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Meaning of Inventory Control:
Inventory control can be defined as the system used in a
manufacturing concern to control the firms investment in Stock. The
system involves the recording and monitoring of various stock levels,
forecasting future demands and deciding when and how much
quantity or order. The overall objective of inventory control is to
minimise the costs associated with stock.
ADVERTISEMENTS:
(c) Set up and tooling costs where goods are manufactured internally
and planning, production control costs associated with the internal
order.
(c) Loss of future sales because customers may find out other sources.
Having considered the costs involved in stock we find that one of the
major objectives of a stores control system is to ensure that ‘Stock
outs’ do not occur and surplus stocks do not exist. Stocks out hampers
production while surplus stocks lock up working capital. Both are
equally harmful.
So, any inventory planning model focuses on the twin problems of size
and timing.
Definition:
Economic Order Quantity may be defined as the most favourable
quantity or the optimum quantity of materials which can ideally be
purchased each time most economically. The EOQ is the size that will
result in minimum total annual costs of the item of material in
question.
So, the total costs of an inventory policy consist of: Total acquisition
cost + Total ordering cost + Total carrying cost.
Carrying Costs:
Carrying costs usually consist of:
(i) Loss of interest on investments in inventory.
Ordering Costs:
Ordering costs consist of:
(i) Clerical costs of preparing a purchase order.
(ii) Postage, telegram charges and telephone bills for placing an order.
Determination of EOQ:
The EOQ can be determined by the application of the following
formula:
Stock levels (How much to Purchase) for Inventory Control:
Maintenance of various stock levels is very important from costing
point of view. For efficient control of both stocks and purchases
certain stock levels are fixed up for every item of stores. Adequate
stocks of raw materials, components and parts are needed for various
reasons.
Advantages:
(i) Ideal stock levels guarantee a constant flow of raw materials to
production departments.
(v) Various stock levels serve as indices for initiating action on time.
Maximum Level:
Maximum level is the level above which stocks are not allowed to rise.
It is advisable to keep the level as low as possible.
Maximum, Minimum and re-order levels are not static. They must be
varied to suit changing circumstances. Thus, alterations will take place
if the usage of certain materials is increased or decreased, if the re-
order period changes, or if, in the light of a review of Capital available,
it is decided that the overall inventory must be increased or decreased.
Determination of Maximum Level:
Re-order level + Re-order quantity Minus (Minimum consumption x
Minimum time required for delivery).
Illustration:
From the following information calculate Maximum level:
Re-order quantity — 6,000 units
How to Determine?
Reorder level is determined by the application of the
following formula:
Maximum reorder period x maximum usage.
Illustration:
From the following information find out reorder level:
Maximum consumption 2,000 units per month. Time required for
delivery 2-4 months.
This is known as lead time. This indicates the time lag between the
date of placing order with the supplier and receiving date of materials.
Problem 2:
From the following particulars find out:
(i) Re-order stock level,
Solution:
(a) Reorder Stock level:
Maximum consumption x Maximum Reorder period = 2,500 x 4 =
10,000 units