22-12-2012, 12:27 PM
Inventory Control
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DEFINITION OF INVENTORY
Inventory is the stock of any item or resource used in an organization . An inventory system is set of policies and controls that monitor levels of inventory and determine what levels should be maintained , when stock should be replenished, and how large orders should be.
INTRODUCTION
The term inventory means the value or amount of materials or resource on hand. It includes raw material, work-in-process, finished goods & stores & spares.
Inventory Control is the process by which inventory is measured and regulated according to predetermined norms such as economic lot size for order or production, safety stock, minimum level, maximum level, order level etc.
Inventory control pertains primarily to the administration of established policies, systems & procedures in order to reduce the inventory cost.
Objectives of Inventory Control
To meet unforeseen future demand due to variation in forecast figures and actual figures.
To meet the customer requirement timely, effectively, efficiently, smoothly and satisfactorily.
To smoothen the production process.
To gain economy of production or purchase in lots.
To reduce loss due to changes in prices of inventory items.
To meet the time lag for transportation of goods.
To meet the technological constraints of production/process.
Benefits of Inventory Control
Ensures an adequate supply of materials
Minimizes inventory costs
Facilitates purchasing economies
Eliminates duplication in ordering
Better utilization of available stocks
Provides a check against the loss of materials
Facilitates cost accounting activities
Enables management in cost comparison
Locates & disposes inactive & obsolete store items
Consistent & reliable basis for financial statements
Nature of Inventory
Dependent demand- Demand for one product is linked with demand for another product, such as components, subassemblies etc.
Independent demand- Demand for a product/ service occurs independently of demand for any other for any other product or service, such as finished product, service parts, lubricants, cutting oil, greases, preservatives etc.
Setup (production change) cost
To make each different product involves obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials and moving out the previous stock of material.
If there were no costs or loss of time in changing from one product to another, many small lots would be produced. This would reduce the inventory levels, with the resulting change in cost.
Shortage costs
When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled.
There is a trade-off between carrying stock to satisfy demand and the cost resulting from stock out.
This balance is sometimes difficult to obtain because it may not be possible to estimate lost profits, the effect of lost customers or lateness penalties.
Economic Order Quantity (EOQ)
EOQ or Fixed Order Quantity system is the technique of ordering materials whenever stock reaches the reorder point.
Economic order quality deals when the cost of procurement and handling of inventory are at optimum level and total cost is minimum.
In this technique, the order quantity is larger than a single period’s ne requirement so that ordering costs & holding costs balance out.