the B group are
important but not critical. Items in the C group have the least importance in the company's operation. The
driving factor is the fact that some inventory items are more important than others.
• For example, San Miguel uses ABC analysis to determine which items are critical, important and not very
important. The company makes ice creams, dairy products, beer, etc. Ingredients used are milk, sugar,
preservatives, malt, hops and chemicals. Different items are categorized as per their level of importance.
3. Safety stock - It is the additional stock that is kept on hand so as to avoid stock outs. This helps in reducing
losses due to stock outs. Safety stock can be determined by calculating the stock out costs, the service level and
the probability of a stockout. The driving factor is that stock outs should be avoided.
For example, 3M calculates its reorder point by taking safety stock into consideration.

6.9 INVENTORY CONTROL TECHNIQUES

Techniques of Inventory Control:

1. ABC analysis:
The basic work in this always better control analysis is the classification and identification of different types of
inventories, for determining the degree of control required for each. In many firms it is found that they have
stocks which are used at very different rates. So items are classified under three broad categories A, B and C, on
the basis of usage, bulk, value, size, durability, utility, availability, criticality etc.; and should be controlled with
due weightage to differential characteristics.
The items included in group A involve largest investments and the inventory control should be most severe to
these items. C group consists of inventory items which involve relatively small investments although the
number of items remains large. These items deserve minimum attention of control. In B group that items are
included which are neither of A nor C.
 Advantages of ABC Analysis

• 1. Optimisation of Inventory Management function

• 2. Avoiding loss of business opportunities
• 3. Less stock handling costs for low-value items
• Opportunity to convert Class B items into Class A
From the figure it can be observed that there are compara­tively few items in A but they constitute a large
proportion of the total rupee value; B items are in the intermediate range and C items are numerous but
inexpensive.

The purpose behind the ‘distribution by value’ analysis is ‘Always Better Control’. Donald G. Hall recommends
that different attitudes shall be adopted in inventory management—aggressive for class A items, active for class
B items and loose for class C items; and that each category should be given the attention as deserves. R.S.
Chadda recommends the following order for selective control:

A Items B Items C Items

1. Control Tight Moderate Loose

2. Exact Exact Estimated

Requirements

3. Postings Individual Individual Group

4. Check Close Some Little

5. Expediting Regular Some None

6. Safety Low Medium Large

Stocks
2. Economic order quantity model:
The basic decision in an economic order quantity (EOQ) procedure is to determine the amount of stock to be ordered,
at a particular time so that the total of ordering and carrying costs may be reduced to a minimum point. A firm should
place optimum orders and neither too large nor to small. The EOQ is the level of inventory order that minimizes the
total cost associated with inventory. The EOQ model is based on following four assumptions:

(i) A firm has a steady and known demand of D units each period for a particular input.
(ii) The firm consumes the input at a uniform rate.
(iii) The costs of carrying stocks are a constant amount C per unit per period.
(iv) The costs of ordering more inputs are a fixed amount O per order. Orders are delivered instantly.
The EOQ model is very simple one and its assumptions will be unrealistic in many applications, in practice
orders are not delivered instantly. The assumption of a constant usage of inventory and known annual demand
are of doubtful validity.
3. Minimum Safety Stocks:
- is the level of inventory, below which the stock of materials should not be fall. If the stock goes
below minimum level, there is a possibility that the production may be interrupted due to
shortage of materials.

Thus the best level of safety stock for a given item depends on stock-out costs, variability of usage rates and
delivery times. The safety stock level is the multiplication of the average demand during a period of the
maximum delay and the probability of its occurrence.
If the usage rate and delivery time or lead time can be forecasted with a high degree of accuracy and if the cost
of stock-out is estimated to be small, then little or no safety stock will needed. If the circumstances are not so
favourable, then the significant investment in safety stock will be desirable.
JUST IN TIME (JIT) METHOD
In Just in Time method of inventory control, the company keeps only as much inventory as it needs during the production process.
With no excess inventory in hand, the company saves the cost of storage and insurance. The company orders further inventory when
the old stock of inventory is close to replenishment. This is a little risky method of inventory management because a little delay in
ordering new inventory can lead to stock out situation. Thus this method requires proper planning so that new orders can be timely
placed.

VED ANALYSIS
VED stands for Vital Essential and Desirable. Organizations mainly use this technique for controlling spare parts of inventory. Like,
a higher level of inventory is required for vital parts that are very costly and essential for production. Others are essential spare
parts, whose absence may slow down the production process, hence it is necessary to maintain such inventory. Similarly, an
organization can maintain a low level of inventory for desirable parts, which are not often required for production.
MATERIAL REQUIREMENTS PLANNING (MRP) METHOD
Material Requirements Planning is an inventory control method in which the manufacturers order the inventory after
considering the sales forecast. MRP system integrates data from various areas of the business where inventory exists.
Based on the data and demand in the market, the manager would carefully place the order for new inventory with the
material suppliers.

FAST, SLOW & NON-MOVING (FSN) METHOD

This method of inventory control is very useful for controlling obsolescence. All the items of inventory are not used in the same
order; some are required frequently, while some are not required at all. So this method classifies inventory into three categories,
fast-moving inventory, slow-moving inventory, and non-moving inventory. The order for new inventory is placed based on the
utilization of inventory.
I love you completely, with all my soul. Without you I‘m nothing, a butterless roll.