Methods of Inventory Control

SUJITH ICM,TRIVANDRUM

Min-Max system of Inventory control

The min-max system works by simply setting a mnimum and maximum level quantity of inventory for any particular item. Suitable for companies experiencing cyclical and seasonal demand. In order to achieve better control over inventory,company should

Analyze demand from customers within a given period.

Assess the average units per order. Determine customer sales cycle times. Use historical order patterns, and account for seasonality. Determine number of customers ordering within that given period. Encourage constant feedback from sales on changes in customer demand.

ExampleIf a company averages 3000 units sold a month, and the lead time for stock replenishment is approximately 3-4 weeks, then a relatively save minimum inventory threshold would be to cover this 3000 units, plus 50% of this value to account for any sudden spikes in demand. So, in this case, a minimum inventory level might be 4,500 units, and a maximum level could be as high as 10,000 in to cover the entire quarters requirement. Max-10000

Min-4500

ABC analysis
ABC analysis is a basic analytical tool which enables management to concentrate its efforts where results will be greater. In ABC analysis items can be classifed into three,as A-class items,B-class items and C-class items.The categorisation is made to pay right attention and control demanded by items. A-class items - Constitute 5-10% of the total items and account for 7075% of the total money spent on inventories. B-class items - generally 10-15% of total items and represent 10-15% of the total expenditure on materials.

C-class items - 70-80% of items and 5-10% of total expenditure

A firm has 7 different items in its inventory. The average number of each of these items held, along with their costs, is listed below. The firm wishes to introduce an ABC inventory systems. Suggests. Suggest a breakdown of the items of the items into A, B and C classification.

Item number Average number units inventory 1 2 3 4 5 6 7 20000 10000 32000 28000 60000 30000 20000

Average cost of per unit in

Item (1)

Units (2)

Percent (3)

Unit cost Total (4) cost (5)

Percent of total (6)

20000

10

Rs. 60.80 Rs12160

00

38

Rs. 60.80

2 3 4 5 6 7 TOTAL

10000 32000 28000 60000 30000 20000 200000

5 16 14 30 15 10 100

102.4 11.00 10.28 3.40 3.00 1.30

1024000 352000 288000 204000 90000 26000 3200000

32 11 9 6.38 2.80 0.82 100

102.40 11.00 10.28 3.40 3.00 1.3

Just-in-Time
An inventory strategy, companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. A just in time inventory in management process involves understanding how much of a given item is needed to maintain production while more of the same item is ordered. Benefits Reduced set up time Improvement in the flow of goods from warehouse to shelves

Efficient use of employees with multiple skills

Coming in of supplies at regular intervals all through the production day

Example
A good example would be a car manufacturer that operates with very low inventory levels, relying on their supply chain to deliver the parts they need to

build cars. The parts needed to manufacture the cars do not arrive before nor
after they are needed, rather they arrive just as they are needed.

Economic Order Quantity(EOQ)

Economic order quatity is one of the important techniques used to determine the optimum quantity or number of orders to be placed from the suppliers. The main objective of economic order quantity is to minimize the cost of ordering and cost of carrying materials and total cost of production. The formula for EOQ can also be used for determining the optimum ordering quantity as given below EOQ Where

(2AB/CS)
EOQ-economic order quantity A-annual consumption B-buying cost per order C-cost per unit S- storage and carrying cost

EXAMPLE
ABC Ltd. is engaged in sale of footballs. Its cost per order is $400 and its carrying cost unit is $10 per unit per annum. The company has a demand for 20,000 units per year. Calculate the order size, total orders required during a year, total carrying cost and total ordering cost for the year. EOQ -

(2AB/CS)

EOQ = (2 20,000 400/10) = 1,265 units

Two-Bin Inventory Control

The two bin system involves using one main bin for inventory with a second bin as backup. When the stock runs out of the main bin, you place a new order and start picking from the reserve bin. The two-bin inventory control method is mainly used for small or low value items, used to monitor the quantity of an item left behind.

The two bin system is used to establish a connection between the order and reorder procedures. As mentioned above, from the point of view of a producer, uneven supply of stock and odd consumption is not very healthy.

It would be unlikely to run out even through a time of increased demand.

VED ANALYSIS
VED analysis represents classification of items based on their criticality. The analysis classifies the items into three groups called Vital, Essential and Desirable. Vital category encompasses those items for want of which production would come to halt. Essential group includes items whose stock-outs cost is very high. Desirable group comprises of items which do not cause any immediate loss of production or their stock-out entail nominal expenditure and cause minor disruptions for a short duration.

Steps involved in making VED analysis

Identify the factors to be considered for VED analysis Assign points/weightages to the factors Divide each factor into three degrees and allocate points to each degree Prepare categorization plan Evaluate items Place the items into V, E and D categories

FACTOR 1

FIRST DEGREE

SECOND DEGREE

THIRD DEGREE

Stock out cost in Above Rs. X

Between Rs. X to Y Above Rs. Y

the event of non (30)

availability (30) 2 Lead (30) 3 Nature of an item (20) Produced commercial shelf availability (20) 4 Sources of supply (20) Local (20) time for 1 4 weeks (30)

(60)

(90)

4 8 weeks (60) to Produced suppliers design

Over 8 weeks (90) to Produced buyers design proprietary items (60) to or

procurement

standard, or off the (40)

Outstation (40)

Imported, items (60)

quota i.e.

controlled supply

Categorization Plan

POINTS 100 160

CLASSIFICATION DESIRABLE

161 230
231 300

ESSENTIAL
VITAL

SDE ANALYSIS
SDE analysis classifies the items into three groups called Scarce, Difficult and Easy. The information so developed is then used to decide purchasing strategies. SDE analysis is based on the problem of procurement namely Non availability Scarcity Longer lead-time Geographical location of suppliers Reliability of suppliers, etc.

Scarce classification comprises of items, which are in short supply, imported or canalized through government agencies.

Difficult classification includes those items, which are available indigenously but are not easy to procure. Easy classification covers those items, which are readily available.

S-D-E analysis is employed, To decide on the method of buying To fix responsibility of buyers.

FSN ANALYSIS
FSN analysis is based on the consumption figures of the items. The items under this analysis are classified into three groups: F (fast moving) S (slow moving) N (Non moving) To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into account and the period, usually in terms of number of months that has elapsed since the last movement is recorded.

F-S-N analysis helps to identify

Active items, which require to be reviewed regularly Surplus items whose stocks are not being consumed. Non moving items which are not being consumed.

XY-Z ANALYSIS

XYZ analysis is based of value of the stocks on hand (i.e. inventory investment). Items whose inventory values are high are called X items while those inventory values are low are called Z items. And Y items are those, which have moderate inventory stocks.

Usually X Y Z analysis is used in conjunction with either ABC analysis or HML analysis.