INVENTORY CONTROL

TECHNIQUES……..
INVENTORY CONTROL
TECHNIQUES :
OPERATIONAL ASPECT OF
THE INVENTORY MGT
REALISE THE OBJECTIVE OF
INVENTORY MGT &CONTROL.
 ALL DEPENDS
ON THE
CONVIENIENCE OF THE FIRM TO
ADOPT ANY
OF
THE TECHNIQUES
Most commonly used techniques………
ABC ANALYSIS…….….  .
 ALWAYS bETTER CONTROL.
ALSO KNOWN AS PVA( ( AND SIM
TECHNIQUE(SELECTIVE INVENTORY CONTROL)
DIVIDES INVENTORY INTO THREE CATEGORIES-A,B
AND C ……ON THE BASIS OF THEIR ANNUAL
CONSUMPTION VALUE….!!!
objective= is to vary expenses associated with mantaining
appropriate control.
THIS IDEA HAS DRWAN FROM VILFREDO PARETO ,an
italian economist…
 it categorises the inventory into a,b,c classes
acc to the potential amount to be control.
After classifieng…..
the firm decide where to put efforts..
mainly strong control on a items.
Moderate control on B ITEMS
LOOSE CONTROL ON C ITEMS.
Procedure for abc
analysis:
1. List each invenotry item with number
2. Determine the annual volume of usage and rupee
value of usage.
3. Multiply each item of annual volume usage with
rupee volume,
4. Calculate each item’s percentatge of total inventory
on terms of the usage.
5. Categorize===== “A “ to 10% of all ites with high %
6. “B”20% of all items with high %
7. “c” rest of all 70% of all the items
 Example:
Inventory item Annual use (iin rs % of total classification
inventory usage

1 3000 1.33
2 4000 1.77
3 6000 2.66
4 2000 0.88
5 10,000 4.44 B
6 18,000 8 A
7 5000 2.22
8 12000 5.33 B
9 1000 0.44
10 2000 0.88
Total 10 items Total=2,25,000 REST ALL ARE IN C
CATEGORRY
ITEMS IN A ITEMS IN B ITEMS IN C

ITEM NUMBER 6 5 AND 8 NUMBER ITEM ITEM

NUMBER=.1,2,3,4,7,9,10

•VERY STRICT CONTROL 1. MODERATE 1.LOOSE CONTROL

•HANDLED BY SENIOR CONTROL 2.HIGH SAFETY STOCK
•MAXIMUM EFFORTS TO 2. LOW SAFETY 3.BULK ORDERING CAN
REDUCE LEAD TIME 3. ORDER ONCE IN 3 BE MADE
•ACCURATE FORECAST MONTH 4 ROUGH ESTIMATE
•NO SAFETY STOCK 4. QUATERLY REVIEW 5 REVIEW
•WEEKLY CONTROL 5. MODERATE EFFORTS ANUALLY,QUATERLY
STATEMENTS 6. ESTIMATE BASED ON 6 MINNMUM EFFORTS
PAST DATA
2.EOQ MODEL (ECONOMIC
ORDER QUANTITY)
WHAT SHOULD BE THE SIZE OF
ORDER???????
TECHNIQUE SOLVE THE PROBLEM OF
THE MATERIAL MANAGER…!!!
CARRYING COST+ ORDERING COST
A MATERIAL MANAGER TORN BETWEEN THE
KEEEPING LOW INVENTORY BY ORDERING IN
SMALL QUANTITY AND BY DESIRE TO REDUCE
COST BY BUYING LARGE QUANTITY…
PROCEDURE FOR CONSTRUCTIN THE
MODEL :
1. DELEVELOP A FUNCTIONAL RELATIONSHIP B/W THE
VARIABLES OF INTEREST AND MEASURE THE
EFFECTIVENESS,,,BY THIS:
TOTAL COST=ANNUAL PURCHASE COST+ANNUAL ORDERING
COST+ANNUAL HOLDING COST
TC=DC+D*S/Q+Q*H/2
WHERE:
TC=TOTAL COST,D=DEMAND,C=PURCHASE COST PER
UNIT,Q=QUANTITY TO BE ORDER,S=COST OF PLACING
AN ORDER,H=HOLDING COST PER UNIT OF AVRG
INVENTORY
I=COST OF CARRYING INVENTORY AS PERCENTAGE.
2. CALCULATE ORDER QUANTITY,Q,FOR WHICH TC IS MINIMUM,
(TOTAL COST IS MINIMUM AT THE POINT WHERE ORDERING
COST AND CARRYING COST MEETS. OR EQUAL.
DS/Q= QH/2

EOQ OR

WHERE
D= DEMAND,
S=COST OF PLACING AN ORDER,
H= COST OF PLACING AN ORDER
LETS REPRESENT EOQ
GRAPHICALLY……!!
—A POINT WHERE CARRYING COST CURVE AND
ORDERING COST MEET REPRSENT THE LEAST TOTAL
COST WHICH INCIDENTALLY THE ECONOMIC ORDER
QUANTITY….
ASSUMPTIONS OF EOQ MODEL:
WEAKNESSES OF EOQ
ERRATIC USAGES
COSTLY CALCULATION
FAULTY BASIC INFORMATION
EOQ ORDERING MUST BE TEMPERED WITH
JUDGEMENT
NO FORMULAE IS SUBSTITUTE FOR
COMMONSENSE.
3)Order point problem(reorder
level)
At what level shoud the order be placed???
 if inventory level is high -------block the capital….!!!
If the level is toooooo low--------disturb production…..!!!
So……. Efficient mgt of inventory NEEDS to maintain
optimum inventory level…!
Where there is no stock out and cost are minimum…!!!!
 now…the Different stock
levels:
1. Minimum level:--- need to be maintained for
smooth production.
how to fix min level??????
first need to know…
 lead time…(taken to receive the delivery aftr placing
order wwith suplier.,,,).
 Consumption rate (based on past experience & production
plan)
 material nature…(requirement of material=whaethr for
special or regular production)
Formula for calculating minmimum stock level=
re order level-(normal usage*avrg delivery time)
2.Re-order level:
 Is the level of stock at which the order should be placed. For
replenish the current stock .
 Lies btwn minimum stock level and maximum stock level.
Lead time avrg daily usage reorder point.
(above is on asumption that the usage is consistent and lead time is
fixed))))
3.Maximum level:
 level of stock beyond which the firm should not maintain the
stock.
 stock Beyond maximum level is called overstocking.
Serves as a safety margin
Excess inventory cause..
high cost..!!  blocks firms capital funds
Maximum stock level= reorder level+ re order quantity -
((minimum usage *minimum delivery time))
Safety stock-
Prediction of avrg daily usage.& lead time is difficult……
No doubt…. The raw material varies…. Day to day…!!!!!

Re order point= lead time* avrg usage+safety stock
Average stock level:

(minimum level + stock level)/ 2