Inventory control techniques include ABC analysis, economic order quantity (EOQ), perpetual inventory system, review of slow and non-moving items, input-output ratio analysis, and setting various inventory levels. EOQ determines the optimal order quantity to minimize total inventory costs. Perpetual inventory involves continuously updating inventory records as items are received or used to prevent closing down for stocktaking. Input-output ratio analysis examines the relationship between raw materials used and final outputs. Setting inventory levels such as maximum, minimum, reorder helps maintain appropriate stock levels.

1. INVENTORY CONTROL
TECHNIQUES
GEETA P. DAREKAR
SCOP AURANGABAD

2. CONTENTS
Introduction
Objectives of inventory control
Functions of inventory control
Inventory control techniques procedure

3. Technique of
Inventory
Control.
1. ABC
analysis
2. Economic
Order
Quantity
3. Perpetual
Inventory
system
4. Review of
slow and non
moving items
5. Input
output ratio
analysis
6. Setting of
various level

4. INTRODUCTION
The term inventory means the value or amount of materials or
resource on hand. It includes raw material, work-in-process,
finished goods , stores & spares.
Inventory Control is the process by which inventory is measured
and regulated according to predetermined norms such as
economic lot size for order or production, safety stock, minimum
level, maximum level, order level etc.
Inventory control pertains primarily to the administration of
established policies, systems & procedures in order to reduce the
inventory cost.

5. INTRODUCTION
Inventory control is a process of
maintaining optimum level of inventory by
using any technique of inventory control.
OR
It is a systematic control, constant checking
& evaluation of stored inventories.

6. WATER TANKANALOGY FOR INVENTORY
Supply Rate
Inventory Level
Demand Rate
Inventory Level
Buffers Demand
Rate from Supply
Rate

7. Objectives of inventory control
(1) Maximum customer service
(2) Minimum inventory investment
(3) Low cost plant operation

10. 1. ABC ANALYSIS

11. ECONOMIC ORDER QUANTITY:
(EOQ )Economic Order Quantity: The
correct quantity of the material to buy is the
quantity at which the ordering cost and the
inventory carrying cost will be minimum.

12. What Is ‘Ordering Cost’ And ‘Inventory Carrying
Cost’? (1 M Each)
Ordering Cost: are
the expenses incurred to
create and process an
order to a supplier. It
consist of cost of paper
work which consist of
use paper, typing,
posting, filing etc. It also
includes salaries of staff
involved in work,
incidental cost like follow
up, receiving, inspection
etc.
Inventory
carrying cost:
Refers to the total
cost of holding
inventory. It includes
rent on storage, cost
of insurance and
taxes, salaries of the
store keeper, losses
in store due to
pilferage, wastage,
breakage etc.

13. ECONOMIC ORDER QUANTITY:
Methods for Determination of EOQ:
1) Tabular determination of EOQ
2) Graphic presentation of EOQ
3) Determination of EOQ by algebraic
formula

19. EXAMPLE

20. PERPETUAL INVENTORY
SYSTEM

21. This is a method of recording the store
balance after every receipt and issue to
facilitate regular checking and to prevent
closing down for stock-taking. The
perpetual inventory systems comprises of
•1.Bin Card
•2.Stores ledger
•3.Continuous stock-taking

22. 1) Bin Card- This is a document maintained by the store-keeper in his
store to keep record of all items of materials and goods in his store.
So bin card serves the purpose of providing ready references. It
shows quantities of each material received, issued and in stock.

23. 2) Store ledger- It is kept in the cost accounting department. The stores
ledger is generally maintained in the form of loose leaf cards because
they can be easily removed and inserted.

24. 3) Continuous stock taking : Under this system only a limited
number of items are verified on a day. The selection of the
items of materials should be such that each item of material
gets checked up at least a certain number of times in a year &
checking of a particular item is evenly distributed during the
period. The selected number of items are counted daily or at
frequent intervals and compared with the bin card and
stores ledger by the store keeper. The bin card and store
ledger record the balances and their correctness can be verified
by means of physical verification .In case any difference
between recorded and actual balances, it has to be pointed out
to the management.

25. 1. It helps in detection & immediate rectification of errors.
2. It ensures a reliable checking of the store items.
3. Timely action can be taken on shortages.
4. It serves as moral check on staff.
5. Overstocking & under stocking is avoided.
6. Helps in completion of profit & loss account & balance sheet

26. REVIEW OF SLOW AND NON MOVING ITEMS
Inventory is important constituent of total cost and as such proper
system of inventory control leads to a significant economy in the
total cost of production. So proper system must be enforced to
detect and control slow moving , obsolete & dormant stock.
Slow moving items are those which are moving at a slow rate.
Dormant items are those which are moving temporarily due to
seasonal production.
Obsolete items are those which have become useless due to change
in the design, method of mfg. ,process etc.

27. The steps taken to detect these.
1) Periodic report: A monthly or quarterly report on the stocks of non
moving items is prepared which indicates its purchase, consumption &
balance in hand. Report given to management.
2) Obsolete items: Many slow & non-moving items become useless
with the time. A good method should be designed to locate these items
so that it can be utilised or its further purchase can be stopped.
3) Moving ratio: By calculating the moving ratio, we can determine
slow moving, dormant or obsolete items. These ratios show the
turnover of these items for presentation to the management.

28. VED
This system is based on utility of items.
In a drug store VED analysis is useful in controlling & maintaining the
stock of various types of formulation of a particular group of drugs. The
older the brand, the greater will be its requirement.
The best way to calculate the requirements is to classify the different
brands of drugs into following categories:
The brands are classified into following categories, V= vital. E=
essential D= desirable.

29. VED
Accordingly one has to maintain maximum stock of vital items, followed by essential items & then desirable items.
EX. Acetyl salicylic acid brands availableare Disprin, Micropyrine and Anacin hence divided as follows
V=vital, Disprin
E= essential, Micropyrine
D=desirable, Anacin

30. Scrap And Surplus & Its Disposal
Scrap: Scrap is residue incidentally obtained from manufacturing process. It is
usually a small value and is recoverable without further processing.
Eg powder and fine granules obtained in processing of tablets, non-returnable
containers and packing cases.
Surplus items: Surplus items are those items which are not required by the
organisation..Eg rejected components, defective parts, obsolete material etc
Classification :
• Legitimate scrap: Predetermined or anticipated in advance due to mfg process.
• Administrative Scrap: Material becomes obsolete due to change in design.
• Defective Scrap: Substandard raw materials and poor workmanship in handling such material.

31. Scrap And Surplus & Its Disposal
There are two methods of disposal of scrap & surplus
· It can be reprocessed into useful raw material for subsequent production
· It is sold if it cannot be recycled into useful material.
Control of scrap
Proper attention during the designing stage of the product.
By selecting the right right material and equipment during production of
finished goods.
By selecting right type of personnel with proper training and experience so
that they can handle the material properly.

32. SETTING OF VARIOUS LEVELS
In order to maintain inventory control, it is important to decide
upon various levels of materials. These are
1 Maximum
2 Minimum and
3 Reorder level.
4 Danger level
These levels are not permanent, but need revision due to
changes in the factors which determine these levels

33. MAXIMUM STOCK LEVEL
Maximum stock level represents the upper limit beyond which the
quantity of any item is not normally allowed to rise. The maximum stock
level for a particular item is fixed after considering the following points:
 1) Rate of consumption of material
 2) Storage space available
 3) Amount of capital needed and available
 4) Nature of material
 5) Market trend
 6) Fashion Habits
 7) Government restrictions
 8) Risk Involved due to fire, obsolescence and deterioration
 9) Lead time from the date of placing the order.

34. • The formula for computing maximum level is as follows:
• Maximum level = Reorder level + Re-order quantity - Minimum consumption
• Minimum consumption =Minimum consumption per week × Minimum
re- order period

35. MINIMUM STOCK LEVEL OR SAFETY STOCK
• Minimum stock level
• Minimum stock level or safety stock is the lower limit below which the
stock of any item should not normally be allowed to fall.
• This is also known as buffer stock The main purpose of determining this
limit is to protect against the possibility of a particular item going out of
stock and there is further danger of stoppage of its production and
supplies.
• This level is fixed taking into consideration following factors.
i) Average rate of consumption
ii) Lead time: Lead time is the total time consumed between the
recognition of the need
of an item till the time received for use.

36. MINIMUM STOCK LEVEL OR SAFETY STOCK
• Minimum level = Re-order level – (Normal consumption per
week × Average delivery time).
Or normal reorder period.

37. RE ORDER LEVEL
• Re order level is fixed between the minimum and maximum
stock levels. When stock of an inventory reaches at this point
the process for purchase of material should be started.
• The reorder level is slightly more than minimum stock level to
guard against
• 1) Abnormal use of item
• 2) Abnormal delay in supply
• The formula for calculating the reorder level.
• Reorder level = Minimum consumption X Maximum
During the period re-order period.

38. DANGER STOCK LEVEL
This is generally below the minimum stock level.
Normal stock level should never be allowed to fall below the minimum
level.
If it reaches the danger level at any point of time , urgent action must be
taken to prevent stock out. Danger level can be calculated with the help
of following formula.
Danger level = Average rate of consumption ×
Emergency supply
time.

39. SETTING OF VARIOUS LEVELS

40. INPUT-OUTPUT RATIO ANALYSIS
Input-output ratio is the relation between quantity of material charged to
the production process and the quantity of material in the final output.
For example, 2 kg of material A is put in production process and the
content of this material in the final product is 1.6 kg.
.: Input-Output Ratio = 2/1.6 X 100 = 125%
Advantages
1. It determines the efficiency of the manufacturing department.
2. It helps in the comparison of actual consumption of material with the
standard consumption. It indicates whether the use of material is
favourable or unfavourable.
3. The cost of raw material in the finished product can be find out by
multiplying the cost of raw material per unit by the input output ratio.

41. INPUT-OUTPUT RATIO ANALYSIS
• For example :
• A drug and pharmaceutical company uses chemical “A” as a raw material @
Rs100- per kg. The 1-0 ratio is 125%. Due to non availability of this raw material
two other substitutes are available as per the following information. Recommend
which of the material to be used.
• Solution Since the rate per Kg and I-O ratio vary in case of both the substitutes,
the final decision depends on the cost of each of the substi tutes in the finished
product per unit.
Material Rate per Kg I-O Ratio
A 1 Rs 150 110%
A 2 Rs 120 140%

42. INPUT-OUTPUT RATIO ANALYSIS
• The cost of the
raw material = Input / Output X Rates per unit in
the finished product
• The cost of the raw material A 1= 110/100 x 150 =165 per kg
A2 = 140/100 x 120 = 168 per kg
• A 1= 110 % x 150 =165 per kg
A2 = 140 % x 120 = 168 per kg
• Taking into consideration the cost of raw material chemical A1 is
recommended because it is more economical.

43. USE OF MATERIAL BUDGETING
In this method purchase budget of both the whole and the individual
item is prepared. During the preparation of material budget the
following factors are to be considered:
(1) Increase or decrease in the sales of the previous month in
comparison with the corresponding monthly sales in the previous
year.
(2) Adjustment of over buying or under buying during the previous
month .
When any purchase is made it is subtracted from the balance of the
purchase budget maintained in a separate purchase journal. In this
way, the person concerned in purchase of inventory will come to
know whether he is buying too much or too little by referring to
purchase budget.

44. Establishing An Effective Purchase Procedure
The purchase procedure means the sequence of steps in which a purchase transaction is
carried out.
1. The purchase procedures starts with the recognition or realization of the need of an
item.
2 .The need is written in the requisition form .
3. The sources are identified and the appropriate supplier is selected as a result of mutual
negotiations .
4. The order is placed with the selected supplier.
5. The goods are received and then thoroughly checked.
6. Invoice is checked and payment is made.
7. The purchase transaction is recorded.

45. Establishing An Effective Purchase Procedure
Keeping a proper record is very advantages because
1. It acts as a guide for future action.
2. It provides authentic records about the inventory which is needed for the
inventory control.
3. The purchase order is legal document which helps in case of any legal
problems.
In general, every business organization prepares its own purchasing manual which
prescribes the purchase policies and procedures, The purchase policies differ from
company to company because these are framed keeping in view the objectives of the
company.
Good purchase policies and inventory control are interlinked with each
other. Therefore, such purchasing policies are to be pursued which are
effective in controlling the inventories.

46. QUESTIOS
1 Define inventory control (1 Mark)& write its objectives.(1 Mark)
2 Define E.O.Q.(1 M) Mention different methods of E.O.Q.(3M)
3 Explain howwill you apply VED analysis for drugstore.(2 Marks)
4. Write note on perpetual method of inventory control along with its advantages.( 2m
5. Differentiate between slow moving, dormant material & obsolete items. Enlist the steps taken to detect
these. (1Mfor eachitem, 1M for steps),
6. Define ‘Scrapand Surplus’. Give its disposal procedure. ( 1Mark eachfor definition of scrap & surplus
and 1 ½ mark forDisposal procedure)
7. Explain maximum stock level, minimum stock level, re-orderlevel. .(1 Meach)
8. Giveadvantages of perpetual inventory control.

48. Thank you