Inventory Control
Techniques
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Inventory
Transformation Process
Raw Finished
Material goods
Vendorssupplier Work in Customers
proces
s
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Water Tank Analogy
Inventory Level
Supply Rate
Inventory Level
Demand Rate
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Economic order of quantity
EOQ = Average Monthly Consumption X Lead Time [in
months] + Buffer Stock – Stock on hand
ECONOMIC ORDER OF
QUANTITY(EOQ)
PURCHASING CARRYING
COST COST
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Inventory Holding/Carrying
Costs
• Storage space (rent/depreciation)
• Property tax on warehousing
• Insurance
• Deterioration/Obsolescence
• Material handling and maintenance, equipment
• Stock taking, security and documentation
• Capital blocked (interest/opportunity cost)
• Quality control
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Ordering Costs
• Stationary
• Clerical and processing, salaries/rentals
• Postage
• Processing of bills
• Staff work in expedition /receiving/
inspection and documentation
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SELECTIVE INVENTORY CONTROL
Selective inventory control is defined as process of classifying items
into different categories and thereby directing appropriate attention
to the materials.
It is based on the principle of ‘Vital few and trivial many’ made by
Pareto.
CLASSIFICATION
1. A-B-C technique
2. V-E-D classification
3. H-M-L ’’
4. F-S-N ’’
5. S-D-E ’’
6. S-O-S ’’
7. G-O-L-F ’’
8. X-Y-Z ’’
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ABC ANALYSIS
(ABC = Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted
with large number of items it rationalizes the number of
orders, number of items & reduce the inventory.
A Category= About 10 % of materials consume(Low
volume )70 % of resources(high Rupee value).
B Category= About 20 % of materials
consume(Moderate volume) 20 % of
resources(moderate Rupee value)
C Category= About 70 % of materials consume(High
volume) 10 % of resources(low Rupee value)
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THE GROUPS
GROUP ‘A’
Low volume, high Rupee
value
GROUP ‘B’
Moderate volume,
moderate Rupee value
GROUP ‘C’
High volume, low Rupee
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‘A’ ITEMS
Small in number, but consume large amount
of resources-Money
Must have:
•Tight control
•Rigid estimate of requirements
•Strict & closer watch
•Low safety stocks
•Managed by top management
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‘B’ ITEM
Intermediate
Must have:
•Moderate control
•Purchase based on rigid requirements
•Reasonably strict watch & control
•Moderate safety stocks
•Managed by middle level management
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‘C’ ITEMS
Larger in number, but consume lesser amount of
resources-Money
Must have:
•Ordinary control measures
•Purchase based on usage estimates
•High safety stocks
ABC analysis does not stress on items those are
less costly but may be vital
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ANNUAL COST CUMMULATI VE
ITEM % ITEM COST %
ABC [Rs.] COST [Rs.]
1 90000 90000
10 % 70 %
A 2 50000 140000
3 20000 160000
N 4 7500 167500
20 % 20 %
A 5 7500 175000
6 5000 180000
L
7 4500 184500
Y 8 4000 188500
S 9 2750 191250
10 1750 193000
I 11 1500 194500
S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
SHEET 17 500 198500
18 500 199000
19 500 199500
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20 500 200000
A Items
B Items
C Items
% of total Rupee
Usage
% of total No of 16
V-E-D ANALYSIS
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VED ANALYSIS
•Based on critical value & shortage cost of an item
–It is a subjective analysis.
•Items are classified into:
Vital: Shortage cannot be tolerated.
(items without which the activities will come to halt.)
Essential:
•Shortage can be tolerated for a short period.
(items which are likely to coz disruption of the normal activity.)
Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized
(in the absence of which the hospital work does
not get hampered.)
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VED ANALYSIS
•Based on critical value & shortage cost of an item
–It is a subjective analysis.
•Items are classified into:
Vital:
•Shortage cannot be tolerated.
Essential:
•Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized
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V E D ITEM COST
A AV AE AD CATEGORY 1 10 70%
B BV BE BD CATEGORY 2 20 20%
C CV CE CD CATEGORY 3 70 10%
CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL
CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
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H-M-L ANALYSIS
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H-M-L ANALYSIS
Based on cost per unit(Based on the unit value (in
rupees) of items.
H-Highest
M-Medium
L-Low
The items should be listed in decreasing order of unit
value and management may fix limits for deciding the
three categories.
This is used to keep control over consumption
at departmental level for deciding the frequency of
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F-S-N ANALYSIS
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F-S-N ANALYSIS:
F- Fast,
S- Slow
N- Non moving
Based on utilization.
Fast moving.
Slow moving.
Non-moving.
Non-moving items must be periodically reviewed to
prevent expiry & obsolescence
It takes into account the distribution and handling patterns of
items from stores.
Used when obsolescence is to be controlled.
May be a change in technology or an item is no longer in use.
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S-D-E Classification
• Based on the lead-time analysis and
availability.
S – Scarce: longer lead time (imported).
D – Difficult: long lead time (indigenous).
E – Easy : reasonable lead time
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S-O-S Classification
• S-O-S :Seasonal- Off- Seasonal
• Some items are seasonal in nature and
hence require special purchasing and
stocking strategies.
• EOQ formula cannot be applied in these
cases.
• Inventories at the time of procurement will
be extremely high.
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G-O-L-F Classification
• G-O-L-F stands for:
G – Government
O – Ordinary
L – Local
F – Foreign
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