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Inventory control aims at estimating and minimizing all kinds of wastes and losses while the
material are being purchased, stored, handled, issued or consumed.
Meaning of Inventory:
Inventory comprises of –
b. Stock of Work-in-progress;
Inventory control involves the planning, organizing and controlling the purchase and
storage of inventory so as to ensure the availability of inventory -
A number of techniques are used at planning, procuring and holding stage of material
cost control. Some of the techniques of inventory control are discussed below:
1. Level Setting.
4. ABC Analysis
5. VED Analysis.
1. Level Setting:
Setting of various stock levels is one of the techniques of inventory control. The main
purpose of setting various stock levels is to avoid the situation of under stocking and over
stocking. These levels are not permanent but need revision according to the changes in the
factors which determine these levels.
Minimum stock Level is that level of stock below which the stock in hand should not
normally be allowed to fall. It is the lowest quantity of a particular material which
must be held in the store at all times.
The objectives of fixing the minimum stock level is to avoid the cost of under
stocking such as cost of stoppage of production due to shortage of materials like cost of idle
labour, cost of idle plant and machinery.
Re-order level:
Re-order Level is the level of stock at which fresh order should be placed for
replenishment of stock. It is fixed between maximum and minimum levels in such a way that
fresh supplies are received just before the minimum level is reached.
The objectives of fixing Re-order level is to determine when the fresh order should be
placed for replenishment of stock.
Danger level:
Danger level is the level at which normally issue is of the raw material inventory are
stopped and emergency issues are only made on special requisition approved by the
competent authority.
The objectives of fixing danger level are to deter mine when an argent action is
required for fresh supplies of materials.
The EOQ technique solves one of the major problems of the inventory management
i.e. The order quantity problem by answering to the question: “How much inventory should
be ordered at a particular point of time?” The EOQ may be determined by any of the three
following methods:
a. Graphical method
b. Tabular method
c. Formula method
The formula method is the generally used method out of the three methods. EOQ may be
calculated with the help of the following formula:
EOQ = √2AO/C
Where, A = Annual consumption of input (in units)
The inventory turnover ratio is computed with the help of the following formula:
Inventory turnover ratio = cost of materials consumed during the period ÷ cost of
average stock held during the period
4. ABC Analysis:
ABC analysis is a system of inventory control which exercises discriminating control
over different items of stores classified on the basis of investment involved. It is based on a
principle of management by exception i.e. Concentrate more on critical areas than others.
Usually all items of stores are classified into three categories according to give the
importance as follows:
5. VED Analysis
VED analysis is used primarily for control of spare parts. The spare parts can be
divided into three categories namely:
a. Vital
b. Essential
c. Desirable
The spares, the stock out of which even for a short time with stop production for quite
some time and manner cost of stock out is very high on known as vital spares.
The spares, the absence of which cannot be tolerated for more than a few hours, or a
day and the cost of lost production is high and which are essential for the production to
continue a known as essential spares.
The desirable spares on those spares which are needed but their absence for even a
week or so with not lead to the stoppage of production.
VED analysis analyses items based on their criticality in production. It can also be used for
those items of materials which are difficult to procure.
Bin card provides a continuous quantitative record of receipts, issues and balances of
each item of stores. Separate bin cards are maintained for each time. It is filled up with the
physical movements of goods.
This ratio is used to judge the efficiency in the usage of materials. The ratio indicates
the relation between the unit of material put in for production and the units of finished
products.
1. The internet
Books referred:
Kalyani Publishers