8.1.

INTRODUCTION
One of the basic functions of management is to employ capital efficiently so as
to yield the maximum
returns. This can be done in either of two ways or by both, i.e. (a) By maximizi
ng the margin of profit;
or (b) By maximizing the production with a given amount of capital, i.e. to incr
ease the productivity of
capital. This means that the management should try to make its capital work hard
as possible. However,
this is all too often neglected and much time and ingenuity are devoted to make
only labour work
harder. In the process, the capital turnover and hence the productivity of capit
al is often totally neglected.
Several new techniques have been developed and employed by modern management to
remedy this
deficiency. Among these Materials Management has become one of the most effectiv
e. In Materials
Management, Inventory Control play vital role in increasing the productivity of
capital.
Inventory management or Inventory Control is one of the techniques of Materials
Management
which helps the management to improve the productivity of capital by reducing th
e material costs,
preventing the large amounts of capital being locked up for long periods, and im
proving the capital turn over ratio. The techniques of inventory control were evolved and developed
during and after the
Second World War and have helped the more industrially developed countries to ma
ke spectacular
progress in improving their productivity.
The importance of materials management/inventory control arises from the fact th
at materials
account for 60 to 65 percent of the sales value of a product, that is to say, fr
om every rupee of the sales
revenue, 65 paise are spent on materials. Hence, small change in material costs
can result in large sums
of money saved or lost. Inventory control should, therefore, be considered as a
function of prime
importance for our industrial economy.
Inventory control provides tools and techniques, most of which are very simple t
o reduce/control
the materials cost substantially. A large portion of revenue (65 percent) is exp
osed to the techniques,
correspondingly large savings result when they are applied than when attempts ar
e made to saver on
other items of expenditure like wages and salaries which are about 16 percent or
overheads which may
be 20 percent. By careful financial analysis, it is shown that a 5 percent reduc
tion in material costs will
result in increased profits equivalent to a 36 percent increase in sales.
8.2. DEFINITION OF INVENTORY AND INVENTORY CONTROL
The word inventory means a physical stock of material or goods or commodities or
other economic
resources that are stored or reserved or kept in stock or in hand for smooth and
efficient
running of future affairs of an organization at the minimum cost of funds or cap
ital blocked in
the form of materials or goods (Inventories).