05-09-2014, 10:32 AM
INVENTORY CONTROL & MANAGEMENT
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ABSTRACT
Every organization requires inventory for smooth running of its activities. It (inventory management) refers to the stock of the products a Firm is manufacturing for sale and the components that makes up a Product. It serves a link between production and distribution Process. Inventory management is an important (vital) requirement to manufacturing companies. The purpose of inventory management is to ensure availability of materials in sufficient quality with minimum investment. It is absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investments. The reduction in excessive inventories carries a favourable impact on the company‘s profitability. This study was based on the fallowing objectives.
INTRODUCTION
Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time.
Any organization which is into production, trading, sale and service of a product will necessarily hold stock of various physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may be noted that the organizations hold inventories for various reasons, which include speculative purposes, functional purposes, physical necessities etc.
From the above definition the following points stand out with reference to inventory:
All organizations engaged in production or sale of products hold inventory in one form or other.
Inventory can be in complete state or incomplete state.
Inventory is held to facilitate future consumption, sale or further processing/value addition.
All inventoried resources have economic value and can be considered as assets of the organization.
INVENTORY CONTROL
The main objective of inventory control is to achieve maximum efficiency in production & sales with minimum investment in inventory.
Inventory control is a planned approach of determining what to order, when to order and how much to order and how much to stock, so that costs associated with buying and storing are optimal without interrupting production and sales.
FINISHED GOODS
These are the goods which are ready for the consumers. The stock of finished goods provides a buffer between production and market. The purpose of maintaining inventory is to ensure proper supply of goods to customers. In some concerns the production is undertaken on order basis, in these concerns there will not be a need for finished goods. The need for finished goods inventory will bemore when productions is undertaken in general without waiting for specific orders.
INVENTORY TURNOVER RATIO
Kohler defines inventory turnover as “a ratio which measures the number of times a firm’s average inventory is sold during a year”.
A higher turnover rate indicates that the material in question is a fast moving one. A low turnover rate, on the other hand, indicates over-investment and locking up of working capital on undesirable items.
Inventory turnover ratio may be calculated in different ways by changing the numerator, but keeping the same denominator. For instance, the numerator may be materials consumed, cost of goods sold or net sales. Based on any one of these, the ratio differs from industry to industry.
Stock turnover is measured in terms of the ratio of the value of materials consumed to the average inventory during the period. the ratio indicates the number of times the average inventory is consumed and replenished. By diving no. of days in a year by turnover ratio, the number of days for which the average inventory is held, can be ascertained.
Comparing the no. days in the case of two different materials, it is possible to know which is fast moving & which is slow moving. On that basis, attempt may be made to reduce the amount of capital locked up, and prevent over-stocking of slow moving items.
Advantages:
(I) Price is based on actual cost and not on basis of approximations such as no profits or losses arises by reasons of adopting this method.
(II) The resulting stock balance generally represents fair commercial valuation of stock.
(III) It is based on traditional principles.
Disadvantages:
(I) The number of calculations in the stores ledger involved tends to be Complicated with increase in clerical error.
(II) The cost of consecutive similar jobs will differ if the price changes Suddenly.
(III) In times of rising prices, the charge to production is unduly low as the Cost of replacing the material will be higher.
Last in first out (LIFO)
This is the price paid for the material last taken into stock from which the materials to be priced could have been drawn. This method also ensure material being issued at the actual cost.
Its use is based on the principle that costs should be as closely as possible related to current price level. Under this method production cost is calculated on basis on replacement cost.
Advantages
(I) Production is charged at the most recent prices so that it is based on the principle that cost should be related to current price levels.
(II) It obviates the necessity for continuously ascertaining the replacement price.
(III) Neither profit nor loss is usually made by using this method.
(IV) In the times of rising prices there is no wind fall profit as would have been obtained under FIFO.
Disadvantages
(I) Needs more clerical work.
(II) Compassion among similar jobs is very difficult.
(III) Stock values relating to prices of the oldest cost on hand may be entirely out of the current replacement prices.
CONCLUSION
A better inventory management will surely be helpful in solving the problems the company is facing with respect to inventory and will pave way for reducing the huge investment or blocking of money in inventory. From the analysis we can conclude that the Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can maintain safety stock for its components in order to avoid stock-out conditions & help in continuous production flow. This would reduce the cost and enhance the profit. Also there should be tight control exercised on stock levels based on ABC analysis & maintain high percentage in fast moving items in inventories as per on FSN analysis for efficient running of the inventory. Since the inventory Turnover ratio shows the
Increasing trend, there will be more demand for the products in the future periods. If they could properly implement and follow the norms and techniques of inventory management, they can enhance the profit with minimum cost.