This document discusses inventory management policies and control methods. It describes key inventory control parameters like important inventory items, order quantities, order timing, and costs. It explains perpetual and periodic inventory review systems, which differ in whether order size or frequency is held constant. Physical counting, two bin systems, FIFO, LIFO, and weighted average costing methods are also outlined. The document concludes by covering push-pull inventory methods and risk pooling concepts.

1. MATERIALS AND INVENTORY
MANAGEMENT
UNIT 4: INVENTORY MANAGEMENT
POLICIES
Prepared and presented by,
Ganesha Pandian . N
Assistant Professor.
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2. CONTENT
 Inventory control
 Inventory control parameters
 Inventory record keeping
 Reactive, planning and adaptive methods
 Push pull inventory control methods
 Risk pooling
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3. INTRODUCTION
 Proper inventory control policies and procedures
reduces the cost associated with the inventory
 The inventory policies must align with the overall
firm’s financial goals and operational needs.
 Inventory control – efficiency in inventory
management – increases the profit of firm
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4. INVENTORY POLICIES AND CONTROL
 Inventory policies and control decisions are
concerned with maximizing the customer
satisfaction and minimizing the cost.
 The main components in inventory control are: 1.
carrying cost 2. ordering cost 3. shortage cost
 One is to decide on when to order and how much to
order and then to create a systematic tracking of
inventory 4
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5. INVENTORY CONTROL PARAMETERS
 In inventory control methods, there are some
inventory control parameters are:
1. Which inventory items are important?
2. How much to order?
3. When to order?
4. Cost associated with managing inventories
5. Which inventory strategy firm likely to pursue?
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6. INVENTORY CONTROL METHODS
 Two major variables in an inventory control
system are:
1. Order quantity
2. Ordering frequency
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7. INVENTORY CONTROL SYSTEMS
 There are two types of inventory control systems
are:
1. Perpetual review system: holds the order size
constant and lets the frequency of ordering
fluctuate according to demand requirements
2. Periodic review system: holds the frequency of
ordering constant and lets the order size fluctuate
according to demand requirements 7
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8. PERPETUAL CONTROL SYSTEM
 It is a continuous system keeps monitoring every single
activity whether receipt or withdrawal from inventory.
 This system keeps the regular track and record of
inventory.
 The stock position is monitored continuously
 When the stock position drops to the re-order point, a
fixed quantity Q is ordered
 Excellent for high cost items needed close attention
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9. ADVANTAGES OF PERPETUAL INVENTORY
SYSTEM
 An efficient and meaningful order size
 Safety stock needed for the lead time period
 More attention for fast moving items
 Relatively insensitive to forecast and parameters
change
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10. DISADVANTAGES OF PERPETUAL INVENTORY
SYSTEM
 Requires perpetual auditing of inventory in stock
 Prevents the economies, as the several items in
one order
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11. PERIODIC CONTROL SYSTEM
 Does not attempt to keep track inventory on a
continuous basis.
 The periodic system monitors inventory at regular
basis as weekly, monthly and yearly depends
 Periodic review systems need larger safety stock
than continuous review systems
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12. FEATURES OF PERIODIC REVIEW SYSTEM
 The stock position is reviewed at regular intervals
 An amount equal to a target inventory T minus the stock
position is ordered after each review
 The periodic system is well suited for inventory control
when there is one central supplier and items are
expensive
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13. COMPARISON TO PERPETUAL SYSTEM
1. It does not have re-order point but rather than a
target inventory
2. It does not have an EOQ, since the quantity varies
according to demand.
3. The order interval is fixed, but the order quantity
will vary 13
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14. ADVANTAGES OF PERIODIC SYSTEM
 Various items can be ordered from the same
vendor or supplier and delivered in the same
shipment
 Less record keeping due to scheduled
replenishment
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15. DISADVANTAGES OF PERIODIC SYSTEM
 Requires safety stock for protection against
demand fluctuation during both the review period
and lead time
 This results in a large safety stock as compared to
the perpetual system
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16. PHYSICAL COUNTING SYSTEM
 It is a part of internal management and audit
requirement.
 In case of perpetual system, then the physical counting
become necessary
 Organizations use the warehouse management system
software to perform efficient and effective counting
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17. TWO BIN INVENTORY CONTROL SYSTEM
 It is a fixed order system, often used for
inexpensive or low value item
 When the first inventory have finished, the ext order
is made to replenish or refill these inventory items.
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18. FIFO METHOD
 Under this system, the stock first comes should go
first out of the warehouse
 This method is commonly practices in countries like
US
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19. LIFO METHOD
 Under this method, the stock which came last
should go out first.
 This is the most commonly used method in many
places
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20. WEIGHTED AVERAGE COST METHOD
 Under this method, the items are priced as
weighted average cost.
 A new weighted average cost calculated at every
time of delivery
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21. STANDARD COSTING METHOD
 Under this technique, a standard price is fixed on the
basis of cost incurred for manufacturing a particular
product
 The difference between the actual and standard price is
compared and contrasted
 Inventory issued is charged as per the standard price
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22. PUSH PULL INVENTORY CONTROL SYSTEM
 Push method is more of proactive in nature and
often used when the demand is predictable
 Pull method is reactive method and it involves
production process gets initiated when the
customer order is fulfilled
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23. RISK POOLING
 Risk pooling is the concept that advocates that –
one can combine or aggregate demand to reduce
the unevenness or variations in demand
 Risk pooling can be even across regions, across
time or across products
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