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UNIT-4

INVENTORY CONTROL TYBBA/SEM-V M.M

Unit-3 INVENTORY CONTROL Meaning Objectives Importance Functions of Storekeeping Procurement and Carrying Cost ABC analysis Different stock levels VENDOR SELECTION(Unit-2)

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SHRI G.J.PATEL COLLEGE OF MGT & TECH Prepared by: PINKI NENWANI

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INVENTORY CONTROL TYBBA/SEM-V M.M


MEANING OF INVENTORY CONTROL:

Inventory control includes control over raw materials, stores, supplies, spares parts, tools, components, assemblies, work-in-progress and finished goods. Inventory control is a system which ensures the provision of the required quantity of inventories of the required quality at right time with the minimum amount of capital. So, inventory control refers to a planned method of purchasing and storing the material at the lowest possible cost without affecting the production and distribution schedule. Inventories, which comprise of raw materials, consumable stores, machinery and equipment general stores, work-inprogress and finished goods are to be purchased and stored. Inventory control, therefore, is a scientific method of deciding what, when and how much to purchase and how much to have in stock for a given period of time.

OBJECTIVES OF INVENTORY CONTROL

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FUNCTIONS OF INVENTORY CONTROL:

The scope of inventory management is vast. It encompasses various functions starting with determination of the requirement of inventory and ending with the supply of finished products to the users. In widest sense, function included in the scope of inventory management can be summarizes as: Determination of inventory requirement and planning its inflow. Floating tender enquires Identifying suppliers and placing orders for the suppliers. Inspection of items received Storekeeping and stock control. Issue, valuation and Store Accounting. Warehousing and Distribution. All these functions are carried out one after the other, in close sequence. First the periodic requirement of inventory is decided on the basis of sales forecast and production plan. At the same time tender enquires are floated for indentifying the sources of suppliers. Orders are then placed with the suppliers. When the inventory consignment is received they are inspected to ascertain that items supplied are as per the specification given in the order. Items found in order are then stored in bins, racks and containers to ensure their safety, security and prevent deterioration in quality. Inventory items are issued from stores to production and other departments as per their demand. Proper records are maintained for the receipt and issue of all these items. The stores department also maintains the finished goods inventory. Finally these items are issued to the distributors and dealers as their purchase orders, after obtaining instruction from the sales department.

IMPORTANCE OF INVENTORY CONTROL:


1. An efficient inventory control system minimizes the possibility of delay in production. There is no danger of closure of plant, unemployment and lower dividend a dark picture resulting out of poor inventory control. It helps a company to secure many economies e.g.no duplication in ordering better use of available material etc. It is necessary for efficient accounting system, particularly for material aspect of cost accounting. It discourages dishonesty i.e. theft of materials from plant. It is responsible for preparation of financial statement. Losses, damages, deteriorate of materials can be minimized. We can have careful material handling.

2. 3. 4. 5. 6.

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INVENTORY CONTROL TYBBA/SEM-V M.M

By an efficient inventory control we can achieve the primary objective of an inventory control viz.(a) to minimize idle time caused by shortage of inventory and non availability of inventories as per requirements, and (b) to keep down capital investment in inventories, inventory carrying cost and obsolesces losses.

PROCUREMENT COST AND CARRYING COST:


PROCUREMENT COST: This is also known as the cost of acquisition cost of obtaining quotation. Preparation of orders and its placement follow-up action, receiving and inspection, payment of bills, etc. are included in ordering for a single order total costs(total of above mention cost) directed by number of orders placed during that period is ordering cost. CARRYING COST: It refers to cost of keeping the materials in store house. This is also known as possession cost. After receiving the material, it is not wholly used in the production, some production kept lying in storeroom and for them storing expenses are made which are called carrying cost. It includes: (a) Capital cost: Generally capital cost represents interest charges, if borrowed. A capital cost mat be called the opportunity cost, of capital which is incurred for the purposes of making investments in inventories. (b)Storage cost: This comes under operational cost. It includes which expenditure incurred in connection with storekeeping and material handling function. (c)Cost of Damage: If cost creates major part of carrying cost. It can be neither avoided overlooked.

SHRI G.J.PATEL COLLEGE OF MGT & TECH Prepared by: PINKI NENWANI

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ABC ANALYSIS

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DIFFERENT STOCK LEVELS

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Materials - Levels of Stock

Different levels of stock are mentioned in the stores records. The levels are: (a) Minimum level below which at any time the stock must not go; (b) Maximum level above which at any time the stock must not go; (c) Ordering or re-ordering level which if the stock is reached, the purchase requisition is needed to be sent to the buying department; (d) Danger level which if the stock is reached, then very urgent measure needs to be taken. a. Minimum Level: The following factors are to be taken into consideration while fixing the minimum level:1. Nature of the Material: Minimum level must be maintained by the materials which are regularly stored. If a special item of material is to be purchased on a customers request, minimum level is not required to be fixed for that. 2. The maximum time required from the date of order to the date of actual delivery: It is known as lead time. Provided the re-order point remains constant, the longer the lead time, the lower will be the minimum level. 3. Rate of material consumption: The minimum rate, the maximum rate & the normal rate of consumption are to be taken into consideration. b. Maximum level: The following factors are to be taken into consideration while fixing the maximum level:1. Rate of Material consumption. 2. The lead time 3. The maximum requirement of the material at any time. 4. Nature of the material: The materials which deteriorate quickly should be stored as less as possible. 5. Storage space available for the material. 6. Price Economy- During the harvesting seasons, seasonal materials are cheap. So during the harvesting season maximum purchase is made & as a result the maximum level is high. 7. Cost of storage & insurance 8. Cost of the material & finance available: The maximum level is likely to be low when the material is costly. Also the maximum level should be high if the price is likely to be going up. 9. Turnover of the inventory: The maximum level is low in case of slow moving material & the maximum level is high in case of quick moving material. 10. Nature of supply: The maximum level should be as high as possible, if the supply is uncertain. SHRI G.J.PATEL COLLEGE OF MGT & TECH Prepared by: PINKI NENWANI Page 12

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INVENTORY CONTROL TYBBA/SEM-V M.M

11. Economic Order Quantity: Upon the economic order quantity, maximum level largely depends, because the quantity is decided & hence the maximum level is influenced by the economy order quantity unless otherwise contra indicated. c. Ordering or Re-ordering level: Between the minimum level & the maximum level, this level is fixed. This level is fixed in such a manner that the requirement during the lead time is met by the excess of ordering level over the minimum level. Thus, while fixing the re-ordering level, the main factors to be considered are the minimum level, the rate of consumption & the lead time. For working out the above levels, the following formula may be used: Maximum level = Re-order level plus Re-order quantity minus (Minimum usage*Minimum order period) Explanation: On the date on which the quantity is ordered, the actual stock level shall be received, will be the quantity ordered plusre-order level less the minimum consumption during the least lead time. Minimum level = Re-order level minus (Normal usage*Normal i.e. Average re-order period) Explanation: In case the usage is normal, by the time the actual delivery against the order is received, the level will not go below this. Ordering or Re-ordering level = Maximum usage*Maximum delivery period Explanation: Even if the maximum consumption takes place, by the maximum lead time the stock shall just reach zero level. Average Stock level=1/2*(Minimum level plus Maximum level) d. Danger Level: There is another level called danger level, in addition to the minimum, maximum & reordering level. Below the minimum level is this level & urgent measure is to be taken to replenish the stock when the actual stock reaches this level. The purchase quantity cannot be accurately fixed when the normal lead time is not available. So it is fixed in such a way that below the danger level, the actual stock does not fall by the actual lead time. This means that a cushion is contained by the minimum level so that the contingencies can be covered. The danger level is fixed by some concerns below the re-ordering level but above the minimum level. If, as soon as the stock reaches the re-ordering level, the action for purchase is taken, the danger level bears no significance, except that, when the danger level, but not yet the minimum level, is reached by the stock, for the purpose of ensuring that the delivery has been received before the actual stock reaches the minimum level, a reference may be made to the purchase department. When, below the minimum level, the danger level is fixed, it being reached by the actual stock, the detection of the defect in the system is done & the corrective measure becomes necessary. When, SHRI G.J.PATEL COLLEGE OF MGT & TECH Prepared by: PINKI NENWANI

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above the minimum level, the danger level is fixed, it being reached by the actual stock, to ensure that the stock may not go below the minimum level, preventive measures needs to be taken. Example: Two components A & B are used as follows: Normal Usage 120 per week each Minimum Usage 60 per week each Maximum Usage 180 per week each Re-ordering quantity A- 2000; B-3200 Re-ordered period A- 6 to 10 weeks; B-4 to 8 weeks For each component, calculate: 1. Re-ordering level; (b) Minimum level; (c) Maximum level; (d) Average stock level Also on the difference in the levels for the two components, comment briefly. Solution: (a) Re-ordering level = Maximum usage* maximum re-order period A = 180*10 = 1800 units B = 180*8 = 1440 units Re-order level of B is lower because against 10 weeks of re-order period for A, re-order period for B is 8 weeks. (b) Minimum level = Re-ordering level-(Normal usage*Normal re-order period) Normal Re-order period is to be taken as the average re-order period A = 1800-(120*8) = 840 units B = 1440-(120*6) = 720 units. Because of its lower re-ordering level, minimum level for B is lower. (c) Maximum level = Re-ordering level +Re-ordering quantity-(Minimum usage*minimum reorder period) A = 1800+2000-(60*6) = 3440 units B = 1440+3200-(60*4) = 4400 units. Because of its higher re-order quantity, maximum level for B is higher. (d) Average stock level= (Minimum level+ Maximum level)/2 A = (840+3440)/2 = 2140 units B = (720+4400)/2 = 2560 units.

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VENDOR SELECTION

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