9-1 Inventory Management

Storage & Inventory Control

Om Singh
9-2 Inventory Management

Contents
• Aims , Staffing of Store room.
• Facilities and Equipments
• Storage and System
• Location of Storage
• Types of store received
• Inventory
• Objectives
• Methods
• Level of Techniques
• Perpetual Inventory
• Monthly Inventory
• Pricing of Commodities
• Comparison of Physical Inventory
9-3 Inventory Management

Learning Objectives
After studying this topic you will be able to :-
• Storing and Storage Practice.
• Location of Storage and Modern equipments in Storage.
• Explain the purpose and procedures for taking inventory .
• Objectives of inventory
• Explain the ways to assign costs to units of food in industry.
• Compute the daily cost of food sold
• Explain book inventory and actual inventory.
• Understand the formula for calculating cost of food consumed.
• Difference between periodic and perpetual inventory.
• Importance of inventories in hotel industry
• Various types of inventories used in hotel industry.
9-4 Inventory Management

Pre- Requisite

• Knowledge of F&B Operations

• Knowledge of Food and Beverage Costs.

• Calculation of Food Cost.

 9-5 Inventory Management
Storing
• The main objective of a food store is to ensure that an adequate supply of foods for
the immediate needs of the establishment are variable at all times.
• The aim of stock control is to minimize the cost of holding these stocks whilst
ensuring that there are enough materials for production to continue and be able to
meet customer demand. Obtaining the correct balance is not easy and the stock control
department will work closely with the purchasing and marketing departments.
• The marketing department should be able to provide sales forecasts for the coming
weeks or months (this can be difficult if demand is seasonal or prone to unexpected
fluctuation) and so allow stock control managers to judge the type, quantity and timing
of stocks needed.
• It is the purchasing department’s responsibility to order the correct quantity and quality
of these inputs, at a competitive price and from a reliable supplier who will deliver on
time.
• As it is difficult to ensure that a business has exactly the correct amount of stock at any
one time, the majority of firms will hold buffer stock. This is the “safe” amount of
stock that needs to be held to cover unforeseen rises in demand or problems of
reordering supplies
9-6 Inventory Management

Food Storage Standard Concern

1. Condition of facilities and equipment
2. Arrangement of foods
3. Location of facilities
4. Security of storage areas
5. Dating and pricing of stored foods
9-7
Factors Involved in Proper Internal
Inventory Management

Conditions
• Temperature
• Storage containers:
• Staples (airtight, insect-proof); – Perishables (packed to maintain
original quality); - Fresh Fish (packed in ice); - Cooked foods &
open cans (stainless steel containers)
• Shelving:
• Perishables (slatted shelving)
• Non perishables (solid steel shelving)
• Cleanliness: daily sweeping and cleaning
9-8
Factors Involved in Arrangement of
Inventory Management

Foods
• Availability according to use
• Most frequently used items closest to entrance
• Fixing definite location
• Each item always found in the same location
• Separate facilities for storage of different classes of
foods
• Rotation of stock
• Older quantities of food used before newer deliveries
• First-in, first-out method of stock rotation
9-9 Inventory Management

Problems from Lack of Training

• Foods stored in appropriate containers or at

improper temperatures
• One single item stored in several locations

• New delivers stored in front of old

• Increased pilferage if storage areas are not secured

• Values of issues unidentifiable because those

issuing foods have not recorded item prices on
requisitions
9-10 Inventory Management
Product security can be achieved if a few
principles are observed:

1. Food, beverages, and supplies should be requisitioned

only as needed based on approved production
schedules.
2. Required items (issues) should be issued only with
management approval.
3. If a written record of issues is to be kept, each person
removing food, beverages, or supplies from the
storage area must sign, acknowledging receipt of the
products.
4. Products that do not ultimately get used should be
returned to the storage area, and their return recorded.
9-11 Inventory Management
Storage
 Remember that storage costs money, in terms
of the space for items, and the money that is
tied up in inventory items.
 In most establishments, the storage process
consists of four parts: placing products in
storage, maintaining product quality and safety,
maintaining product security, and determining
inventory value
9-12 Inventory Management

Location of Storage Facilities

• Speeds the storing and issuing of food

• Maximizes security

• Reduces labor requirements

9-13 Inventory Management
Food and Beverage items are kept in various
types of storage –

Dry Storage

• Dry storage areas should generally be maintained at

a temperature ranging between 65oF and 70oF.
• Shelving must be sturdy, easy to clean, and at least 6
inches above the ground to ensure proper ventilation.
• Dry goods should never be stored directly on the
floor. Labels should face out for easy identification
9-14 Inventory Management

Refrigerated Storage

• Refrigerator temperatures should generally be

maintained between 32oF (0oC) and 36oF
(2oC). Refrigerators actually work by
removing heat from the contents, rather than
"making" food cold.
• Refrigerators should have easily cleaned
shelving units that are at least six inches off the
floor and are slotted to allow for good air
circulation
9-15 Inventory Management

Freezer Storage

• Freezer temperatures should be maintained

between 0F and -10F (-18oC and -23oC).
• It is anticipated that in the future more and
more foodservice storage space will be devoted
to frozen food.
• Frozen food holding units must be regularly
maintained, a process that includes cleaning
inside and out, and constant temperature
monitoring to detect possible improper
operation
 9-16 Inventory Management
Stock Rotation
• Regardless of the storage type, food and related products should be
stored neatly in some logical order.
• Food product quality rarely improves with increased storage time.
• The primary method for ensuring product quality while in storage is
through proper product rotation and high standards of storeroom
sanitation.
 Storage areas are excellent breeding grounds for insects, some
bacteria, and also rodents. To protect against these potentially
damaging hazards, you should insist on a regular cleaning of all
storage areas.
 Both refrigerators and frozen food holding units should be kept six to
ten inches from walls to allow for the free circulation of air around,
and efficient operation of, the units.
 9-17 Inventory Management
Storing Practice
• Groceries and canned goods are stored in the main storeroom. These
products are stored under main heading and in alphabetical order.
• Perishables are stored in refrigerated units.
• A tag of each piece of meat is filled in the storeroom.
• Only authorized person are permitted in the storeroom.
• Keys are deposited with the security and a register should be maintain
for issuing and depositing of keys.
It is the duty of the F&B Controller :-
• To make studies of the stock to eliminate excess quantities.
• Spot check storage method.
• Temperature , sanitary conditions.
• To assure the product is issued in a “ first in first out “ basis
• To prevent spoilage and pilferage.
 9-18
The Inventory
storageManagement
of food aims to ensure that an adequate supply of food for
the immediate need of the operation is available at all times. In
addition the basic problem in case of these items is to prevent losses
through spoilage, Pilferage.
Spoilage Occurs due to :-
• Long period of storage.
• Poor ventilation
• Incorrect temperature.
• Unsuitable issuing practice.
• Paying no attention to slow moving stocks.
• Pilferage can be kept to minimum by keeping the stockroom locked
and preventing entrance to the stores by unauthorized personnel.
At the receiving end all food items are categorized as :-
• Perishable items, meat, fish ,dairy products, fruits and vegetables.
• No – perishable items.
9-19 Inventory Management
Storage control procedure could be divided into four
categories.

• Storage facilities and equipment.

Temperature and lighting
Storage containers.
Shelving
Cleanliness
• Arrangement of food items.

Location
Rotation of stock
Availability
• Location of storage facilities

• Pest control system

• Security
9-20 Inventory Management

Inventory
Controls
9-21 Inventory Management

Inventory: a stock or store of goods Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain.
9-22 Inventory Management

Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called
work in progress
• Finished-goods inventories
• (manufacturing firms)
or merchandise
(retail stores)
9-23 Inventory Management

Types of Inventories (Cont’d)

• Replacement parts, tools, & supplies

• Goods-in-transit to warehouses or customers
9-24 Inventory Management

Functions of Inventory

• To meet anticipated demand

• To smooth production requirements
• To decouple operations
• To protect against stock-outs
9-25 Inventory Management

Functions of Inventory (Cont’d)

• To take advantage of order cycles

• To help hedge against price increases
• To permit operations
• To take advantage of quantity discounts
9-26 Inventory Management

Objective of Inventory Control

• To achieve satisfactory levels of customer

service while keeping inventory costs within
reasonable bounds
• Level of customer service
• Costs of ordering and carrying inventory
9-27 Inventory Management

Effective Inventory Management

• A system to keep track of inventory
• A reliable forecast of demand
• Knowledge of lead times
• Reasonable estimates of
• Holding costs
• Ordering costs
• Shortage costs
• A classification system
9-28 Inventory Management

Inventory Counting Systems

• Periodic System
Physical count of items made at periodic
intervals
• Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
9-29 Inventory Management

Inventory Counting Systems (Cont’d)

• Two-Bin System - Two containers of

inventory; reorder when the first is empty
• Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
9-30 Inventory Management

Key Inventory Terms

• Lead time: time interval between ordering

and receiving the order
• Holding (carrying) costs: cost to carry an
item in inventory for a length of time,
usually a year
• Ordering costs: costs of ordering and
receiving inventory
• Shortage costs: costs when demand exceeds
supply
9-31 Inventory Management

ABC Classification System

Figure 9.1
Classifying inventory according to some
measure of importance and allocating control
efforts accordingly.
A - very important
B - mod. important
High
C - least important A
Annual
$ value B
of items

Low C
Few Many
Number of Items
9-32 Inventory Management

Cycle Counting

• A physical count of items in inventory

• Cycle counting management
• How much accuracy is needed?
• When should cycle counting be performed?
• Who should do it?
9-33 Inventory Management

Inventory Valuation—LIFO
Last-In, First-Out
• Cost of products most recently added to inventory
(last-in) are the costs assigned when products are
issued (first-out).
• Cost-of-sales figures more accurately reflect
replacement costs.
• During times of inflation, LIFO tends to create a lower
total inventory value because most recent costs are
first issued and most recent costs are typically higher
than products purchased in the past.
9-34 Inventory Management

Inventory Valuation—FIFO
First-In, First-Out
• Oldest costs in inventory are “issued” or assigned
first.
• During times of inflation, FIFO tends to create a
higher total inventory value because the more recently
purchased products with typically the higher costs
remain in inventory.
• Inventory valuation affects food costs, taxes, and
profitability.
9-35 Inventory Management

Economic Order Quantity Models

• Economic order quantity model
• Economic production model
• Quantity discount model
9-36 Inventory Management

Assumptions of EOQ Model

• Only one product is involved
• Annual demand requirements known
• Demand is even throughout the year
• Lead time does not vary
• Each order is received in a single delivery
• There are no quantity discounts
9-37 Inventory Management

The Inventory Cycle

Figure 9.2

Profile of Inventory Level Over Time

Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
9-38 Inventory Management

Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost
Q + DS
TC = H
2 Q
9-39 Inventory Management

Cost Minimization Goal

Figure 9.4C

The Total-Cost Curve is U-Shaped

Q D
TC = H + S
Annual Cost

2 Q

Ordering Costs

Order Quantity
QO (optimal order quantity)
(Q)
9-40 Inventory Management

Deriving the EOQ

Using calculus, we take the derivative of the

total cost function and set the derivative
(slope) equal to zero and solve for Q.

2DS 2(Annual Demand )(Order or Setup Cost )

Q OPT = =
H Annual Holding Cost
9-41 Inventory Management

Minimum Total Cost

The total cost curve reaches its minimum

where the carrying and ordering costs are
equal.

2DS 2(Annual Demand )(Order or Setup Cost )

Q OPT = =
H Annual Holding Cost
9-42 Inventory Management

Economic Production Quantity (EPQ)

• Production done in batches or lots

• Capacity to produce a part exceeds the part’s
usage or demand rate
• Assumptions of EPQ are similar to EOQ
except orders are received incrementally
during production
9-43 Inventory Management

Economic Production Quantity Assumptions

• Only one item is involved

• Annual demand is known

• Usage rate is constant

• Usage occurs continually

• Production rate is constant

• Lead time does not vary

• No quantity discounts
9-44 Inventory Management

Economic Run Size

2DS p
Q0 =
H p− u
9-45 Inventory Management

Total Costs with Purchasing Cost

Annual Annual Purchasing

+
TC = carrying + ordering cost
cost cost

Q + DS + PD
TC = H
2 Q
9-46 Inventory Management

Total Costs with PD

Figure 9.7
Cost

Adding Purchasing cost TC with PD

doesn’t change EOQ

TC without PD

PD

0 EOQ Quantity
9-47 Total Cost with Constant Carrying
Inventory Management

Costs
Figure 9.9

TCa
Total Cost

TCb
Decreasing
TCc Price

CC a,b,c

OC

EOQ Quantity
9-48 Inventory Management

When to Reorder with EOQ Ordering

• Reorder Point - When the quantity on hand

of an item drops to this amount, the item is
reordered
• Safety Stock - Stock that is held in excess of
expected demand due to variable demand
rate and/or lead time.
• Service Level - Probability that demand will
not exceed supply during lead time.
9-49 Inventory Management

Determinants of the Reorder Point

• The rate of demand
• The lead time

• Demand and/or lead time variability

• Stockout risk (safety stock)

9-50 Inventory Management

Safety Stock
Figure 9.12
Quantity

Maximum probable demand

during lead time

Expected demand
during lead time

ROP

Safety stock reduces risk of Safety stock

stockout during lead time LT Time
9-51 Inventory Management

Reorder Point
Figure 9.13

The ROP based on a normal

Distribution of lead time demand

Service level
Risk of
a stockout
Probability of
no stockout

ROP Quantity
Expected
demand Safety
stock
0 z z-scale
9-52 Inventory Management

Fixed-Order-Interval Model

• Orders are placed at fixed time intervals

• Order quantity for next interval?

• Suppliers might encourage fixed intervals

• May require only periodic checks of

inventory levels
• Risk of stockout
9-53 Inventory Management

Fixed-Interval Benefits

• Tight control of inventory items

• Items from same supplier may yield savings in:
• Ordering
• Packing
• Shipping costs

• May be practical when inventories cannot be

closely monitored
9-54 Inventory Management

Fixed-Interval Disadvantages

• Requires a larger safety stock

• Increases carrying cost

• Costs of periodic reviews

9-55 Inventory Management

Single Period Model

• Single period model: model for ordering of

perishables and other items with limited
useful lives
• Shortage cost: generally the unrealized
profits per unit
• Excess cost: difference between purchase
cost and salvage value of items left over at
the end of a period
9-56 Inventory Management

Single Period Model

• Continuous stocking levels

• Identifies optimal stocking levels
• Optimal stocking level balances unit shortage
and excess cost
• Discrete stocking levels
• Service levels are discrete rather than
continuous
• Desired service level is equaled or exceeded
9-57 Inventory Management

Operations Strategy

• Too much inventory

• Tends to hide problems
• Easier to live with problems than to eliminate
them
• Costly to maintain

• Wise strategy
• Reduce lot sizes
• Reduce safety stock
9-58 Inventory Management

Excersice
• Why is perpetual inventory not generally recommended for
the food in the storeroom ?
• Explain the term LIFO and FIFO What do you considered to
be the advantages and dis-advantages of using each of these
methods?
• Explain the difference between Periodic and Perpetual
Inventory ?
• Why a inventory is important for a food and beverage
operation ?
• How a management use inventory as a tool for smooth and
healthy operation
9-59 Inventory Management

Reference
• Management and Cost Control – by- Jagmohan
Negi , Page no :136- 160 , 190 – 211
• Cost control and system Management –by-
Charles Levinson Page no: 109 – 206
• F&B Management – by Bernard Davis – Page
No : 136 - 146