INVENTORY

PLANNING
AND
CONTROL

BY
 LEARNING OBJECTIVES

At the end of the session, participants will be able to:

• define inventory planning and control;
• differentiate between re-order level and periodic level; and
• explain the inventory control systems.
 INTRODUCTION

• Planning and Control are management concepts(functions) which are

inseparable.
• Without planning, control activities becomes baseless and without controlling,
planning becomes a meaningless exercise.
• Planning precedes controlling and controlling succeeds planning.
 INTRODUCTION (Cont’d)
• Planning and Control refers to the designing & arrangement of activities to
achieve common objectives. Tis concerned with managing of ongoing activities
so as to satisfy customers demand.

• Inventories are kept in the store so that customers needs would be met at every
point in time irrespective of the location.
 INTRODUCTION (Cont’d)
• Without proper inventory planning and control, customers demands might not be
met and/or an organisation’s resources would be wasted; thereby breeding
operating losses.
 DEFINITION OF INVENTORY

• Inventory refers to the stock held in store or warehouse prior to use or

distributions to end users.
• There are three kinds of inventory that are of concern to managers:
• Raw materials,
• In-process or semi-finished goods,
• Finished goods.
 INVENTORY PLANNING

• It is the process of determining the optimal quantity and timing of inventory for
the purpose of aligning it with sales and production capacity.
 INVENTORY PLANNING (Cont’d)

• Inventory Planning is concerned with the making of decisions on:

 What to buy
 How to buy
 Where to buy and
 When to buy

• The reason for Inventory Planning is basically to save cost.

 Inventory control

• Inventory control involves the procurement, custody and disposition of

materials.
• It is a method of ensuring that the right quantity and quality of the relevant
stock is available at the right time and at the right place.
 Inventory control (Cont’d)

• Business owners and organisations pay close attention to inventory as it

usually represents the second largest expense in their businesses.
• Hence it is important to ensure that unnecessary goods are not purchased
to avoid wastages.
• Close attention should be paid on the cost of inventory.
 Types of Inventory cost

• Ordering or Acquisition cost

• This is a cost in placing an order up to

the point of receiving the goods into
the warehouse.
• Holding or Carrying cost

• It is the cost incurred for holding

materials from one period to another.
 Types of Inventory cost

• Stock out cost

• These are the cost involved when

customers demand cannot be met
because the stock is exhausted.
• Purchase cost
• This is the actual cost of purchasing the goods
 Reasons for Inventory Control

• To ensure that sufficient goods are available to meet anticipated demand.

• Helps control the amount of cash tied up in stock.
• Help to control wastages and pilferages.
• To ensure a continuous and smooth flow in the production process.
 Rationale for Inventory Control

• The overall objective of inventory control is to maintain stock at a level

which minimizes total stocks costs. This is done by establishing two
factors. That is:

• When to order goods and

• How many of the goods to order
 ABC Analysis

• This is an analysis or classification of stocks to enable us identify items

that will have a significant impact on overall inventory cost.
• Since all inventories in an organization are not of equal value, there is
need to focus more attention on the items of high value than items of low
value.
 ABC Analysis.

• ‘A’ items are very important for an organisation (often about 70% of dollar
value and 10% of items).
• ‘B’ items are moderately important. (often about 20% of dollar value and
20% of items)
• ‘C’ items are marginally important. (often about 10% of dollar value and
70% of items)
 STOCK VALUE VS. QUANTITY
ITEM NO ANNUAL ORDER UNIT PRICE TOTAL
(HITS) N N

D00 15 1,166,700 17,500,500

K00 74 100,000 7,400,000

E00 170 25000 4,250,000

 The Basic Contents of Inventory Control
Systems

• The Lead Time: This is the procurement period or period of time between
the placement of order and the time the order was made available and it is
usually expressed in days, weeks, months etc.
 The Basic Contents of Inventory Control
Systems (Cont’d)

• Economic Ordering Quantity (EOQ)

• It represent the most favourable quantity to be ordered each time fresh
orders are placed.
• It is the point where the annual ordering cost equals the annual carrying
cost.
• It is the known as Economic Batch Quantity (EBQ) or Reorder Quantity.
The Basic Contents of Inventory
Control Systems (Cont’d)

• EOQ = 2 D Co
Cc

Where D = annual demand

Co = Cost of Ordering
Cc = Carrying Cost
 The Basic Contents of Inventory Control
Systems (Cont’d)

• Maximum Level: This is the stock level selected as the maximum desirable
level of stock which is used as an indicator to show when stocks have risen
too high.
• ML =

(RL + EOQ) – (MIN LEAD TIME x MIN USAGE)

• Reorder Level: This is the point at which it is essential to
initiate purchase requisition for fresh supplies of the
materials.

• RL = Max Lead time x Max Usage

 The Basic Contents of Inventory
Control Systems (Cont’d)
• Buffer Stock: This is also called Minimum Stock Level or Safety Stock and it is
the level below which the stock of an item should not fall.
• ML =

RL – (AVERAGE LEAD TIME x AVERAGE USAGE)

Types of Inventory Control Systems
• There are two main inventory control systems are:

• The Re-order level System.

• The Periodic Review System

The Reorder Level System of
Inventory Control
• This system is also known as the two-bin system. it has
the following characteristics:
• A predetermined reorder level is set for each item of
stock.
• When the stock level falls to the reorder level, a
replenishment order is issued.
 The Reorder Level System of
Inventory Control

• The replenishment order quantity is invariably the EOQ

• The stock items are separated into two bins. Stock is initially drawn from
the bin and a replenishment order issued when it becomes empty.
The Reorder Level System of
Inventory Control…Cont’d
• The reorder level system maintain stock records with
calculated reorder levels which trigger off the required
replenishment order.
• It is also known as perpetual or continuous system.
 The Periodic Review System

• This is a system that places orders of varying sizes at regular intervals to

replenish inventory up to a specified or target inventory level.
• It sets a specific re-order period, but the re-order quantity can vary
according to need.
• It is also known as fixed-time period.
 Conclusion

• Since inventory constitute one of the largest expenses in business, it is

pertinent for store and warehouse officers, inventory controllers,
procurement officers and management in general to monitor inventory
closely.
 Conclusion (Cont’d)
• Responsible inventory officers/supervisors should keep a close eye on
inventory to avoid stock-out, obsolete stocks, pilferages and waste.
• EVERYTHING IS DIFFICULT
IF YOU CRY,
EVERYTHING IS EASY
IF YOU TRY.