what is inventory control management and how do you apply it in an organization

7/30/2019 What is Inventory Control Management and How Do You Apply It in an Organization

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INVENTORY CONTROL

It is Supervision of supply, storage and accessibility of items in order to insure anadequate supply without excessive oversupply.

It can also be referred as internal control - an accounting procedure or system

designed to promote efficiency or assure the implementation of a policy or

safeguard assets or avoid fraud and error etc.

Inventory control involves the procurement, care and disposition of

Materials. There are three kinds of inventory that are of concern to

Managers:

Raw materials,

In-process or semi-finished goods,

Finished goods.

If a manager effectively controls these three types of inventory, capital can be

released that may be tied up in unnecessary inventory, production control can be

improved and can protect against obsolescence, deterioration and/or theft, The

reasons for inventory control are: Helps balance the stock as to value, size, color,

style, and price line in proportion to demand or sales trends. Help plan the

winners as well as move slow sellers Helps secure the best rate of stock turnover

for each item. Helps reduce expenses and markdowns. Helps maintain a

business reputation for always having new, fresh merchandise in wanted sizes and

colors. Three major approaches can be used for inventory control in any type and

size of operation. The actual system selected will depend upon the type of

operation, the amount of goods.


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WHAT IS INVENTORY CONTROL

MANAGEMENT AND HOW DO YOU APPLY IT IN

AN ORGANIZATION?

The most important objective or inventory control is to determine and maintain an

optimum level of investment in the inventory. Most companies have now

successfully installed one or the other system of inventory planning and control.

The inventory control models range from very simple methods to highly

sophisticated mathematical inventory models.

In the simplest method, the purchase man periodically reviews the stock, perhaps

visually; to see what inventory items are in short supplies and places order when he

thinks a minimum level has been reached or when the inventory of a particular

item is exhausted. No inventory levels are kept on records. Obviously, such a

method is likely to incur excessive purchasing and carrying costs on the one hand

and stock out costs on the other. While excess purchase would lead to excessive

investment in obsolete or slow moving goods, shortage or inventory may disrupt

production or sales may be permanently lost.

To improve upon the visual method a re-order line may be drawn in the bin or

storage area so that when stock reaches this line, order will be placed. The re-order

line in the bin would be high enough to cover normal usage until the new order

arrives. A variation of this method is to use the two bins systems: an order is

placed when the working stock bin is empty.


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Another inventory control approach is through the perpetual inventory system.

Managers are already familiar with the principles and procedures of this system.

Another method used to assist in the control of inventory is the ABC classification.

Here the inventory items are classified into groups, usually three, according to the

annual cost of the item used and ranked according to the rupee value of the usage.

It may, however , be pointed out here that ABC analysis is not actually a control

system in itself: it shows the way to decide which items are most in need of strict

control system. It is ultimately the management who decides how best to control

each class of items.


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APPROACHES OF INVENTORY CONTROL

1.

Economic purchase order quantity (How much to order)2. Reorder level (when to order)3. Minimum inventory or safety stock.

Economic Purchase Order Quantities: In order to control inventory a decision

model has been developed to determine the optimum quantity of materials to be

purchased on each purchase order. The model determines the optimum working

stock level to be maintained. Each time a purchase order is placed, the company

incurs certain costs. In order to minimize the costs of placing purchase orders, the

company could increase the order quantity to meet the companys entire needs for

the year at one time, incurring only the cost of one purchase order. However, such

a practice will lead to having a large average inventory of working stock, resulting

in increased carrying costs. The costs of ordering and costs of carrying inventory

may be summarized as follows:


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COST OF ORDERING

Preparing purchase or production orders, receiving and preparing andprocessing related documents.

Incremental costs of purchasing or transportation for frequent orders(Purchase in small lots is often costlier and transportation costs also

increase)

Out of pocket costs of postage, telephones, telegrams, cost of stationery,traveling etc.

Extra costs of numerous small production runs, overtime, setups, trainingetc. In addition- fixed costs in form of salaries, wages of employees

connected with this work in purchasing, receiving, inspection and Material

handling Departments.


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COSTS OF CARRYING

Interest on Investment.

Losses from obsolescence and deterioration, spoilage. Storage-space costs, including Rent, Rates, Taxes, Electricity, and etcs. Insurance, in addition- fixed costs in form of salaries, wages etc of

employees connected with this work in stores and Material handling

Departments.

It should be noted that in the consideration of the optimum inventory decision, the

costs of buying the inventory would usually be irrelevant, because it is assumed

that the quantity required for the year would be the same for various alternative.

The important relevant costs to be considered are the costs of ordering and the

costs of carrying.


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MINIMUM INVENTORY OR SAFETY STOCK

In our previous paragraph, we had assumed with certainty that 18 units would be

used per week. In practice, we seldom come across such a situation and demand

cannot be forecast accurately. Actually the demand may fluctuate from period to

period. If, therefore the usage per week at anytime goes beyond 18 units per week,

the company will be out of stock for some time. Hence a rise the need for

providing for some safety stock, i.e. some minimum or buffer as inventory as a

cushion against such stock outs. The recorder point is inter-related with the safety

stocks because as the recorder point is moved upwards, the amount of the cushion

is increased. Thus the recorder point is the resultant of the demand during lead-

time plus safety stock. By increasing the safety allowance the recorder point is

increased by the same amount. It should be noted that the economic order quantity

does not come into the picture and is independent of safety stock analysis.

There are several methods determining safety stock levels. A rough and ready

method followed by many companies is to provide a constant safety stock of say,

one or two months usage requirements regardless of the item. Another method

mainly based on intuition is to have large safety stock when quantity usage is high,

lead time is long or the ordering schedule is frequent. Small safety stocks can be

maintained when there is low usage, short lead time or infrequent ordering.

Another method makes a statistical analysis of the probability of a stock out by

predicting the dispersion of usage around average usage and the dispersion of lead

times around the average lead time. The above discussions of inventory control are

based on the two bins or constant order quantity system.


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THE PRODUCT LIFE CYCLE, DEMAND

UNCERTAINTY, AND INVENTORY

The structure of independent demand and logistical requirements vary by stage in

the product life cycle (introduction, growth, maturity, and decline). During

introduction, logistics must support the business plan for product launch, while

preparing to handle potential rapid growth by quickly expanding distribution. At

market maturity, the logistical emphasis shifts to become cost driven. In the

decline stage, cash management, inventory control, and abandonment timing

become critical. Over-abundance of products in the late maturity or decline stage

will eventually result in obsolete products. The obvious difficulty is predicting how

long each stage will last and how abruptly sales will fall in the decline stage.

The life cycle strategy typically involves getting to profitability quickly

recuperating startup costs, then sustaining high profits for as long as possible, and

finally acting decisively for products in decline to minimize losses. Understanding

this life cycle can help managers select logistical tactics, inventory levels and

supply chain designs. The ultimate goal for companies should be to have just

enough inventory to satisfy consumer demand.

Another life cycle attribute is that demand uncertainty shifts as we progress

through time. Product managers face substantial uncertainty during the

introduction and growth stages, relative stability during maturity, and increasing

uncertainty in decline. This uncertainty drives forecasting accuracy and the level of

safety stock required to meet customer service expectations.


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The coefficient of variation (CV) measures the stability of a product's demand,

comparing the variability in demand to the size of the average demand . High

demand variability in the introductory stage means it is difficult, if not impossible,

to forecast demand. Thus, high levels of inventory must be held to meet even

minimal customer service levels. In contrast, lower variability during maturity

means that demand forecasts are quite accurate. However, inventory levels may

still be large because they are based on larger sales volumes.

In addition to the vagaries associated with product life cycle stage, two other

sources of uncertainty also drive the level of inventory. First, demand can vary

from day to day, week to week, or seasonally. Second, there may be variability in

lead time, or the time from when an order is placed until delivery is made.

Forecasting demand used to be more exact because products stayed in the mature

product life cycle phase for a long time. Today many companies find it far more

difficult to forecast sales because of product proliferation. Product line extensions

result in more products that cannibalize sales and shorten the life cycle. Thus, more

sales are coming from products in the erratic earlier stages of life, as opposed to

sales from products in the mature stage of the life cycle


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SELECTIVE CONTROLS

ABC ANALYSIS

A form of Pareto analysis applied to a group of products in order to apply selective

inventory management controls. The inventory value for each item is obtained by

multiplying the annual demand by unit cost and the entire inventory is then ranked

in descending order of cost. However, the classification parameter can be varied;

for example, it is possible to use the velocity of turnover rather than annual

demand value.

ABC CLASSIFICATION

The classification of inventory, after ABC analysis, into three basic groups for the

purpose of stock control and planning. Although further divisions may be

established, the 3 basic categories are designated A, B and C as follows:

A Items - An item that, according to an ABC classification, belongs to a small

group of products that represents around 75-80% of the annual demand, usage or

production volume, in monetary terms, but only some 15-20% of the inventory

items. For the purpose of stock control and planning, the greatest attention is paid

to this category of A-products. A items may also be of strategic importance to the

business concerned.


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B items - An intermediate group, representing around 5-10% of the annual

demand, usage or production value but some 20-25% of the total, that is paid less

management attention.

C Items - A product which according to an ABC classification belongs to the 60-

65% of inventory that represents only around 10-15% the annual demand, usage or

production value. Least attention is paid to this category for the purpose of stock

control and planning and procurement decisions for such items may be automated.

ACTIVE INVENTORY

Any item or element of inventory which has been used or sold within a given

period. Often set at 12 months.


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AGGREGATE INVENTORY MANAGEMENT

The size of many inventories requires that they be broken down into groupings for

the purpose of control. Aggregated inventory is the further collection of these

groupings into a single entity to enable the establishment of operating policies, key

performance indicators, targets and reports. Aggregate Inventory Management

enables such things as the overall level of inventory desired to be established and

then appropriate controls implemented to ensure that individual operating decisions

achieve that goal, at optimum cost.

Allocated Stock

A part or product that has been reserved, but not yet withdrawn or issued from

stock, and is thus not available for other purposes.

All-Time Order

The last order for a particular product in the last phase of its life cycle. This order

is of such a size that the stock provided will satisfy all expected future demand (see

all time requirement below) for the product concerned. Sometimes known as a life

of type order.

All-Time Requirement

The total requirement for a particular product to be expected in the future.

Normally used for products in the last phase of their life cycles, when production is

(nearly) stopped.


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All-Time Stock

The stock resulting from the assessment of an all-time requirement and delivery of

an all-time order. If necessary, controls can be set for such stock to avoid

consumption of items for reasons over and above those for which usage was

predicted.

Anticipation Stock

Inventory held in order to be able to satisfy a demand with seasonal fluctuations

with a production level that does not fluctuate at all or that varies to a lesser extent

than the demand.

Availability

The primary measure of system performance relating to the expected percentage of

the supported system that will be available at a random point in time and not out of

service for lack of spares.

Available Stock

The stock available to service immediate demand.

Available to Promise (ATP)

The uncommitted portion of a companys inventory and planned production,

maintained in the master schedule to support customer order promising. The ATP

quantity is the uncommitted inventory balance in the first period and is normally

calculated for each period in which an MPS receipt is scheduled. In the first period,

ATP includes on-hand inventory less customer orders that are due and overdue.


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Reference

www.management.hub.com/inventory-management-

intro.html

Book:

Logistic & Supply Chain Management.

(Vipul Publication)
http://www.management.hub.com/inventory-management-intro.htmlhttp://www.management.hub.com/inventory-management-intro.htmlhttp://www.management.hub.com/inventory-management-intro.htmlhttp://www.management.hub.com/inventory-management-intro.html

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