This document provides an overview of inventory control. It defines inventory as the stock of items used by an organization. The objectives of inventory control are to meet demand, smooth production processes, and gain economies of scale. The benefits of inventory control include ensuring adequate supply while minimizing costs. Inventory control aims to balance holding, ordering, and shortage costs. Common models for determining optimal inventory levels include the economic order quantity model, which balances ordering and carrying costs to minimize total costs.
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This document provides an overview of inventory control. It defines inventory as the stock of items used by an organization. The objectives of inventory control are to meet demand, smooth production processes, and gain economies of scale. The benefits of inventory control include ensuring adequate supply while minimizing costs. Inventory control aims to balance holding, ordering, and shortage costs. Common models for determining optimal inventory levels include the economic order quantity model, which balances ordering and carrying costs to minimize total costs.
This document provides an overview of inventory control. It defines inventory as the stock of items used by an organization. The objectives of inventory control are to meet demand, smooth production processes, and gain economies of scale. The benefits of inventory control include ensuring adequate supply while minimizing costs. Inventory control aims to balance holding, ordering, and shortage costs. Common models for determining optimal inventory levels include the economic order quantity model, which balances ordering and carrying costs to minimize total costs.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
This document provides an overview of inventory control. It defines inventory as the stock of items used by an organization. The objectives of inventory control are to meet demand, smooth production processes, and gain economies of scale. The benefits of inventory control include ensuring adequate supply while minimizing costs. Inventory control aims to balance holding, ordering, and shortage costs. Common models for determining optimal inventory levels include the economic order quantity model, which balances ordering and carrying costs to minimize total costs.
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Inventory Control
GROUP MEMBERS: VISHNU NAIR SUJA PILLAI
DEFINITION OF INVENTORY Inventory is the stock of any item or resource used in an organization . An inventory system is set of policies and controls that monitor levels of inventory and determine what levels should be maintained , when stock should be replenished, and how large orders should be.
INTRODUCTION The term inventory means the value or amount of materials or resource on hand. It includes raw material, work-in-process, finished goods & stores & spares. Inventory Control is the process by which inventory is measured and regulated according to predetermined norms such as economic lot size for order or production, safety stock, minimum level, maximum level, order level etc. Inventory control pertains primarily to the administration of established policies, systems & procedures in order to reduce the inventory cost.
Objectives of Inventory Control
To meet unforeseen future demand due to variation in forecast figures and actual figures. To meet the customer requirement timely, effectively, efficiently, smoothly and satisfactorily. To smoothen the production process. To gain economy of production or purchase in lots. To reduce loss due to changes in prices of inventory items. To meet the time lag for transportation of goods. To meet the technological constraints of production/process.
Benefits 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.
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
Setup (production change) cost
To make each different product involves obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials and moving out the previous stock of material. If there were no costs or loss of time in changing from one product to another, many small lots would be produced. This would reduce the inventory levels, with the resulting change in cost.
Ordering costs These costs refer to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details such as counting items and calculating order quantities.
Shortage costs When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled. There is a trade-off between carrying stock to satisfy demand and the cost resulting from stock out. This balance is sometimes difficult to obtain because it may not be possible to estimate lost profits, the effect of lost customers or lateness penalties.
INVENTORY MODELS
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 periods ne requirement so that ordering costs & holding costs balance out.
Tc (Total Cost) Cost (Rs.) Carrying 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
Q D TC DC H S 2 Q TC = Total annual cost D = Demand C = Cost per unit Q = Order quantity S = Cost of placing order/setup cost H = Annual holding and storage cost per unit of inventory
EOQ
2 DS H
ORDER POINTS & SERVICE LEVELS
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.
Always Better Control (ABC) Analysis
This technique divides inventory into three categories A, B & C based on their annual consumption value. It is also known as Selective Inventory Control Method (SIM) This method is a means of categorizing inventory items according to the potential amount to be controlled. ABC analysis has universal application for fields requiring selective control.
ITEM A
QUALITY COSTLIER
QUANTITY ORDER LESS
CHECKING Regular system to see that there is no overstocking as well as that there is no danger of production being interrupted for unwanted material. Position being viewed in each month. Order in large quantity so that cost can be avoided
LESS COSTLIER
ORDER MAY BE ON REVIEW BASIS . LARGER
ECONOMICAL
Advantages & Disadvantage of ABC
Advantage: Helps to exercise selective control Gives rewarding results quickly Helps better planning of inventory control Provides sound basis for allocation of funds & human resources. Disadvantage: Proper standardization & codification of inventory items needed. Considers only money value of items & neglects the importance of items for the production process or assembly or functioning. Periodic review becomes difficult if only ABC analysis is recalled.
Bibliography Brooks R.B and L.W Wilson-Inventory Record Accuracy Silver, E; D.Pyke; and R.Peterson- Decision System for inventory Management and Production Planning Control. Sipper and R.L Bulfin Jr. Production Planning, Control and integration: McGraw-Hill.
