Inventory Control

Aniket

 Inventory :Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners. An inventory can be defined as a stock of goods which is held for the purpose of future production or sales. Inventory is also the stock of items held to meet the future demand. It is a list of goods and materials, or those goods and materials themselves, held available in stock by a business . The stock of goods may be kept in the following forms: o Raw Materials :- Basic Inputs that are converted into finished product through the manufacturing process. o Partly finished good ( Work in progress ) :- Semi-manufactured products need some more work before they become finished goods for sale. o Finished goods :- Completely manufactured products ready for sale.

Reasons to hold Inventory :o Meeting anticipated demand :- It does not matter whether it is a production, retail or even a service-oriented business there must be adequate supplies of materials/ products to meet expected demand for goods or services. For businesses or departments where the demand is exceptionally high, consistent and there is rapid stock turnover, this is critical to ensuring that they can comfortably meet expected demand and keep customers satisfied. o Guarding against shortages :- In times are shortages, adequate inventory is a blessing. Businesses that can efficiently hold stock have a competitive advantage. This is because the production runs/ services of those businesses would not be immediately affected by adverse supply conditions. Therefore, holding inventory ensures continuity in the short-to-medium term. o Benefitting from bulk discounts :- Trade discounts are usually available for bulk purchases. In many cases, the larger the order, the higher the discount is. Businesses seek to hold inventory when the trade discounts make the cost of holding it worthwhile. Apart from reducing the unit cost of each item, ordering costs (carriage inward and import duties for example) are also reduced.

o Dealing with variations in usage or demand :- A spike in production levels or increased inefficiency in usage of materials can lead to increased demand for items held in inventory. This can arise in cases where a customer requires a special order or where seasonal demand is significantly higher. A related point is that stock can improve a business responsiveness to contingencies; holding inventory is a useful tool in contingency planning. o To guard against high inflation/ supply shortages:- Efficient inventory holding can also be part of a deliberate strategy by a business in difficult economic times. High inventory levels can be a safeguard against rapid increases in prices in the short term. This strategy prevents the business from having to purchase stock at higher prices in the near future. Supply shortages can be inflationary as well, making this strategy a sensible one even beyond mere cost considerations.

Inventory Control :o Various definitions of Inventory Control :According to Gordon Carson, "Inventory control is the process whereby the investment in materials and parts carried in stocks is regulated, within pre-determined limits set in accordance with the inventory policy established by the management." In General sense, "Inventory control is a method where all stocks of goods are properly and promptly issued, accounted, and preserved in the best interest of an entity that handles its inventory." In terms of Business, "Inventory control is a method designed by the top level of management of a company. It requires a strategic decision to be taken for its effective implementation. Its proper implementation is the responsibility of the store manager." In an Academic perspective, "Inventory control is a method to identify those stocks of goods, which can be used for the production of finished goods. It shall be supported by a schedule which gives details regarding; opening stock, receipt of raw-materials, issue of materials, closing stock, and scrap generated."

Why is Inventory Control required? The ideal inventory and proper merchandise turnover will vary from one market to another. Average industry figures serve as a guide for comparison. Too large an inventory may not be justified because the turnover does not warrant investment. On the other hand, because products are not available to meet demand, too small an inventory may minimize sales and profits as customers go somewhere else to buy what they want where it is immediately available. Minimum inventories based on reordering time need to become important aspects of buying activity. Carrying costs, Ordering costs, material purchases, and storage costs are all expensive.

Following important points convey the broad meaning of inventory control: Inventory Control mainly focuses on location, storage, recording the quantity, and accounting for the amount of inventories. It helps to supply inventories to different departments or units whenever demand requisition is raised. Mostly, it supplies inventories to the production department. Inventory control means to monitor the stock of goods used for production, distribution and captive (self) consumption. It keeps a record of inventory issued to the concerned department located at a specific place. It provides prompt and proper service to all concerned departments or units. It also helps to maintain inventories at lowest costs. It bifurcates high-value and low-value stock of goods. It also avoids over-stocking and under-stocking of raw-materials. It means maintaining the inventory at a desired level.

Importance of Inventory Control :o Inventory management helps in maintaining a trade-off between carrying costs and ordering costs which results into minimizing the total cost of inventory. o Inventory management facilitates maintaining adequate inventory for smooth production and sales operations. o Inventory management avoids the stock-out problem that a firm otherwise would face in the lack of proper inventory management. o Inventory management suggests the proper inventory control system to be applied by a firm to avoid losses, damages and misuses.

 Inventory Control Systems :

o A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished and how large orders should be placed. o An inventory system monitors the levels of inventory and determines the timeline and quantity of orders. Companies maintain inventories of raw materials, work in progress or final products for various reasons, including unpredictable raw material delivery time, allowing for production scheduling flexibility or demand variations. There are many inventory-related costs including holding, ordering and shortage costs. o An effective inventory control system can minimize these costs and increase the efficiency.

There are various Inventory Control Systems. Some of them are as follows:-

o Economic Order Quantity :- Economic Order Quantity, better known as EOQ, is a mathematical tool for determining the order quantity that minimizes the costs of ordering and holding inventory. It attempts to minimize total inventory cost by answering the following two questions : 1) How much should I order? ( Economic Order Quantity ) 2) How often should I place each order? ( Cycle Time ) The goal is to minimize total inventory cost. Inventory costs are made up of Holding and Ordering cost. The equation for total inventory cost is developed as follows: Total Inventory Cost (TIC) = Holding Cost + Ordering Cost TIC = (Average Inventory)(Holding cost per unit) + (Number of orders per year)(Ordering cost per order) Assumptions of Basic EOQ Model: o o o o o Demand is known with certainty. Demand is relatively constant over time. No shortages are allowed. Lead time for the receipt of orders is constant. The order quantity is received all at once.

o ABC Analysis :- The ABC method focuses efforts on the small percentage of items that generate the majority of the firm's sales. The inventory is divided into three major categories based on the value of items. The A category represents the highest-value items in the inventory. B and C items account for the moderate- and low-value items, respectively. Managers minimize total inventory costs by dividing time and effort spent on items based on their value. Some inventory items need strict control, while others do not need tight monitoring. o Multi-period inventory systems :- There are two types of multi-period inventory systems: fixed-order quantity models and fixed-time period models. In the fixed-order quantity model, an inventory item is ordered when the stock of the item reaches a specific reorder level. Demand for items, cost per unit, ordering costs, lead time and holding costs are considered when determining the reorder level. In the fixed-time period model, orders are placed at the end of a specific time period, such as a week or month. It works by counting inventory and placing orders periodically. It works best in situations when vendors make routine visits to customers and take orders for their complete line of products. o Just-in-time inventory systems :- Managers now believe that holding inventory masks other problems such as poor quality and bad supply chain management. Reducing inventory will expose these hidden problems so that they can be solved. A just-in-time inventory system tries to maintain no extra raw materials or work in progress. Supplies arrive just in time for production. Holding costs, employees and space needed to manage the inventory is reduced in this way. These systems play a vital role in todays inventory control and management.

Conclusion :Careful classification of inventory and continuing analysis of those classifications can play a vital role in maintaining cost at the efficient levels that the organizations have established as their goals. Inventory Control is a constant requirement of doing business successfully in the current scenario.