CONCEPT OF INVENTORY MANAGEMENT The term ‘inventory management’ is used in two ways unit control and value control.Production and purchase officials use this word in term of unit control whereas in accounting this word is used in term of value control.Investment in inventory represents the one of the largest asset item of business enterprises particularly those engaged in manufacturing ,wholesale trade and retail trade.
IMPORTANCE OF INVENTORY CONTROL
A proper inventory control lowers down the cost of production and improves the profitability of the enterprise. Here are certain specific advantages of inventory control :
1) reduction in investment in inventory
2) proper and efficient use of raw material
3) improvement in production and sales
4) efficient and optimum use of physical as well as finacial resources.
TECHNIQUES OF INVENTORTY CONTROL
In managing inventories the firm’s objective should be in consonance with the wealth maximization principle.To achieve this the firm should determine the optimum level of investment in inventory . To deal with the problems of inventory management effectively, it becomes necessary to be conversant with the different techniques of inventory control.
TECHNIQUES OF INVENTORY CONTROL
1) INVENTORY LEVEL TECHNIQUE
2)ECONOMIC ORDER QUANTITY
INVENTORY LEVEL TECHNIQUE
The main objective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor any unnecessary investment in inventory, for this purpose determination of maximum and minimum limits of inventory and ordering level is necessary.
R.O.L.= maximum usage rate × maximum lead time
2) Maximum level = reorder level +reorder quantity –( min.usage rate × min.lead time
3) Minimum level = reorder level – ( normal usage rate × normal lead time)
ECONOMIC ORDER QUANTITY
A strategic factor in inventory control is computing the optimum size of a normal purchase order. It is the quantity of inventory which can be reasonably ordered at a time and purchased economically.It is also known as standard order quantity or economic lot size.