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Inventory: Introduction Inventory means the stock of various kinds of goods that are kept in a store for a smooth

flow of production and sales services. These goods may be in various forms, viz., raw materials, work-in-progress, and finished products. The term inventory may be classified into two main categories; Direct Inventories and Indirect Inventories. The items which play a direct role in the manufacture and become an integral part of finished goods are included in the category of Direct Inventories. These may be further classified into four main groups: a. Raw Material Inventories b. Work- In- Progress Inventories c. Finished Goods Inventories; and d. Spare parts A raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state. Latex, iron ore, logs, and crude oil, would be examples. The work-in-progress refers to the semi-finished products, the work of which has started but remains to be completed by the end of a production cycle. Finished products refer to the products which are completed and ready for sale.A spare part, service part, or spare, is an item of inventory that is used for the repair or replacement of failed parts. Indirect Inventories include those items which are necessarily required for manufacturing but do not become the component of finished products like: oil, grease, lubricants, petrol, office-materials, maintenance materials etc. The total of all the above types of goods constitute what is technically called inventory.

Thus, inventory may be broadly defined as the stock of goods, commodities or other economic resources that are stored at any given time for production or for meeting the various demands in future. Inventory Management/ Control: Inventory management is primarily about specifying the shape and percentage of stocked goods. It is required at different locations within a facility or within many locations of a supply network to proceed the regular and planned course of production and stock of materials. The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Objectives of Inventory Control: The chief objectives of inventory control may be enumerated as under: 1. To reduce the amount of investment in the inventories as far as possible without affecting the earning capacity. 2. To avoid the unnecessary and uneconomical blockage of capital in the inventories. 3. To minimize the cost and quantity of materials used in the operations. 4. To maintain the stock of various types of goods within the limits by keeping timely the records of the inventories. 5. To provide with scientific basis for planning the inventory requirements. 6. To ensure the timely steps for replacement and replenishment of the inventories.

7. To avoid the pilferages, thefts, wastes, losses, damages and misappropriations of the inventories. 8. To standardise and centralize the information relating to the Receipts, Issues and Balances of the different items of the inventories. 9. To meet the demand fluctuations successfully without any prejudice to the interest of the organisation. 10. To make provision against, variations in lead time or delivery period of the materials. 11. To reduce pressure on the production system and improve the customerservice by maintaining the finished goods at higher levels. 12. To reduce the volume of surplus stock so as to avoid unnecessary blocking of capital and obsolescence losses. Purpose of Inventories: To meet anticipated demand: These inventories are referred to as anticipation stocks because they are held to satisfy expected demand. Examples of this type of demand arc stereo systems, tools, or clothing. To smooth production requirements: Firms that experience seasonal patterns in demand often build up inventories during off-season periods to meet overly high requirements during certain seasonal periods. These inventories are aptly named seasonal inventories. Companies that process fresh fruits and vegetables deal with seasonal inventories. So do stores that sell greeting cards, skis, snowmobiles, or Christmas trees. To decouple components of the production-distribution system: The inventory buffers permit other operations to continue temporarily while machine breakdowns are resolved. Similarly, buffers of raw materials are used to insulate production from disruptions in deliveries from suppliers. Finished goods inventories are used to buffer

sales operations from manufacturing disruptions. By recognizingthe cost and space needed, companies start to realize the elimination of disruptions can greatly decrease the need for the inventory buffers decoupling operations. To protect against stock-outs: Delayed deliveries and unexpected increases in demand increase the risk of shortages. Delay can occur because of weather conditions, traffic congestion, supplier stock-outs, deliveries of wrong materials, quality problems, and so on. The risk of shortage can be reduced by holding safety or buffer stock, which are stocks in excess of average demand to compensate for variability in demand and lead time. Lead time is the time elapsed between the placement of order and its delivery. To take advantage of order cycles: Inventory storage enables a firm to buy and produce in economic lot size in order to minimize purchasing and inventory costs without having to try to match purchase or production with demand requirements in the short run. This results in periodic orders, or order cycles. The resulting stock is known as cycle stock. In some cases, it is also practical or economical to group orders and/or to order at fixed intervals. To hedge against price increases or to take advantage of quantity discounts: Materials purchased in larger quantities may be cheaper due to discounts and lower transport cost. Paperwork and inspection of incoming goods are often simplified when larger quantities are ordered. However, the downside to this is that a huge sum of money is tied up in dormant goods, more space is occupied, more material handling cost is involved, and losses due to deterioration and obsolescence can occur. To ensure against scarcity of materials and permit operations: Work-in-process and pipeline inventories allow the smooth operations throughout a production-distribution system.

Requirements of Inventory Control: A system of inventory control, to be really effective and purposeful, requires the following steps to be taken up by the management: 1. Maintenance of the necessary records of the stocks in a systematic manner. 2. Conducting periodic reviews of the stock levels. 3. Keeping purchase requisitions under proper control. 4. Planning of the materials in proper and accurate manner. 5. Searching for new favourable suppliers. 6. Maintaining a proper coordination among the departments of purchases,productions and sales. 7. Issuing guidelines for understanding properly the costs of ordering andthe cost of carrying the stocks. 8. Enforcing audit of the system preferably by the internal auditors. 9. Introduction of selective inventory control. Advantages of Inventory Control: The chief advantages of an effective system of inventory control may be enumerated as under: 1. Various types of materials can be purchased in reasonable quantities and at the required time. 2. Margin of safety against the unpredictable high rate of consumption can be provided. 3. Availability of the materials as and when required for carrying on the flow of production without any disruption can be ensured without any delay. 4. Proper checking on the over stocking of the inventories can be exercised to reduce the amount of uneconomic investments in the dead stock.

5. Adequate supervision can be made of the materials in the store to reduce losses of the materials caused by misuse, pilferage, theft, deterioration and obsolescence etc. 6. Policies of the organisation relating to the procurement and utilization of the materials can be strictly implemented without any deviation. 7. Time adjustment with the changing situation in the market is made possible. 8. Balance of stocks can be arrived at, for preparation of the financial reports and production planning well in time. 9. The customers can be supplied with their desired items adequately at the minimum possible cost. 10. All sorts of available resources, viz.: capital, space etc. can be most effectively and economically used without any unnecessary loss. 11. Losses due to change in the price level of the materials can be minimized by purchasing and keeping them in proper quantities. 12. Discounts on bulk purchases can be availed of. 13. Possibility of ordering in duplicate can be avoided. Types of Inventory Models: Basically, there are five types of inventory models: Fluctuation Inventories: These have to be carried because sales and production times cannot be predicted accurately. In real-life problems, there are fluctuations in the demand and lead-times that affect the production of items. Such type of reserve stocks or safety stocks are called fluctuation inventories. Anticipation Inventories: These are built up in advance for the season of large sales, a promotion programme or a plant shut-down period. In fact, anticipation inventories store the men and machine hours

for future requirements. Cycle (lot-size) Inventories: In practical situations, it seldom happens that the rate of consumption is the same as the rate of production or purchasing. So the items are procured in larger quantities than they are required. This results in cycle (or lot-size) inventories. Transportation Inventories: Such inventories exist because the materials are required to move from one place to another. When the transportation time is long, the items under transport cannot be served to customers. These inventories exist solely because of transportation time. Decoupling Inventories: Such inventories are needed for meeting out the demands during the decoupling period of manufacturing or purchasing. Costs Involved in Inventory Problems: Following are the various cost elements involves in the managing of inventories or in controls purpose. Holding Cost (Inventory carrying cost): The cost associated with carrying or holding the goods in stock is known as holding cost. Holding cost varies directly with the size of inventory as well as the time when the item is held in stock. Holding cost includes the following costs: (a) Invested capital costs (b) Administrative costs (c) Handling costs (d) Storage costs (e) Depreciation costs (f) Taxes and insurance costs (g) Salvage costs. Set up cost (Order cost or Acquisition cost): This includes the fixed costs associated with obtaining goods through placing of an order or purchasing or manufacturing or setting up machinery before starting production. Set up costs are independent of the quantity ordered or produced. The administrative costs for

purchasing, the costs of requisitioning material, costs for placing an order, costs for follow up etc. are set up costs. The transport costs, cost of checking supplies, cost of advertisements, consumption of stationary, postage and telephone charges are also included in order costs. Shortage Costs or Stock-out Costs: These costs arise due to shortage of goods, sales may be lost, and goodwill may be lost either meeting the demand or being quite unable to meet the demand at all. In the case where the unfilled the goods can be satisfied at a later date (backlog case), these costs are usually assumed to vary directwith the shortage quantity and the delaying time both. On the other hand, if the unfilled demand is lost (no backlog case) shortage costs become proportional to shortage quantity only. Systems Costs: These are the costs which are associated with the nature of the control systems selected. If a very sophisticated model of the relationship between stockout costs, inventory holding cost and cost of ordering is used and operated with the help of a computer, it may give the theoretical minimum of the other costs but the cost of such control system may be sufficiently high to offset the advantages achieved. In most of the situations, however, there is no substantial increase in costs because of the proposed control system and in such cases, these costs can be overlooked. Inventory Control Techniques: The inventory of a firm consists of a large number of items of various nature, size, and value. It would not be possible to exercise the same degree of control over each and every item of the inventory. Hence certain items are to be selected over which proper control should be exercised to derive the optimum benefits for the firm. For this purpose, there are different methods of selective control which are enumerated as under:

1. ABC Analysis (Always Better Control Analysis) 2. VED Analysis (Vital, Essential and Desirable items analysis) 3. FNSD Analysis (First moving, Normal moving, Slow moving and Dead items analysis) 4. HML Analysis (High, Medium and Low volume analysis) 5. SDE Analysis (Scarce, Difficult and Easily available items analysis) 6. GLF Analysis (Govt., Local and Foreign suppliers analysis) 7. VIR Analysis (Vital, Important and Routine analysis) 8. MTR Analysis (Material, Turnover, Rate analysis) 9. SOS Analysis (Seasonal and Off seasonal analysis) Economic Ordering Quantity: Economic order quantity is the level of inventory that minimizes total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for his in-depth analysis. EOQ only applies when demand for a product is constant over the year and that each new order is delivered in full when the inventory reaches zero. There is a fixed cost charged for each order placed, regardless of the number of units ordered. There is also a holding or storage cost for each unit held in storage (sometimes expressed as a percentage of the purchase cost of the item). We want to determine the optimal number of units of the product to order so that we minimize the total cost associated with the purchase, delivery and storage of the product The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per

year. Note that the number of times an order is placed will also affect the total cost; however, this number can be determined from the other parameters. Methods of Computation of EOQ: Broadly speaking, there are three methods of determining the EOQ. These are: 1. Trial or Tabular Method. 2. Algebraic Method. 3. Graphic Method Trial or Tabular Method: Under this method, a table of different possible lot sizes together with their respective carrying costs, ordering costs and total costs is prepared to locate the lot size or the ordering quantity that minimizes the total cost. The working out of this table with eight columns continues till the total cost column shows an increasing figure or the ordering cost equals with that of the carrying cost. The lot size that immediately precedes the lot size with the increasing total costs is marked as the Economic Lot Size or Economic Order Quantity. Algebraic Method: Under this method the Economic Order Quantity or the Economic lot size is determined by the following model: EOQ/ELS = 2QO/C

Where, EQQ = Economic order quantity ELS = Economic lot size Q = Quantities needed during a year O = Ordering cost per order C = Carrying cost per unit of inventory. The above model of EOQ/ELS has been formulated on the basis of the following equation of the most economical point of inventory cost: Total carrying cost = Total of ordering cost EOQ

Graphic Method of EOQ: Under ihis method, data relating to the ordering cost, carrying cost and total cost as revealed from the trial table are plotted systematically on a graph paper and accordingly three different curves are drawn for the three costs respectively. The curve representing the ordering cost will be gradually falling downward as the lot size increases. The curve representing the carrying cost will go on increasing in the shape of a diagonal line as the lot size of the order increases. The curve representing the total cost will be falling gradually with the increase in lot size till the point of economic lot size, after which it will begin to rise with the further increase in the lot size of the order. The point at which the carrying cost curve and ordering cost curve intersect each other indicates the EOQ and the lowest possible cost.

References: A Modern Approach to Operations Management Operation Research Management Optimisation Techniques Operations Research Operations Research Wikipedia : By Ram Naresh Roy : SD. Sharma : LR. Potti : Panneerselvam : BS. Goal & SK. Mittal