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It is Supervision of supply, storage and accessibility of items in order to insure an adequate supply without excessive oversupply. It can also be referred as internal control - an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc. Inventory control involves the procurement, care and disposition of Materials. There are three kinds of inventory that are of concern to Managers: Raw materials, In-process or semi-finished goods, Finished goods.
If a manager effectively controls these three types of inventory, capital can be released that may be tied up in unnecessary inventory, production control can be improved and can protect against obsolescence, deterioration and/or theft, The reasons for inventory control are: Helps balance the stock as to value, size, color, style, and price line in proportion to demand or sales trends. Help plan the winners as well as move slow sellers Helps secure the best rate of stock turnover for each item. Helps reduce expenses and markdowns. Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colors. Three major approaches can be used for inventory control in any type and size of operation. The actual system selected will depend upon the type of operation, the amount of goods.
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Another inventory control approach is through the perpetual inventory system. Managers are already familiar with the principles and procedures of this system. Another method used to assist in the control of inventory is the ABC classification. Here the inventory items are classified into groups, usually three, according to the annual cost of the item used and ranked according to the rupee value of the usage. It may, however , be pointed out here that ABC analysis is not actually a control system in itself: it shows the way to decide which items are most in need of strict control system. It is ultimately the management who decides how best to control each class of items.
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Economic Purchase Order Quantities: In order to control inventory a decision model has been developed to determine the optimum quantity of materials to be purchased on each purchase order. The model determines the optimum working stock level to be maintained. Each time a purchase order is placed, the company incurs certain costs. In order to minimize the costs of placing purchase orders, the company could increase the order quantity to meet the companys entire needs for the year at one time, incurring only the cost of one purchase order. However, such a practice will lead to having a large average inventory of working stock, resulting in increased carrying costs. The costs of ordering and costs of carrying inventory may be summarized as follows:
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COST OF ORDERING
Preparing purchase or production orders, receiving and preparing and processing related documents. Incremental costs of purchasing or transportation for frequent orders (Purchase in small lots is often costlier and transportation costs also increase) Out of pocket costs of postage, telephones, telegrams, cost of stationery, traveling etc. Extra costs of numerous small production runs, overtime, setups, training etc. In addition- fixed costs in form of salaries, wages of employees connected with this work in purchasing, receiving, inspection and Material handling Departments.
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COSTS OF CARRYING
Interest on Investment. Losses from obsolescence and deterioration, spoilage. Storage-space costs, including Rent, Rates, Taxes, Electricity, and etcs. Insurance, in addition- fixed costs in form of salaries, wages etc of employees connected with this work in stores and Material handling Departments. It should be noted that in the consideration of the optimum inventory decision, the costs of buying the inventory would usually be irrelevant, because it is assumed that the quantity required for the year would be the same for various alternative. The important relevant costs to be considered are the costs of ordering and the costs of carrying.
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The coefficient of variation (CV) measures the stability of a product's demand, comparing the variability in demand to the size of the average demand . High demand variability in the introductory stage means it is difficult, if not impossible, to forecast demand. Thus, high levels of inventory must be held to meet even minimal customer service levels. In contrast, lower variability during maturity means that demand forecasts are quite accurate. However, inventory levels may still be large because they are based on larger sales volumes. In addition to the vagaries associated with product life cycle stage, two other sources of uncertainty also drive the level of inventory. First, demand can vary from day to day, week to week, or seasonally. Second, there may be variability in lead time, or the time from when an order is placed until delivery is made. Forecasting demand used to be more exact because products stayed in the mature product life cycle phase for a long time. Today many companies find it far more difficult to forecast sales because of product proliferation. Product line extensions result in more products that cannibalize sales and shorten the life cycle. Thus, more sales are coming from products in the erratic earlier stages of life, as opposed to sales from products in the mature stage of the life cycle
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ABC CLASSIFICATION
The classification of inventory, after ABC analysis, into three basic groups for the purpose of stock control and planning. Although further divisions may be established, the 3 basic categories are designated A, B and C as follows: A Items - An item that, according to an ABC classification, belongs to a small group of products that represents around 75-80% of the annual demand, usage or production volume, in monetary terms, but only some 15-20% of the inventory items. For the purpose of stock control and planning, the greatest attention is paid to this category of A-products. A items may also be of strategic importance to the business concerned.
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B items - An intermediate group, representing around 5-10% of the annual demand, usage or production value but some 20-25% of the total, that is paid less management attention. C Items - A product which according to an ABC classification belongs to the 6065% of inventory that represents only around 10-15% the annual demand, usage or production value. Least attention is paid to this category for the purpose of stock control and planning and procurement decisions for such items may be automated.
ACTIVE INVENTORY
Any item or element of inventory which has been used or sold within a given period. Often set at 12 months.
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All-Time Requirement The total requirement for a particular product to be expected in the future. Normally used for products in the last phase of their life cycles, when production is (nearly) stopped.
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All-Time Stock The stock resulting from the assessment of an all-time requirement and delivery of an all-time order. If necessary, controls can be set for such stock to avoid consumption of items for reasons over and above those for which usage was predicted. Anticipation Stock Inventory held in order to be able to satisfy a demand with seasonal fluctuations with a production level that does not fluctuate at all or that varies to a lesser extent than the demand. Availability The primary measure of system performance relating to the expected percentage of the supported system that will be available at a random point in time and not out of service for lack of spares. Available Stock The stock available to service immediate demand. Available to Promise (ATP) The uncommitted portion of a companys inventory and planned production, maintained in the master schedule to support customer order promising. The ATP quantity is the uncommitted inventory balance in the first period and is normally calculated for each period in which an MPS receipt is scheduled. In the first period, ATP includes on-hand inventory less customer orders that are due and overdue.
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Reference www.management.hub.com/inventory-managementintro.html Book: Logistic & Supply Chain Management. (Vipul Publication)
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