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Inventory control system

An inventory control system is a system that encompasses all aspects of managing a
company's inventories; purchasing, shipping, receiving, tracking, warehousing and storage,
turnover, and reordering. In different firms the activities associated with each of these areas
may not be strictly contained within separate sub-systems, but these functions must be
performed in sequence in order to have a well-run inventory control system. Computerized
inventory control systems make it possible to integrate the various functional sub-systems
that are a part of the inventory management into a single cohesive system.

In today's business environment, even small and mid-sized businesses have come to rely on
computerized inventory management systems. Certainly, there are plenty of small retail
outlets, manufacturers, and other businesses that continue to rely on manual means of
inventory tracking. Indeed, for some small businesses, like convenience stores, shoe stores, or
nurseries, purchase of an electronic inventory tracking system might constitute a wasteful use
of financial resources. But for other firms operating in industries that feature high volume
turnover of raw materials and/or finished products, computerized tracking systems have
emerged as a key component of business strategies aimed at increasing productivity and
maintaining competitiveness. Moreover, the recent development of powerful computer
programs capable of addressing a wide variety of record keeping needs—including inventory
management—in one integrated system have also contributed to the growing popularity of
electronic inventory control options.

Given such developments, it is little wonder that business experts commonly cite inventory
management as a vital element that can spell the difference between success and failure in
today's keenly competitive business world. Writing in Production and Inventory Management
Journal, Godwin Udo described telecommunications technology as a critical organizational
asset that can help a company realize important competitive gains in the area of inventory
management. He noted that companies that make good use of this technology are far better
equipped to succeed than those who rely on outdated or unwieldy methods of inventory
control.

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1.1. Types of Inventory Control systems

I. ABC Method
II. Two Bin Method
III. Three Bin Method
IV. Fixed Order Quantity
V. Fixed Period Ordering
VI. Just In Time
VII. Vendor Managed Inventory

I. ABC Method

This is one of the most common methods used across retail industry and it is at times coupled
with other methods for better control on inventory. This is more of an inventory classification
technique where in products are classified based on the sales contribution and importance of
the same in their assortment plan.

A- Category products will be the maximum grocers in sales and flagship products with higher
margin. Usually top 20% of the products in the assortment contributing to 80% of the total
sales are classified under A-category where tight control on inventory is required to ensure no
loss in sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto
principle.

B-Category products are important to the retailer but are less important compared to A
Category products.

C-Category products are bottom of the line contributing less to sales. These items are
marginally important for the business and are kept only for the sole purpose of customer
requirement.

II. Two Bin Method

This is a simple method used usually in warehousing where in an item is stored in two
locations or bins in a warehouse and the stock is replenished in the first bin from the second
bin once the first bin is consumed completely. The required quantity to be filled in the second
bin is placed for ordering. The availability of stock in each bin is calculated based on reorder
lead time to ensure enough stock is made available till the new stock arrives.

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III. Three Bin Method

This is a common method in manufacturing where Kanban system is being followed. It is

similar to two bins system with a third bin at the supplier’s location. The supplier will not
manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each
with a Kanban card tracking movement of inventory is available, one at manufacturing/shop
floor, one at the shop/back store and one with the supplier. Once the inventory in
manufacturing/shop floor bin/display is consumed/sold, it is replenished with the complete
bin from the back store/shop. Later the back store bin is sent to the supplier and replace with
a complete bin from the supplier. Then the supplier will manufacture to fill the inventory in
the third bin with him. This will act as a complete loop until manufacturing of the product is
ceased.

IV. Fixed Order Quantity

This method is used to avoid ordering mistakes and ensure regular replenishment of existing
products. Only a fixed quantity can be ordered at one time for the item. This type of ordering
is usually used in auto replenishment of goods where in auto reordering point is set in system
and when the product's inventory level hits the reordering point or minimum stock levels, an
order is placed to the maximum stocking capacity of the product. To use this method the
retailer should know the minimum and maximum stocking capacity of the product based on
space allocated and the sales trend.

V. Fixed Period Ordering

In this system there is fixed time interval between every order placed for the item. For
example a vendor will visit the store in person and check the inventory of the respective
products and resupply the products based on the sales for the time duration. This kind of
ordering is done in small format stores like pharmacies and grocery stores.

VI. Just In Time

The objective of Just in Time method is to increase the inventory turnover and at the same
time reduce the inventory holding cost. JIT inventory system also exposes the unwanted or
the dead inventory held by the retailer/manufacturer. This method is ideal for manufacturing
organization and it is not used in Retail industry in general. This will also involve usage of
Kanban card to track inventory movement.

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VII. Vendor Managed Inventory

As the name explains, it involved SKUs managed directly by the supplier. Inventory is
replenished based on the sales on regular intervals by the vendor. The retailer provides shop
floor space and the vendor is charged a consignment rate on every product sold at the
location. The ownership of the items from receiving to sales and inventory loss if any will be
with the supplier.

2. Types of Inventory Methods

Inventory items are valuable business assets, whether the inventory consists of products in
development, final products or simply raw materials. Business managers seek to control the
inventory, so raw materials and products do not expire and become financial waste for the
company. While some inventory methods are suited for small businesses, others are ideal for
larger business inventories.

i. Manual Counts

Businesses that have small inventories use manual counts to ensure that all expected
inventory is readily available. During these counts, managers check the expiration dates on
the relevant products to ensure that they are still within a legal sales period. Expired products
serve as a health threat to the public and must be removed as inventory waste – a business
expense. The control aspect of manual counts include identifying and removing broken items,
as well as determine if any internal theft has occurred.

ii. Perpetual Methods

Companies that have active inventories due to sales or frequent production may use a
scanning system to track all items going in and out of the inventory on a daily basis. The
perpetual method tracks all traffic using a scanning system on a daily basis. At the end of the
day, the manager has exact figures of the incoming and outgoing traffic, so he knows what is
available in the inventory at any given time.

iii. Periodic Methods

Small businesses that may not use the inventory on a daily basis may benefit from using the
periodic method. Also known as the periodic inventory method, this control procedure simply
calculates how the inventory has changed over a fiscal period by comparing the starting

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inventory with the fiscal-end inventory. The comparison considers all incoming traffic,
including large shipments of raw materials.

iv. LIFO and FIFO

The LIFO and FIFO methods are control procedures for active inventories. LIFO means last-
in first-out, so this control method is ideal for companies that sell products on demand, rather
than groceries and produce with expiration dates. The FIFO method is first-in first-out, so the
products are removed based on the day they were added. This keeps products going
continuously to avoid waste. This method is ideal for products that have expiration dates,
such as food and medicine.

3. About the Brand: Patanjali

Patanjali Ayurveda Limited is an Indian consumer goods company. Manufacturing units and
headquarters are located in the industrial area of Haridwar while the registered office is
located at Delhi. The company manufactures mineral and herbal products. Baba Ramdev
established the Patanjali Ayurveda Limited in 2006 along with Acharya Balkrishna with the
objective of establishing science of Ayurveda in accordance and coordination with the latest
technology and ancient wisdom.

4. About the Store

Name of the store: Chaturvedi

Enterprises (PATANJALI)
Location: H.S.R Layout, Sector-6,
Bengaluru
Type: Speciality store
Owner: Anup Chaturvedi
Categories sold: Foods, Ayurvedic
Medicines, Personal care, cleaning
agents, Health juices.
Source of inventory: Organic Tree,
Nature Land, Organic Tatva
Store Rent: 10,000/month

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Chaturvedi Enterprises, a small 500 sq. ft. store behind 21st main road, is at the residential
area of H.S.R Layout with daily sales of approx. Rs. 4000 to Rs. 8000 per day. Currently the
owner along with the assistant manages the store. They have an inventory stock of worth
Rs. 3,00,000.

5. Product Line of the store

Natural Health Natural Food Ayurveda Herbal Home Natural
Care Products Medicines Care Personal Care
Agarbatti and
Badam Pak Biscuits Churna Skin Care
Dhoops
Cornflakes, Hawan
Health Drinks Tulsi Body care
Muesli Samagri
Pooja
Ghee Noodles Amruth Baby Care
Essentials
Honey Spices Vati Dental Care
Chyawanprash Dalia, Poha Asava Toiletries
Edible Oil Ashwagandha Dishwash Bar
Rice Hair Care
Candy Eye Care
Flour
Pickles
Murabba
Pulses

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6. Inventory Control System for Patanjali Store

The new Patanjali store follows 2 types of inventory control systems. They are:

i. ABC Method: ABC analysis is a method of analysis that divides the inventories into
three categories: A, B and C.

Category A represents the most valuable products that the new store has. These are the
products that contribute heavily to their overall profit without eating up too much of their
resources. The store has transportation inventory category which is 20% of their inventory
and brings 60-70 % of customer footfall and similar sales in their store.
Category A includes the following inventories:
- Flour
- Ghee
- Cooking Oil
- Spices
- Rice
- Biscuits
- Aloe Vera Gel
- Aloe Vera Juice
- Toothpaste
- Soaps
- Hand wash
- Dalia
- Dish Wash Bar
- Poha

Category B represents their middle line of products. These products are less important to the
store in comparison to category A products. These products are still important because the
margin levels of these products are high. They contributore upto 20% of total sales. Items
which fall in category B in the Patanjali store are as follows-
- Shampoo
- Hair Conditioner
- Body Lotion
- Hair Oil
- Chyawanprash
- Eye Drops
- Kohl
- Lip Balms
- Tooth Brushes
- Phenyl

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 - Jaggery
- Cornflakes
- Ayurvedic Medicines
- Muesli
- Badam Pak
- Atta Noodles
- Candies

Category C is all about the hundreds of transactions that are essential for profit but don’t
individually contribute much value to the store. For this category sales is not defined but is
important as they bring those customers who are not loyal to their store.
These products have fluctuating demand from both end- supply and customer demand.
Some of the items of Patanjali store which come under C category are as follows-
- Diapers
- Air Fresheners
- Pickles
- Camphor
- Vinegar
- Pot fill

Following is a General Graph for ABC classification of Inventory:

ABC Inventory Classification

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ii. Fixed Order Quantity Method: This is the other inventory control method which
Chaturvedi Enterprises follows. An inventory system controls the level of inventory by
determining how much to order (the level of replenishment), and when to order. FOQ helps
to keep stock levels fairly stable. As a result this ensures that there is no stock out unless
there is a great level of fluctuation. There is also less wastage in terms of ordering supplies.
Even if the store maintains different replenishment cycles for different categories, the
quantity of order more or less remains the same. They check it through the system, if items
less than 5 in quantity remain, they get an alert. As a small retail business, FOQ helps new
stores in efficiently maintaining store inventory without affecting the space for inventory.

7. Inventory method followed by Patanjali store

The Patanjali store follows the method of manual counts with lower level of inventory.
Manual inventory systems are time consuming generally, as the owner keeps track of
inventory sales on a daily basis. Inventory counts help the store to manage the reorders, so
that they can never be out of stock.

Item Inventory Replenishment Cycle

Ghee, Flour, Cooking Oil, Rice, Aloe Vera Weekly Replenishment
Juice, Soaps, Face Wash, Shampoo,
Conditioner, Dish wash Bar, Health Juices,
Dalia, Murabba, Poha
Spices, Biscuits, Ayurveda Medicines, Fifteen Days Replenishment
toothpastes, Hand wash, Badam Pak
Atta Noodles, Cornflakes, Muesli, Eye Twenty Days Replenishment
Drops, Washing surf and Bars
Jaggery, Kohl, Agarbatti, Pooja Essentials, Monthly Replenishment
Pickles
Body Lotions, lip Balms, Candy, Honey Two months Replenishment
Pot Fill Four Month Replenishment
Air Fresheners, Diapers, Camphor Five Month Replacement

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  Fast Moving Items- Food Items, Personal Care, Ayurveda Medicines
 Slow Moving Items- Diapers, Camphor, Pot Fill, Herbal Home Care
 Profit- 15% profit on the item.

 Ordering Stock- At a time they get stock of Rs. 1 lakh. If they order stock of 5lakh,
the owner said that it is difficult to get the entire order on time as the supply of
Patanjali is slow.
 Store Expenses:
i. Electricity: Rs.1000/ month
ii. Staff: Rs.10000/month
iii. Cleaning: Rs. 1000/month
iv. Rent: Rs. 10000/month
- Apart from the Patanjali products, the store also had some products of other brands
namely Sri Sri and Pranik. Some of the products under both the brands are as follows:
i. Sri Sri- Energy Bar, Cleansing Milk, Anti Acne Gel, Rose water
ii. Pranik- Herbal Medicine for Diabetes: D.B Care, Multi Vitamin Tablet

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8. Conclusion
In today's business environment, even small and mid-sized businesses have come to rely on
computerized inventory management systems. Certainly, there are plenty of small retail
outlets, manufacturers, and other businesses that continue to rely on manual means of
inventory tracking.

The Patanjali store that was studied in this project follows manual inventory method as there
are limited number of products.

The Patanjali store follows 2 types of inventory control systems- ABC method and Fixed
Order Quantity method. ABC analysis divides the inventories into three categories: A, B and
C depending on the sale of the products. Products that have high sales come under category
A, those having medium sales under category B and those having least sales come under
category C.

In the Fixed Order Quantity system, the maximum and minimum inventory levels are fixed,
and maximum and fixed amount of inventory can be replenished at a time when the inventory
level reaches the auto set reorder point or the minimum stock level.

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