Inventory Control

INVENTORY CONTROL
© 1. Introduction
Inventory is defined as the list of movable goods which are necessary to
manufacture a product and to maintain the equipments and machinery in good
working order/condition.
Classification
Broadly Classified into
 Direct inventory
 Indirect inventory
i. Direct inventory
It plays direct role in the manufacture of product such as:
 Raw materials
 Inprocess inventories (= work in progress)
 Purchased parts (purchasing of some components instead of
manf. in the plant)
 Inished goods.
ii. Indirect inventory
it helps the raw materials to get converted into finished part. such as:
 Tools
 Supplies
- miscellaneous consumable – brooms, cotton, wool, jute,
etc.
- welding electrode, solders etc.
- abrasive mat – emery cloth, sand paper etc.
- brushes, maps, etc.
- oil greases etc.
- general office supplies – candles, sealing wax etc.
- printed forms such as – envelope, letter heads, quotation
forms etc.
Inventory control
Inventory control means – making the desired items of required quality
and quantity available to various departments/section as & when they need.
(c) Relevant costs
The relevant costs for how much & when decisions of normal inventory
keeping one:
1. Cost of capital
Since inventory is equivalent to locked-up working capital the cost of
capital is an important relevant cost. this is the opportunity cost of
investing in inventory.
2. Space cost
Inventory keeping needs space and therefore, how much and when
question of inventory keeping are related to space requirements. this
cost may be the rent paid for the space.
3. Materials handling cost
The material need to be moved within the warehose and the factory and
the cost associated with the internal movement of materials (or
inventory) is called materials handling cost.
4. Obsolescence, spoilage or Deterioration cost
If the inventory is procured in a large quantity, there is always a risk of
the item becoming absolute due to a change in product design or the
item getting spoiled because of natural ageing process. Such cost has a
relation to basic question of how much and when?
5. Insurance costs
There is always a risk of fire or theft of materials. a firm might have
taken insurance against such mishaps and the insurance premium paid
are the relevant cost.
6. Cost of general administration
Inventory keeping will involve the use of various staffs. with large
inventories, the cost of general administration might go up.
7. Inventory procurement cost
Cost associated with the procurement activities such as tendering,
evaluation of bids, ordering, follow-up the purchase order, receipt and
inspection of materials etc. is called inventory procurement cost.
(c) Basic EOQ model
EOQ = Economic Order Quantity.
EOQ represent the size of the order (or lot size) such that the sum of
carrying cost (due to holding the inventory) and ordering cost is minimum. it is
shown by point A of figure 2.1.
As mentioned earlier, the two most important decisions related to
inventory control are:
 When to place an order? &
 How much to order?
In 1913, F.W. Harris developed a rule for determining optimum
number of units of an item to purchase based on some fundamental
assumptions. This model is called Basic Economic Order Quantity model. it has
broad applicability.
Assumptions
The following assumptions are considered for the sake of simplicity of model.
1) Demand (D) is assumed to be uniform.
2) The purchase price per unit (P) is independent of quantity ordered.
3) The ordering cost per order (Co) is fixed irrespective of size f lot.
4) The carrying cost/holding cost (Cc) is proportional to the quantity stored.
5) Shortage are not permitted i.e., as soon as the level of inventory reaches
zero, the inventory is replenished.
6) The lead time (LT) for deliveries (i.e. the time of ordering till the material
is delivered) is constant and is known with certainty.