Inventory control


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  • 4/10/2007
  • Inventory control

    2. 2. CONTENT Introduction Classification of inventory Objective of inventory control Cost of inventory Inventory categories- special considerations Selective inventory control Reorder quantity method References
    3. 3.  Introduction Inventory means all materials , supplies , tools ,in – process , products and finished products recorded in a book by an organisation and kept in the stock , warehouse or plant for some period of time . Inventory may also be defined as “A detail list of those movable items which are necessary to manufacture a product and to maintain the equipment and machinery in a good working order . The quantity along with the value of every item is also maintained in the list .
    4. 4. Classification of inventory There are mainly two types of inventory-1. Direct inventory .2. Indirect inventory.
    5. 5. 1. Direct inventories – These are divided into following categories .a) Raw material .b) Semi- finished goods .c) Finished goods .d) Spare parts2. Indirect inventories .
    6. 6. Need for inventories To ensure smooth and uninterrupted production. To render timely or quick customer service . To facilitate production during the lead time . To facilitate full utilization of labour and equipment . To enjoy the economies of large scale production . To ensure efficient and economic operations. To ensure smooth and effective running of the inventories.
    7. 7. Inventory control “It means control over materials lying in the stores” “It refer to the regulation of the stock and the flow of materials and components in an efficient, effective and economical manner to meet the need of manufacturing department.” “Inventory control refers to the process whereby the investment in a material and parts carried in stock is regulated within predetermined limits set in accordance with the inventory policy established by the management”
    8. 8. Aims of inventory control Never run out of stock of any material . Never build up very large inventory . Never send out too many small orders for more as such small order turn out to be very costly.
    9. 9. Objective of inventory control1. To reduce the minimum idle time due to shortage of materials and spare parts .2. To offer maximum service and satisfaction of customers.3. To minimize as much as possible capital investment and cost of storage .4. To provide a scientific basis for planning inventory requirement .5. To hold reasonable inventories in order to avoid losses from inventory obsolescence.
    10. 10. 6. To maintain reasonable safety stock .7. . To maintain necessary inventory record Advantages of inventory control-1. To ensure continuous production by supplying material .2. It helps the concerned to secure many economics through bulk purchase such as higher discount , lower price , better use of available resource etc.3. It helps the management in maintaining efficient accounting particularly material aspect of cost accounting .4. It ensures timely and continuous supply of goods to customers by maintaining sufficient stock of finished goods
    11. 11. Cont…..5. It eliminates overstocking of the inventories and maintain minimum investment .6. It helps in optimum utilization of men , money , material ,equipments ,time and thereby reduce the total cost of the production.
    12. 12. Inventory management It is defined as scientific method of finding out how much stock should be maintained in order to meet the production demands and be able to provide right type of the material at the right time , in right quantities and at competitive prices.
    13. 13. Cost of inventory It involves fixing or standardization individual item cost labour & burden rates for a period of time usually a calendar or year. Cost control takes in to account seasonally deals, promotion, introduction of new production& other factor that create a demand on inventory equipment and personnel It involves three type:-1) Material cost2) Labour cost3) Burden or over Head cost
    14. 14. 3. Burden or over Head cost:-two types1. Direct burden:-expenditure on OT, sick pay, employee insurance, retire benefit etc.2. Fixed burden :-operational budgets &expenses of engineering, QC and material management-cost of fuel, electricity, land and real estates taxes etc.
    15. 15. Inventory categories – special considerations Based on the nature of the items-1. Production inventories.2. MRO inventories . Includes parts and subassemblies3. Work – in – process inventories :- The inventory either waiting in the system for processing or being processed. .4. Finished good inventories .
    16. 16. Factors influencing inventories Manufacture requires relatively long process cycle – time . Procurement of the material has a long lead time . Demand for finished products is sometimes seasonal and prone to fluctuation . Material costs are affected by fluctuation in demand and subsequent by fluctuation in manufacturing.
    17. 17. Selective inventory control A process of classifying atoms into different categories, there by directing appropriate attention to the material in the context of company’s viability. Classification of material for inventory control1. ABC Analysis- this technique all the materials are classified according to their value high, medium, and low. A class- material having small % of total items but having higher values. B class- material are the medium value of material should be in the normal control. in other words, these materials having more % of total items but having medium value. C class- the low value of materials should be under the simple method of control. In the other words, these material having high % of total items but having low value
    18. 18. A Items B Items C Items It covers 10% of total It covers20% of total It covers 70% of total inventory inventory inventory It consumes about 70% It consumes about 20% of It consumes about 10% of of total budget total budget total budget Very strict control Very moderate control. Very loose controlIt requires either no safety It requires low safety It requires high safety stocks or low safety stocks stocks stocks It must be handled by It can be handled by It can be handled by any senior officer middle management office management
    19. 19. Advantages and disadvantagesAdvantages This technique helps for control of material on selective base This technique reduces clerical costs It is proper and powerful method for cost reductionDisadvantages ABC analysis should be changed periodically upto dates but it is difficult task to change frequently. Standardization and codification become difficult.
    20. 20. V-E-D Classification V- Item without which the activity will come to the halt E- Items which are likely to cause disruption of the normal activity. D- In the absence of which the hospital work does not get hampered. H-M-L classification Based on the unit value of items. F-S-N Classification Takes into account distribution handling pattern of items from store S-O-S classification
    21. 21.  S-D-E Classification: Based on lead-time analysis & availability. S- Scarce D-Difficult E-Eassy G-O-L-F Classification: G- Government O- Ordinary L- Local F- Foreign X-Y-Z Classification: Based on the value of inventory stored.
    22. 22. Reorder quantity method The quantity of items to be order so as continue production without any interruption in future. Methods:1) Fixed quantity method:-when the stock level drops to a pre-determined point know as reorder level, then the order is placed.Calculated using E O Q formula.Reorder level quantity = Safety stock +(usage rate x lead time)
    23. 23.  Open access bin system:- The bin is filled with items to the maximum level as and when required. Open bins with items are kept at places nearer to the production line. The operators use items without making a record. The system is usually restricted to C-items.E.g. Postal department where a fixed quantity of stamps is kept. at the end of each week, the quantities are examined and brought back to the maximum level Two –bin system:- Two bins are filled with items at different levels, when the first one is exhausted, it indicates the time for reorder. The 2nd one is a reserve stock during lead-time period.This is normally applicable to hospital & community pharmacies.
    24. 24. Economic order quantity It is defined as the quantity of the material to be ordered at one time . This quantity is fixed in such a manner as to minimize the cost of ordering and carrying the stock so that only correct quantity of the material is to be purchased . There should be no over stock or under stock balance should be made between the cost of carrying and the cost of not carrying that is cost of carry out . The economic order quantity depends upon the two type of costs
    25. 25. A. Procurement cost- Receiving quotations. Processing purchase requisition Follow up and expending the purchase order . Receiving the items and inspecting the items . Processing vendors invoice .B. Carrying cost – Interest on the capital investment . Cost of the storage facility. Cost involved in deterioration . Cost of insurance property tax .
    26. 26. EOQ model provide s a level of inventory at which the combined cost of procuring &carrying inventory are minimum 50 cost 40 ying Cost per period st Carr Tot al co 30 Min 20 cost 10 Procuring costs EOQ 100 200 300 400 500 Order quantity
    27. 27.  Determination of EOQ EOQ = 2 ab cs where a = Annual consumption b = Buying cost per order c = Cost per unit of material s = Storage & other inventory carrying cost
    28. 28. REFERENCES Drug store & business management by Mohammed Ali. Pharmaceutical management & production management by C.V.S. Subramanian. Drug store& business management by . R.M.mehta .