Inventory control techniques

inventory management

1. INVENTORY CONTROL TECHNIQUES
Techniques of inventory control
o Inventory control techniques are the tool available for smooth running of the business
enterprises.
o The inventories should be maintained at a level lying between the excessive and the
inadequate. This level is known as the “OPTIMUM LEVEL” of inventories.
Inventory control techniques
 ABC CLASSIFICATION.
 HML CLASSIFICATION.
 VED CLASSIFICATION.
 SDE CLASSIFICATION.
 FSN CLASSIFICATION.
 EOQ CLASSIFICSTON.
 MAX-MINIMUM SYSTEM.
 TWO BIN SYSTEM
 LEAD TIME
 BUFFER STOCK
 PERPETUAL INVENTORY CONTROL SYSTEM
 SOS CLASSIFICATION
 XYZ CLASSIFICATION
1.ABC Analysis: [ALWAYS BETTER CONTROL

2.  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
„A‟;‟B‟;‟C‟.
OR
 In this technique the materials are divided into 3 groups. A,B,C according to the cost of
the materials and money value.
 The categorizing is done according to the turnover of the various products
 A items - A few costly items come under this category these items require proper
storage and handling, overstock is avoided.
 B items - These are neither costly nor cheap.
 C items - Cheaper in cost.
 It is also known as Selective Inventory Control Method (SIM).

3. Procedure:
 Make the list of all items of inventory.
 Determine the annual volume of usage & money value of each item.
 Multiply each item’s annual volume by its rupee value.
 Compute each item’s percentage of the total inventory in terms of annual usage in
rupees.
 Select the top 10% of all items which have the highest rupee percentages & classify
them as “A” items.
 Select the next 20% of all items with the next highest rupee percentages & designate
them “B” items.  The next 70% of all items with the lowest rupee percentages are “C”
items.




ADVANTAGES OF ABC ANALYSIS
o It ensures a closer and a more strict control over such items, which are having a sizable
investment in there.
o It releases working capital, which would otherwise have been locked up for a more
profitable channel of investment.
o It reduces inventory-carrying cost.
o It enables the relaxation of control for the ‘C’ items and thus makes it possible for a
sufficient buffer stock to be created.

4. o It enables the maintenance of high inventory turn over rate.
DISADVANTAGES OF ABC ANALYSIS
o Proper standardization & codification of inventory items needed.
o Considers only money value of items & neglects the importance of items for the
production process or assembly or functioning.
o Periodic review becomes difficult if only ABC analysis is recalled.
o When other important factors make it obligatory to concentrate on “C” items more, the
purpose of ABC analysis is defeated.

5. 2.VED ANALYSIS [ VITAL, ESSENTIAL, DESIRABLE]
o It is based on the importance of the item and its effects.
o VITAL DRUGS – Such drugs are categorised as vital whose absence (no stock) cannot be
tolerated even for an single day. That means in their absence the work of hospital or
wards or patient care to come standstill
o ESSENTIAL Drugs – These are the drugs without which a hospital can function but may
affect the quality of service to some extent but not to a very serious extent.
o DESIRABLE Drugs - These are the drugs whose absence will not affect the functioning of
hospital or ward or department or patient care.
o The motive of this system is to reduce investment in inventories. The drugs which are
fast moving , ie which are in great demand should be stocked more than drugs
occasionally demanded and lastly the drugs which are rarely demanded should be
stocked in minimum quantity.

6. .Category I items:
 most important ones
 control by the administrator himself.
Category II items:
 intermediate importance
 under control of the officer in charge of the stores.
Category III items:
 least importance
 under the control of the store keeper.
MATRIX OF ABC/ VED ANALYSIS CONTD..
 Items with high criticality (V), but required in small quantity (A) should receive highest
priority. Items with low criticality (D) and which are required in big quantity(C) should
receive least priority.
3.High Medium Low(HML):
o The HML classification is same procedure as adopted in ABC.
o The core difference is HML classification unit value is the criterion and not the annual
consumption value.
o The inventories should be place in descending order and it is up to mgt to fix limits of
these three categories.
o Example: the mgt may decide all units with unit value of Rs 2,000 and above will be H
items….
o The basic criterion of HML classification is the unit value of the item.
o Unit value is the basis of this analysis and not the annual consumption value
H [High]- Unit value > 1000 (Sanctioned by higher officials)
M Medium]- Unit value 100 to 1000
L [Low]- Unit value < 100
Advantages  Used to keep control over consumption at departmental level.

4.ECONOMIC ORDER QUANTITY
 It is the most effective technique for determination of the quantity.
 It is defined as the quantity of materials to be ordered at one time which minimises the
lost.
 The basic objective of EOQ is to have an ideal order quantity for any item and to
economise on the cost of the purchase.
 Computation of EOQ The widely used formula is EOQ =√{2A×O/C}
 Where ,
A=Annual or periodic requirement
O=Ordering cost
C=Carrying cost

What is EOQ ?
 Economic order quantity is one of the techniques of inventory control which minimizes
total holding and ordering costs for the year.
 The economic order quantity is the technique which solves the problem of the materials
manager.

7. EOQ Models
1. ‘Q’ Models [ Q system]
2. ‘P’ Models [P system]
Q Model of EOQ

In ‘Q’ model, a fixed quantity of material is ordered whenever the stock on hand reaches
the recorder point the fixed quantity of material ordered each time is nothing but the
economic order quantity (EOQ). when the new consignment arrives the total stock shall be
within the maximum and the minimum limits.

P model of EOQ

In this model the stock position of each item of material is regularly is reviewed; Under this
model inventory is ordered based on fixed period.

5. FSN ANALYSIS ‘Fast moving, Slow moving, and Non-moving’
 based on the consumption pattern of the items Method
 Date of receipt or last date of issue whichever is later, is taken to determine the number
of months which has lapsed since the last transaction.
 For analysis, the issuing of items in past two or three years are considered
 No issuing of item during that period- labeled ‘N’ item
 10-15 issues in that period- ‘S’ Item
 Exceeding such limits of numbers of issues during that period -‘F’ Item

ADVANTAGES
 Helps to avoid investment in non-moving or slow items
 Facilitates timely control
 Useful in controlling obsolescence.
6. SDE ANALYSIS [Sarce, difficult, easy]
 to obtain S’- scarce items
 which are difficult to obtain
 generally imported
 which are in short supply
 managed by top level management.
 ‘D’ ‘difficult’ items
 which are available indigenously but are difficult items to procure.
 E’ ‘Easy’ items
 easy to acquire
 readily available in the local markets
ADVANTAGES  Useful in the context of scarcity of supply

8. 7. SOS Analysis:
 ‘S‟ stands for Seasonal items and „OS‟- Off Seasonal items.
 In general it is merit to seller to buy seasonal items at lower price and keep inventory
and sell them at high price during Off seasons.
 If not the seller has to buy the goods at higher prices during Off seasons.
 Decisions are taken based on the fluctuations and availability.

8. XYZ Analysis:
 This classification is based on the value of inventory of materials actually held in stores
at given time.
 This helps to control the average inventory model value.
 X items which are 10% of no.of items stored, but accounting for 70% of the total
inventory value.
 Y items are 20% of no.of items stored and account for 20% of total inventory value.
 Z items are 70% of no.of items stored and account for 10% of the total value.
 This analysis focuses on efforts to reduce the inventory of these items.

9.LEAD TIME : It is the time taken between the placing of order and receipt of drug to the
department. The longer the lead time the larger is the safety stock, resulting in excess of
investment in inventories.
10.BUFFER STOCK : The quantity of stock kept as reserve to guarantee against un fore seen
demands is known as buffer stock. This stock protects against variation in demand and
procurement period. It is used in emergencies.

11.PERPETUAL INVENTORY SYSTEM
Perpetual Inventory System is a method in accounting for calculating inventory
immediately after the sale and purchase with the use of computerized point-of-sale
systems and enterprise asset management. In simpler terms, such a system tracks the
inventory in real-time, i.e., after each transaction.


 It is a system of records.
 It reflects the physical movements of stocks & their current balance.

9.  Bin cards & the stock ledger help the management in maintaining this system.
 Records of all issues and balances.
 Maintenance of records of all physical movements of stock that are
Continuous stock taking and Surprise checks
Merits:
 Provides better control
 Acts as an internal check mechanism
 Assures minimum of investment at least cost
 Timely detection of errors & discrepancies.
 Preparation of final accounts at any time is possible.
Demerits:
 Not suitable for small units
 More paper work
 Actual stock taking may not be
 possible in true sense

12. JIT SYSTEM

13. KANBAN SYSTEM etc