Inventory Control
Jannatul Naim
Lecturer
Department of Pharmacy
The University of Asia Pacific
Inventory
Inventory is a list of goods and materials, or those goods and materials
themselves, held available in stock by a business.
In other words, inventory is a stored accumulation of material and
physically located resources used in a transformation process and
activated as assets.
Inventory is a very expensive asset that can be
replaced with a less expensive asset called
“INFORMATION”.
Reasons behind Inventory
• Error in demand forecast • Possibility to increase of
• Late delivery or purchase price
unpredictable from • Lead-time variations
suppliers • Consignment stocking
• Minimum supply order
• Minimization of delivery
quantity
costs
• Supplier delivery interval
• Pipeline inventory
• Stocking methodology
• Precautionary stock
• Reorder interval
• Strategic stocking
Stages of Inventory
Three common stages:
• Raw-material inventory: inventory that is stored before it is used in the
production process.
• Work-in-process inventory: partially finished inventory that is within the
production process.
• Finished product inventory: inventory of product ready to be sold.
Types of Inventory
• Normal Inventory: This is inventory required to support
the normal replenishment process under conditions of
certainty. This type of inventory should generally be as
close to zero as possible. However, this may not happen
due to transportation, production or distribution
economics of scale.
• Safety Inventory: Surplus inventory that a company
holds to protect against the uncertainty in demand, in
lead-times and in quality of supply.
• Pipeline inventory: Inventory moving from point to
point in the material flow is called pipeline inventory.
This type of inventory will either belong to the shipper
or to the customer depending on the terms of sale.
Types of Inventory
• Speculative Inventory: This type of inventory is held other
than meeting current demand. For example, the company
may decide to buy and stock more than it needs in the event
that it forecasts that prices of material will rise or supplier
offers lower price if a large quantity is purchased at one time.
• Seasonal Inventory: This type of inventory is accumulated in
advance of significant selling session. If the majority of sales
occur in relatively short projects of time, companies may
stock seasonal inventory to stabilize production over a more
extended period of time and maintain labor force capacities.
• Dead Inventory: No one wants this type of inventory but it is
held for a variety of reasons. Say if company expects demand
may create after long time or it may cost more to dispose of
than it does to keep. Sometimes to meet occasional need of
customers, it is kept as a gesture of goodwill.
Role of Inventory Manager
• Integration
• Effective utilization of technology
• Assist in making strategic planning and functional objectives of the
organization
• Make inventory management plan
ABC Concept
• The ABC classification process is an analysis of a range of objects, such as
finished products, items lying in inventory or customers into three
categories.
• It's a system of categorization, with similarities to Pareto analysis (80/20
rule), and the method usually categorizes inventory into three classes
with each class having a different management control.
ABC Concept
• Popularly known as the "80/20" rule, ABC concept is applied to
inventory management as a rule-of-thumb.
• A - outstandingly important
• B - of average importance
• C - relatively unimportant
ABC Concept
• 10-20% of the items ('A' class) account for 70-80% of the
consumption
• The next 15-25% ('B' class) account for 10-20% of the consumption
and
• The balance 65-75% ('C' class) account for 5-10% of the consumption
Demand Forecasting
• Trend: constant, increasing or reducing. The trend, however, may
change over the long-term.
• Cyclical fluctuations: Demand tends to increase or decrease over
extended periods of time due to business cycles, product life-cycles,
etc.
• Seasonality: influenced by weather, regular events such as holidays,
festivals, or the end or beginning of financial years, etc.
• Random variations: when demand varies from the underlying pattern
due to unforeseen reasons.
Method of inventory valuation
• First in first out (FIFO)
Items issued are valued based on the cost of the oldest units in the
inventory from which the issued material could have been drawn, up
until these are exhausted. Valuation then passes on the next oldest, and
so on. The value of stock at a period end is calculated from the unit
values of the items remaining in stock.
Method of inventory
valuation
• Last in first out (LIFO)
Items issued to production are valued based on the cost of the most
recent units received, up until these are exhausted. Valuation then
passes on the next recent, and so on. The value of inventory at the
period end is, again, calculated based on the unit values of the items
remaining in stock.
Method of inventory valuation
• Weighted average costing
An average value is calculated for each unit in stock. It is calculated
by adding together the values of inventory already in stores together
with the value of any new units introduced, and dividing by the total
quantity of inventory.
Method of inventory
valuation
• Standard costing
This method is most often employed to compute the production cost
of product made up of several component items. A standard cost can
be set for each item, e.g. based on an average of the previous
periods’ costs or on a best estimate of the likely future costs.
Method of inventory
valuation
• Replacement costing
This is similar to standard costing method except that the unit value
is based on the quoted cost to replace the units required to be
maintained in stock.
Control of Dead and
Excess Inventory
• Transfer excess stock to another branch that needs item
• Return the stock to the vendor
• Substitute surplus inventory for lower cost items
• Lower the price and sell………or, give FREE/Extra
• Donate excess stock to NGOs
• Throw it out, take the “write-off” for your financial
statement, and free up room in your warehouse
Inventory Turnover
• Turnover measures the number of times you use or sell your average
investment in inventory.
• It is calculated by dividing annualized cost of goods sold of inventory
(i.e. what you paid for the material you sell) by your average investment
in stock inventory (i.e. what you paid for the material in stock in your
warehouse or store).
Ultimate Lesson
“It’s easy to turn cash into inventory,
but the challenge is to turn
inventory into cash”
Thank You