Basic Concept of Inventory Control, Safety Stock

1. Topic: Inventory Control & Safety Stock
By
A. Raja

2. Inventory Control:
“ The systematic control over the procurement, storage
and usage of materials so as to maintain an even flow of
materials and at the same time avoiding excessive investment
in inventories.”
Inventory control aims to achieve maximum possible
inventory turnover.
The balance between high level and low level can be
done by means of effective inventory control.
INVENTORY CONTROL

3. The inventory control management includes the
following aspects:
• Size of inventory – determining maximum and minimum
levels
• Establishing time schedules, procedures and lot of sizes for
new orders.
• Ascertaining minimum safety levels
• Providing proper storage facilities
•Assigning responsibilities for carrying out inventory control
functions.
• Providing the reports necessary for supervising the overall
activity.

4. Objectives:
• For efficient purchasing, storing, consumption and accounting
for materials.
• To avoid shortages as far as possible and to ensure adequate
supply of products to customers.
• To make sure that the financial investment in inventories is
minimum.
• To maintain timely record of inventories of all the items.
• To maintain the stock within the desired limits.
• To ensure timely action for replenishment.
• To provide a reserve stock for variations in lead times of
delivery of materials.

5. Different systems of inventory control:
• Continuous / Fixed Order Quality Review System ( Q-
system)
• Periodic / Fixed Order Periodic Review System ( P-
system)
• Comparison of Q and P Review system

6. Safety Stock:
Safety stock (also called buffer stock) is a level
of extra stock that is maintained to mitigate risk of
stockouts (shortfall in raw material or packaging) due to
uncertainties in supply and demand.
The amount of safety stock an organization chooses
to keep on hand can dramatically affect their business.
Too little safety stock can result in lost sales and thus,
a higher rate of customer turnover.

7. Too much safety stock can result in high holding
costs of inventory. In addition, products which are
stored for too long a time can spoil, expire, or break
during the warehousing process.
As a result, finding the right balance between too
much and too little safety stock is essential.
The main goal of safety stocks is to absorb the
variability of the customer demand.

8. There are always uncertainties stemming from two
basic reasons:
i. Variability in sales, hence variability in the demand
for the materials or the consumption of the material.
ii. Delay in supply of raw material.
By absorbing these variations, safety stock improves
the customer service level.

9. Reorder Point with a Safety Stock

10. Example
Qn.) ABC Ltd. is engaged in production of tyres. It
purchases rims from DEL Ltd. an external supplier.
DEL Ltd. takes 10 days in manufacturing and
delivering an order.
ABC's requires 10,000 units of rims.
Its ordering cost is Rs.1,000 per order and its carrying
costs are Rs.3 per unit.
The maximum usage per day could be 50 units per day.
Calculate economic order quantity, reorder level
and safety stock.

11. Solution
(i) EOQ =
√((2 * Annual Demand * Ordering Cost Per Unit) /
(Carrying Cost Per Unit))
=√((2 * 10000 * 1000)/3) =2582 Units.
(ii) Maximum daily usage = 50 units & Average daily
usage =10,000/365= 27.4 units
Safety Stock = (50-27.4)*10= 226 units.
(iii) Reorder Level = Safety Stock + Average Daily
Usage * Lead Time
Reorder Level = 226 units + (27.4 units *10) =
500 units.

12. THANK YOU