This document discusses various aspects of inventory management including classification of inventory, objectives of inventory control, costs associated with inventory, different inventory categories, selective inventory control methods, reorder quantity determination, and economic order quantity calculation. Key concepts covered include direct and indirect inventory, aims of minimizing costs while avoiding stockouts, and classification systems to focus control efforts.

1. BY……
GANDHI SONAM MUKESHCHANDRA
M.PHARMA 1st Year
DEPT. OF INDUSTRIAL PHARMACY

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.  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. Classification of inventory
 There are mainly two
types of inventory-
1. Direct inventory .
2. Indirect inventory.

5. 1. Direct inventories – These are divided into
following categories .
a) Raw material .
b) Semi- finished goods .
c) Finished goods .
d) Spare parts
2. Indirect inventories .

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. 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. 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. Objective of inventory control
1. 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. 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. 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. 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. 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 cost
2) Labour cost
3) Burden or over Head cost

14. 3. Burden or over Head cost:-two types
1. 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. Inventory categories – special
considerations
 Based on the nature of the items-
1. Production inventories.
2. MRO inventories .
Includes parts and subassemblies
3. Work – in – process inventories :-
The inventory either waiting in the system for processing or
being processed. .
4. Finished good inventories .

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. 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 control
1. 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. 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 control
It 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. Advantages and disadvantages
Advantages
 This technique helps for control of material on selective base
 This technique reduces clerical costs
 It is proper and powerful method for cost reduction
Disadvantages
 ABC analysis should be changed periodically upto dates but it
is difficult task to change frequently.
 Standardization and codification become difficult.

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.  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. 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.  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. 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. 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. 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.  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. 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 .