Inventory Control

Inventory

Inventory is stock of items held to meet future

demand.

It is a list for goods and materials, or those

goods and materials themselves, held available
in stock by a business.

It is collection of goods processed to form

desired output to the organization.
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 Inventory

Inventory-A physical resource that a firm

holds in stock with the intent of selling it or
transforming it into a more valuable state.

Inventory System- A set of policies and

controls that monitors levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be placed.
 Reasons for keeping Inventories

To stabilise production

To take advantage of price discounts
To meet the demand during the
replenishment period
To prevent loss of orders(sales)
To keep pace with changing market
conditions
 Types of Inventories

Firm or Organization

Work in
progres C
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Raw
Finishe s
material W
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goods t
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 Types of Inventories
• Raw Material Goods
– Basic inputs that are converted into finished product through the
manufacturing process.

• “Work in progress” Goods

– Semi-manufactured products need some more works before they
become finished goods for sale.

• Finished Goods
– Completely manufactured products ready for sale.

• Supplied Goods
– Office and plant cleaning materials not directly enter production but
are necessary for production process and do not involve significant
investment.

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 Inventory Management flow cycle

Raw Material  InspectionMoving Processing  Setup Final Product

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 Inventory Planning and Control

For maintaining the right balance

between high and low inventory to
minimize cost
 Raw materials
 Purchased
parts
 Components
 Subassemblie
s
 Work-in-
process
 Finished
goods
 What is Inventory Management?
• Inventory management is all about specifying the size and
placement of stocked goods.

• It is required at different locations within a facility or within

multiple locations of a supply network to protect the regular and
planned course of production against the random disturbance of
running out of materials or goods.

• Inventory management also concerns with carrying costs of

inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting,
physical inventory, available physical space for inventory.

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 Tasks in Inventory Management

• Track inventory
– To look after the amount of inventory i.e. stock coming into the
business.

• How much to order?

– To specify units of inventory to be used by organization.

• When to order?
– Specify the duration of getting the inventory.

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 OBJECTIVES OF INVENTORY CONTROL

• To meet unforeseen future demand due to

variation in forecast figures and actual figures.
• To average out demand fluctuations due to
seasonal or cyclic variations.
• To meet the customer requirement timely,
effectively, efficiently, smoothly and satisfactorily.
• To smoothen the production process.
• To reduce loss due to changes in prices of
inventory items.
• To meet the time lag for transportation of goods.
 OBJECTIVES OF INVENTORY CONTROL
• To meet the technological constraints of
production/process.
• To balance various costs of inventory such as
order cost or set up cost and inventory carrying
cost.
• To minimize losses due to deterioration,
obsolescence, damage, pilferage etc.
• To stabilize employment and improve labour
relations by inventory of human resources and
machine efforts.
FUNCTIONS of INVENTORY CONTROL
 Ensures an adequate supply of materials
 Minimizes inventory costs

 Facilitates purchasing economies

 Eliminates duplication in ordering

 Better utilization of available stocks

 Provides a check against the loss of materials

 Facilitates cost accounting activities

 Enables management in cost comparison

 Locates & disposes inactive & obsolete store

items
 Consistent & reliable basis for financial

statements
 NATURE OF INVENTORY

 Dependent demand- Demand for one product is

linked with demand for another product, such
as components, subassemblies etc.

 Independent demand- Demand for a product/

service occurs independently of demand for any
other for any other product or service, such as
finished product, service parts, lubricants, cutting
oil, greases, preservatives etc.
 The dependency is vertical if the demand for one
product is derived from the demand for another
product. E.g. demand for engine block is derived
from demand for cars.

 The dependency is horizontal if the demand for

one item is not directly related, but related in
another manner. E.g. demand for C.I. ingots
horizontally depend on automobile product of
company.

 Only independent demand items need forecasting

because that of dependent items can be derived
from de derived from demand for independent
items.
 TYPES OF INVENTORY COSTS

 Ordering (purchasing) costs

 Inventory carrying (holding) costs
 Out of stock/shortage costs
 Other costs
 ORDERING COSTS

 It is the cost of ordering the item and securing

its supply.

 Includes-
 Expenses from raising the indent
 Purchase requisition by user department till the
execution of order
 Receipt and inspection of material
 INVENTORY CARRYING COSTS

 Costs incurred for holding the volume of

inventory and measured as a percentage of
unit cost of an item.

 It includes-
 Capital cost
 Obsolescence cost
 Deterioration cost
 Taxes on inventory
 Insurance cost
 Storage & handling cost
 OUT-OF-STOCK COSTS

 It is the loss which occurs or which may

occur due to non availability of material.

 It includes-
 Break down/delay in production
 Back ordering
 Lost sales
 Loss of service to customers, loss of goodwill,
loss due to lagging behind the competitors, etc.
 OTHER COSTS

 Capacity Costs
 Over-time payments
 Lay-offs & idle time
 Set-up Costs
 Machine set-up
 Start-up scrap generated from getting a
production run started
 Over-stocking Costs
 FACTORS AFFECTING INVENTORY
CONTROL
 Type of product
 Type of manufacture
 Volume of production
 ECONOMIC ORDER QUANTITY (EOQ)
 EOQ or Fixed Order Quantity system is the
technique of ordering materials whenever stock
reaches the reorder point.

 Economic order quality deals when the cost of

procurement and handling of inventory are at
optimum level and total cost is minimum.

 In this technique, the order quantity is larger

than a single period’s ne requirement so that
ordering costs & holding costs balance out.
 Tc (Total Cost)

Carrying
(Rs.)
Cost

Cost
(Q/2)H

DS/Q
(Ordering
Cost)

EOQ

Order Quantity Size (Q)

 ASSUMPTIONS OF EOQ

 Demand for the product is constant

 Lead time is constant

 Price per unit is constant

 Inventory carrying cost is based on

average inventory
 Ordering costs are constant per order

 All demands for the product will be satisfied

(no back orders)

 WEAKNESSES OF EOQ FORMULA

 Erratic usages
 Faulty basic information
 Costly calculations
 No formula is substitute for commonsense
 EOQ ordering must be tempered with
judgment
 BASIC FIXED ORDER QUANTITY
MODEL (EOQ)
Annual Annual
Total Annual Cost Purchas + Orderin
e Cost + Holdin g Cost
Annual
g
=
Q D Cost
TC DC H S
2 Q
TC = Total annual cost
D = Demand
2 C = Cost per unit
EOQ DS Q = Order quantity
H S = Cost of placing order/setup
H = Annual holding and
cost
storage cost per unit of
inventory
 IMPORTANT TERMS

 Minimum Level – It is the minimum stock to be

maintained for smooth production.
 Maximum Level – It is the level of stock, beyond which a

firm should not maintain the stock.

 Reorder Level – The stock level at which an order should be

placed.
 Safety Stock – Stock for usage at normal rate during the

extension of lead time.

 Reserve Stock - Excess usage requirement during normal lead

time.
 Buffer Stock – Normal lead time consumption.
 TYPES OF INVENTORY MODELS

Simple EOQ model

EOQ model with stock outs
allowed
Inventory model under risk
Simple EOQ model
EOQ model with stock outs allowed
Inventory model under risk
 SELECTIVE CONTROL OF INVENTORY

Selective control refers to the variation in

method of control from item to item on some
selective basis.
Many criteria used for this purpose are
Based on the cost of product
Lead time
Usage rate
Procurement difficulties, criticality, frequency of
usage
 SELECTIVE CONTROL OF INVENTORY

ABC analysis
VED Analysis
Material requirements planning
(MRP)
 VED CLASSIFICATION

 VED: Vital, Essential & Desirable classification

 VED classification is based on the criticality of the
inventories.
 Vital items – Its shortage may cause havoc & stop the work in
organization. They are stocked adequately to ensure smooth
operation.
 Essential items - Here, reasonable risk can be taken. If not
available, the plant does not stop; but the efficiency of operations is
adversely affected due to expediting expenses. They should be
sufficiently stocked to ensure regular flow of work.
 Desirable items – Its non availability does not stop the work
because they can be easily purchased from the market as & when
needed. They may be stocked very low or not stocked.
 It is useful in capital intensive industries,
transport industries, etc.
 VED analysis can be better used with ABC

analysis in the following pattern:

Category “V” items “E” items “D” items

“A” items Constant control Moderate stocks Nil stocks

& regular follow
up

“B” items Moderate stocks Moderate stocks Low stocks

“C” items High stocks Moderate stocks Very low stocks

 FSN ANALYSIS

 FSN: Fast moving, slow moving & non moving

 Classification is based on the pattern of issues

from stores & is useful in controlling obsolescence.

 Date of receipt or last date of issue, whichever is later, is

taken to determine the no. of months which have lapsed since

the last transaction.
 The items are usually grouped in periods of 12 months.

 It helps to avoid investments in non moving or slow items.

It is also useful in facilitating timely control.

 For analysis, the issues of items in past two or
three years are considered.
 If there are no issues of an item during the period, it is

“N” item.
 Then up to certain limit, say 10-15 issues in the

period, the item is “S” item

 The items exceeding such limit of no. of issues

during the period are “F” items.

 The period of consideration & the limiting number of

issues vary from organization to organization.

High Medium Low(HML):
 The HML classification is same procedure as adopted in ABC.

 The core difference is HML classification unit value is the

criterion and not the annual consumption value.

 The inventories should be place in descending order and

it is up

to mgmt to fix limits of these three categories.

 Example: the mgmt may decide all units with unit value of Rs
2,000 and above will be H items…..
SDE Classification:
 The SDE is based upon the availability of items.

 Here S refers to Scarce items

 D refers to Difficult items

 E refers to Easy to acquire

 This is based on problems faced in procurement, were

some strategies are made on purchasing.
 ABC Analysis:

 One of the widely used techniques.

 Objective is to vary the expenses associated with control ,
according to potential savings associated with a proper level
of control.
 The ABC approach means of categorizing the inventory
items into three classes ABC.
 The categorizing is done according to the turnover of the
various products.
Procedure:
 List each inventory by number or by designation.

 Determine annual vol of usage and money value.

 Multiply each item annual vol of usage and rupee value.

 Select top 10 percent of all items which have high repee

percentage classify them as „A‟.
 And accordingly.
Example:
Inventory Item Annual use Percentage of
total
usage

101 3,000 0.3

106 4,00,000 40.0

117 7,000 0.7

 Safety stock
Introduction
 Safety stock (also called buffer stock) is a term used by logisticians to
describe a level of extra stock that is maintained to mitigate risk of stock
outs due to uncertainties in supply and demand.
 Safety stock is an additional quantity of an item held in the inventory in
order to reduce the risk that the item will be out of stock, safety stock act
as a buffer stock in case the sales are greater than planned and or the
supplier is unable to deliver the additional units at the expected time.
 The less accurate the forecast, the more safety stock is required to ensure a
given level of service.
 A common strategy is to try and reduce the level of safety stock to help
keep inventory costs low once the product demand becomes more
predictable.
 This can be extremely important for companies with a smaller financial
cushion or those trying to run on lean manufacturing, which is aimed
towards eliminating waste throughout the production process.
 Reasons for keeping safety stock

 Safety stocks are mainly used in a “Make To

Stock” manufacturing strategy.
 This strategy is employed when the lead time
of manufacturing is too long to satisfy the
customer demand at the right
cost/quality/waiting time.
 The main goal of safety stocks is to absorb the
variability of the customer demand.
Creating a safety stock will also prevent stock-
outs from other variations, like an upward
trend in customer demand.
Safety stock is used as a buffer to protect
organization from stockouts caused by
inaccurate planning or poor schedule
adherence by suppliers
 Various methods exist to reduce safety stock,
these include better use of technology,
increased collaboration with suppliers, and
more accurate forecasting.
An Enterprise Resource Planning system (ERP
system) can also help an organization reduce
its level of safety stock. Most ERP systems
provide a type of Production Planning module.
The size of the safety stock depends on the
type of inventory policy that is in effect.
 An inventory node is supplied from a
"source" which fulfills orders for the
considered product after a certain
replenishment lead time.
In a periodic inventory policy the inventory
level is checked periodically (such as once a
month) and an order is placed at that time as to
meet the expected demand until next order.
 In this case, the safety stock is calculated considering
the demand and supply variability risks during this
period plus the replenishment lead time.
 If the inventory policy is continuous policy (such as an
Order point-Order Quantity policy or an Order Point-
Order Up To policy) the inventory level is continuously
monitored and orders are placed with freedom of time.
 In this case, safety stock is calculated considering the
risk of only the replenishment lead time.
 If applied correctly, continuous inventory policies can
lead to smaller safety stock whilst ensuring higher
service levels, in line with lean processes and more
efficient overall business management.
 A commonly used approach calculates the safety
stock based on t he following factors:
Demand: the amount of items consumed by customers,
usually a random variable.
 Lead time: the delay between the time the reorder
point (inventory level which initiates an order) is
reached and renewed availability.
 Service level: the desired probability of meeting
demand during lead time without a stock out.
Naturally, when the desired service level is increased,
the required safety stock increases as well.
 Forecast error: an estimate of how far actual demand
may be from forecast demand.
 Types of Quality Control
Charts
 Attributes Control chart
 QCC which deal with the attribute type Quality
characteristics.
 These attribute QC can be measured in discrete
manner but can’t measure continuously.
 Eg.-Failure, defect etc.
 Attributes are intangible Quality characteristics.
 Eg. Intelligency, Honesty, Poor, Skills, Features
etc.
 p and np charts are based on Binomial
Distribution (Nonconforming Units).
 c and u charts are based on Poison Distribution
(Nonconformities).
Formula for C chart
Formula for P-chart and np Chart
 Variable Control Charts
(VCC)
 QCC which deals with variable quality
characteristics.
 These QCC measured continuosly.
e.g. Marks, Height, weight, Dimensions etc.
 Main parameters of VCC are Central Tendency
(CT), Upper Control Limit (UCL) and Lower Control
Limit.
 Formulae for ( - R ) Chart
 Step by step procedure for plotting of ( - R )
Chart

1) Record the data given in the tabular form.

2) Find individual mean() for each sample.
3) Find ( ) for complete sample/ data.
4) Find range (R) for each sample.
5) Find for () complete sample.
6) Find UCL and LCL.
7) Plot ( - R ) Chart.
8) Check the process capability and revise if
required.
 Advantages of Control
Charts
 A control chart indicates that whether the
process is under control or out of control.
 It determines the unusual variation in a
process.
 It maintains product quality level.
 It provides information about selection of
process and setting up of tolerance limits.
 It can reduce the percentage of rejection by
rectifying the process variability.
Conclusions
 Control charts are simple & robust statistical tools for
understanding process variability.
 The most common application of QC is to monitor
process stability and control.
 There are three main elements of a control chart.
These are Time, Central line, Control limits.
 Control limits are calculated by:
 Estimating the standard deviation (σ) of the sample
data
 Mathematically, UCL= Average+3* σ, LCL=
Average-3* σ
 Process capability is a measure of how the process is
performing with respect to the desired output.
Example : Five observations are made for each of the 10
samples of a job specifications given below. Draw X-Bar
and R-Chart.
Calculating UCL
and LCL
X –Bar
Chart
R- Chart
  Process Capability
 Process Capability is a statistical measurement of a process
ability to produce parts within specified limit on consistent
basis.
 In other words, the Process capability is a measure of how
the process is performing with respect to the desired output.
Thank you