1/3/2015

Inventory Control
Techniques
& Best Practices

Faculty
Mr Ashok Sharma
BTech (IITD), MBA(FMS), FIMA

Jump to first page

What is Inventory ?
Inventory is –
Stock of goods in any form.
Physical Tangible & Monetary Intangible
Stock is money in the form of materials.
Money-Materials-Money Cycle

Money Invested Vs Money Blocked:

How do we
2
make more money through better
management of stocks/ inventories ? Jump to first page

Types: Spread throughout the SC

 RM: Raw materials

 MRO: Maintenance, Repairs and
Operating inventories
 WIP: Work in Progress/ Process
Inventories
 FGI: Finished Goods Inventory
 GIT: Goods in Transit (small lots, JIT
strategies and frequent order cycles have made
transit inventory sizeable and important)

1
 1/3/2015

Impact of Inventory on
BALANCE SHEET

What is a Balance Sheet ?

BALANCE SHEET

 FINANCIAL SNAPSHOT:
 Shows financial position on a
SPECIFIC DATE.

 REFLECTS THE STATE OF THE CO AT ANY

GIVEN POINT OF TIME.

 REFLECTS THE ASSETS AND LIABILITIES.

Components of Balance Sheet

LIABILITIES ASSETS
SHARE CAPITAL FIXED ASSETS

PROFIT AND RESERVES CURRENT ASSETS

DEBT LOSSES

CURRENT
LIABILITIES

2
 1/3/2015

CURRENT ASSETS

 RAW MATERIALS
 PACKING MATERIALS
 FINISHED GOODS
 WORK IN PROGRESS

 RECEIVABLES
 CASH
 ADVANCES

Impact of Inventory on
BALANCE SHEET

High Inventory -- Bigger Asset ??

Industrial Obesity
- A Waste

INCOME STATEMENT
Profit & Loss Statement
 Revenues (sales)
 Expenses
 Resulting Profit/ loss

Over a period of TIME

3
 1/3/2015

Does Money Grow in a Piggy Bank ?

Vegetable Vendor
 1 2 3 4……………………………………..30
 Invests: Rs 500 500 500 500………………….
 Gets by evening: Rs750 750 750 750……….
 Daily Profit Rs 250 250 250 250………………
What is her monthly P & L Statement ?
 Investment: Rs 500
 Sales Income: Rs 750x30= Rs22500
 Profit: Rs 7500
 Return on Investment (ROI)= ??
 7500/500 X 100= 1500% per month !!
Keep the materials moving!
Non- Slow Moving are bad for your health
Increase Velocity of Material Movement
/ Accelerate Business Cycle (ABC)

Inventory control: Stock Control

A scientific system which indicates:

1. What to order ?

2. When to order ?

3. How much to order ?

4. How much to stock ?

11

Why Excess Inventories Build Up ?

- Root Causes
1. Deviation from production schedules
2. Design Changes
3. Bad planning and scheduling: lack of
coordination
4. Long lead times/ COMPRESS LEAD TIMES
5. Imports
6. Too many varieties and lack of standardization
7. Faulty sales forecasting
8. Bureaucratic, time consuming purchase
procedures
9. Unreliable vendors
10. Wrong transportation modes

4
 1/3/2015

Objectives of Inventory Control

 To minimise blockage of money in stocks.
 To make materials available to users/
customers as and when required.

To provide 7 Rs
1. Right Product
2. Right Quantity
3. Right Condition
4. Right Place
5. Right Time
6. Right Cost
7. Right Information

Selective Inventory Control:

“When every thing is important, nothing is”

1. ABC Analysis
2. HML
3. SDE
4. GOLF
5. SOS
6. VED
7. FSN: SLOBS (Slow and Obsolete Stocks)
8. XYZ

Selective Inventory Control:

1. ABC : Always Better Control

2. HML : High Value, Medium Value, Low
Value
3. SDE : Scarce, Difficult to Obtain, Easy to
obtain
4. GOLF: Government Controlled, Local,
Foreign
5. SOS : Seasonal, Off-seasonal
6. VED : Vital, Essential, Desirable
7. FSN : Fast Moving, Slow- , Non- moving,
8. XYZ

5
 1/3/2015

A-B-C ANALYSIS:
Pareto’s Law/ 80-20 Principle
100
90
80
70
60
50
40
30
20
10
0 10 20 30 40 50 60 70 80 90 100
A B C
% of total number of items

MUSIC:
Multi-Unit Selective Inventory Control
A B C

S SC

E EA

Cost-Criticality Analysis (MUSIC)

A B C

V VC

D DA

6
 1/3/2015

Movement Analysis
How to Identify/ Liquidate Non-Moving, High
Stock Value Inventory Control
F S N

X XN

Y YN

Z ZN

Inventory Octopus: Case Study

Inventory Management - Whose Job is it ?
Inventory Management is Everybody’s Job

Inventory Management is not a business

function, rather it is a new business model
necessary for an organization's success and
everyone in the organization needs to be
involved.

ORDERING SYSTEMS
1. When to re-order ?
2. How much to re-order?
1. When to Order:
P-System: Fixed Period System (FOT/ VOQ)
(PRS: Periodic Review System)
Q-System: Fixed Qty System (VOT/ FOQ)
(CRS: Continuous Review System)
P-System:
Re-order Point/ Level (ROP/ ROL) determination:
ROL = Lead Time X Average Daily Demand
But there are
Demand Uncertainties & Lead Time Uncertainties
Safety Stock, Reserve stock, Buffer stock

7
 1/3/2015

ORDERING SYSTEMS
2. How much to order?
P System: OQ=Average Demand X Review Period
Q System:
EOQ: Economic Order Quantity (See next slide)
(know as a concept. Not very practical today. May be
used for C items. Work out formula here).
EPQ
ERQ
JIT : Use of e- Procurement and Reverse
Auctions has led to significant reduction in
lead times and ordering costs/ quantities.

ECONOMIC ORDER QUANTITY

Cost

O
EOQ
Q = Order Quantity

P-System/ Q System
Min-Max
ROL or Re-Order Point: Lowest Qty in
hand or on order before you Reorder
Note:
• No Stockouts
• Order when no inventory
• Order Size determines policy

Inventory

Order Avg. Inventory

Size

Time

8
 1/3/2015

Q System:
Determination of Order Quantity (EOQ)
Total Cost Optimization

Total Cost
Holding Cost

Order Cost

ORDERING SYSTEMS
When to order ? How much to order?
But there are
Demand Uncertainties &
Lead Time Uncertainties

Safety Stock,
Reserve stock,
Buffer stock

Measures of Inventory Performance

Inventory Turnover Ratio (ITR):

 Overall: Sales to Inventory (Sales/ Average Inventory)

 Manufacturing: Cost of Goods Sold to Inventory (COGS/

Average Inventory)

 Materials Consumed to Avg Inventory

Number of Days:
 Raw Materials: (DOC)
 Work-in-progress: Inventory in days production at cost
(DOP)
 Finished Goods: Inventory in days of sales at cost
(DOS)