Inventory Control Techniques

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Inventory Control Techniques

For effective inventory control, some important systems are described in the following sections.

Perpetual Inventory System

The continuous stock-taking system is known as perpetual inventory system. According to the definition of CIMA (The Chartered Institute of Management Accountants), perpetual inventory system is “the recording, as they occur, of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value.”

Under this system, a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of materials is always available. To further streamline the system, entries in the bin card and the stores ledger are reconciled after every receipt and issue and the balance is verified periodically with the physical stock.

The advantages of this system are as follows:

  • It avoids disruptions in the production caused by periodic stock-taking.

  • It also helps in verifying the details and monitoring the stocks periodically.

  • The records being maintained under this system are more realistic and reliable.

  • The discrepancies in stock, if any, can be investigated fast and an appropriate action be initiated promptly.

ABC System of Inventory Control

Under this system, the items of inventory are categorized according to the value of usage of material inputs. Broadly, the materials are classified into three categories, as A, B and C, according to their values. Items under category “A” constitute the most important class of inventories in the overall proportion in the total value of inventory. The “A” items constitute between 5% and 10% of the total items. However, their value may be in terms of nearly 80% of the total value of the inventory.

In category “B,” the items constitute intermediate position. Generally, items in this category may fall about 20%−25% of the total items. However, their value in terms of usage may be about 15% of the total value. In the last category “C,” the items or inventories are the items which have negligible value, say about 65%−75% of the total quantity. In terms of value, their cost may be around 5% of the total usage value of the inventory.

The numbers in percentage, as indicated here, are only indicative. In practice, the actual numbers may depend on the policy of a firm. The philosophy behind this system is that the items having highest value should be controlled more carefully as they involve higher cost of holding. On the other hand, items having medium and small values in terms of costs, despite large in quantity, can be controlled periodically.

Under the management of ABC inventory system, the senior-level executives are involved more particularly in managing the inventory categorized under A category. A minimum level of safety stock is maintained in this category. The controlling process is very rigid with maximum follow-up.

The advantages of ABC system are as follows:

  • The system helps in minimum investment in stocks and inventory.

  • The technique of EOQ further helps in reducing the inventory carrying and holding cost.

  • Since maximum attention is paid on the few selected items, management and adequate control can be adhered to on overall inventory management with the least cost.

Just-in-time Inventory Approach

Just-in-time inventory (JIT) approach of inventory management was developed by Japanese firms with the concept of no inventory holding and therefore avoiding completely the inventory holding costs. This is the more recent trend in inventory management. This principle focuses on total elimination of the intermediate stages like storekeeping, maintenance, etc. The materials ordered and purchased from supplier should directly reach the assembly line exactly when they are required for the production process.

There is no need of storing the materials and then carrying them to the assembly unit. The storing cost, wastage and spoilage can be saved to a larger extent through this approach of inventory management. Even the interest on materials’ carrying cost can also be controlled to a greater extent. However, it is very much important to have perfect logistics and transportation system for the effectiveness of this system. A slight delay in the material receipt may cause huge losses as it will stop the production process.

The major advantages of this system are as follows:

  • The inventory is ordered exactly in time keeping in view of the transportation time in carrying the inventory from supplier to the assembly line.

  • The quantity ordered is sufficient to meet the requirement of the process.

  • It brings cost effectiveness in the production process as all the relative operations are arranged accordingly.

  • Inventory carrying costs is almost zero.

  • The storage arrangements are not required and therefore there is a lot of savings in terms of space for warehouse, store staff, etc.

  • It also avoids losses and damages on account of breakage, wastage, pilferage, etc.

VED Analysis of Inventory Control

The analysis known as vital, essential and desirable (VED) is based on the degree of criticalness of the raw materials in a firm. According to this approach, the materials/items are divided into three categories, in the descending order, depending on their criticalness in the following manner. “V” is an indication of vital items and their stock analysis requires prime focus. The reason being non-availability of these items easily and therefore non-existent of these items in the store at the time if need will result in heavy losses due to stoppage of production.

Therefore, more and more attention is paid to hold these items in adequate quantity to ensure smooth operations of the production process. “E” signifies the essential items required by a firm in the production process. These items are considered essential for running production process effectively. However, the assumption is that without these items, the production system will not suffer.

All the required steps and care should be taken that these items are always available in stock to control any obstacles in the production process. The last category “D” relates to desirable items. The items which do not affect production immediately but availability of these items will ensure more efficiency in the production process. VED analysis can be an effective mechanism for inventory control, more particularly in capital intensive process firms. The focus can be laid to those items which are highly important and difficult to procure.

We can compare VED analysis through Table.

CategoryDegreeSuggested Strategy
VMost critical with high opportunity cost.The percentage of stock to be held should be smaller.
EIt may be quite critical material with substantial opportunity cost.It can be relatively at higher risk of shortage.
DNot very significant effect if not available. Can be stored.A higher risk can be taken.
A Comparison of VED Analysis

FSND Analysis

The holding period of materials, which is known as age of the inventory, is also an important element based on which the materials can be controlled. This analysis categorized the materials based on their moment. It shows the moving position of inventory during the year. This analysis categorizes the items of inventory into four broad categories, in the descending order, according to their usage rate.

This is further explained as follows:

  • The category “F” denotes fast moving items and those stocks which are consumed in a short span of time. Therefore, stock of fast moving items needs to be kept under close observation and under constant watch. The frequency of order should be determined depending on the period of their usage and time for transit to avoid any shortage.

  • The next category starts with “N” which means normal moving items of the stock and these items are generally utilized over relatively a longer period from 6 month to 1 year. The quantities of order for such items are determined on the basis of a new estimate of future demand. An effort is made to avoid the surplus stock.

  • Another term classified as “S” is an indication of slow moving items. The stock-holding period in such cases is more than 1 year. The holdings of these items are reviewed periodically and, in case they are not required, they can be eliminated.

  • The last category of materials starts with “D” which stands for dead stock. This means that there will not be any further demand for such items. Therefore, the firm identifies such items and eliminates from the stores or makes alternate arrangements.

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