THE INVENTORY CONTROL

MODELS WITH A SPECIAL

EMPHASIS ON ABC
ANALYSIS

Submitted by:
Gyanendra mishra
MBA IIIrd SEM
Roll No:-01
Sec-A
INTRODUCTION
Inventory consists of raw material, work in progress,
finished goods. Inventory control tries to specify the
optimum level of inventory that an organisation should
keep. inventory control may be said to be a planned
method
whereby investment in inventories held in stock is
maintained in such a manner
that it ensures proper and smooth flow of materials
needed for production
operations as 'well sales, while at the same time, the
total costs of investment
in inventories is kept at a minimum.
INVENTORY CONTROL
MODELS
 ECONOMIC ORDER QUANTITY
 TWO BIN SYSTEM
 ABC ANALYSIS
 FSN ANALYSIS
 VED ANALYSIS
ECONOMIC ORDER QUANTIY
EOQ or Fixed Order Quantity system is the
technique of ordering materials whenever stock
reaches the reorder point.
 EOQ indicates the size of order that will result in
lowest total of order cost & inventory carrying cost for
an item of inventory.
ORDER COST:- cost for ordering the raw materials
which include agent visit, consignment processing etc.
INVENTORY CARRYING COST:-Involves interest
on the money locked in inventory, cost of storage cost
of material loss due to spoilage etc.
EOQ is calculated by using following formula:

EOQ = 2ab
c

Where,
a = Annual consumption
b = Buying cost per order or ordering cost
c = Cost per unit
TWO BIN SYSTEM
One of the earliest systems of stock control is two-bin
system, which is a simple method of control exercised
by two simple rules. One is when the order should be
placed, and the other is what quantity should be
covered. The bins contain, say, bolts and nuts. The
bolts and nuts are issued from the first bin as and when
required, and as soon as the first bin is empty, more
bolts and nuts are ordered.
The replenishment arrives just when the second bin is
empty. While delivery is awaited, the nuts and bolts
from the second bin are issued. When the delivery
arrives, then both the bins are again filled in.
The following diagram shows this simple method:-

BIN NO 1 BIN NO 2

Use till Bin no 1 is empty Use Bin No 2 when Bin no 1 is empty

 FSN ANALYSIS
FSN: Fast moving, slow moving & non moving
Classification is based on the pattern of issues from
stores & is useful in controlling obsolescence.
Date of receipt or last date of issue, whichever is
later, is taken to determine the no. of months
which have lapsed since the last transaction.
The items are usually grouped in periods of 12
months.
It helps to avoid investments in non moving or slow
items. It is also useful in facilitating timely
control.
For analysis, the issues of items in past two or
three
years are considered.
If there are no issues of an item during the
period,
it is “N” item.
Then up to certain limit, say 10-15 issues in the
period, the item is “S” item
The items exceeding such limit of no. of issues
during the period are “F” items.
The period of consideration & the limiting
number
of issues vary from organization to organization.
VED ANALYSIS
VED: Vital, Essential & Desirable classification

VED classification is based on the criticality of the

inventories.
Vital items – Its shortage may cause havoc & stop the
work in

organization. They are stocked adequately to ensure

smooth operation.
Essential items - Here, reasonable risk can be taken. If
not
available, the plant does not stop; but the efficiency of
operations is adversely affected due to expediting
expenses. They should be sufficiently stocked to
ensure
regular flow of work.

Desirable items – Its non availability does not

stop the work
because they can be easily purchased from the
market as &
when needed. They may be stocked very low or
not
stocked.
ABC ANALYSIS
ABC analysis is a business term used to define an
inventory categorization technique often used in
materials management. It is also known as Selective
Inventory Control.
 This technique divides inventory into three
categories A, B & C based on their annual
consumption value
 When carrying out an ABC analysis, inventory items
are valued with the results then ranked. The results are
then grouped typically into three bands .These bands are
called ABC codes.
ABC CODES:
A:-"A class" inventory will typically contain items that account
for 80% of total value, or 20% of total items . A group consists of
those items which have high value though their number may be
low.

B:- "B class" inventory will have around 15% of total value, or
30% of total items . B group items fall in between with average
value and number.

C:-"C class" inventory will account for the remaining 5%, or 50% of total
items. C group items have very low value but their number may be more.
INVENTORY
CLASSIFICATION
GROUP NO. OF ITEMS(%) INVENTORY
VALUE(%)
A 20 80

B 30 15

C 50 5

TOTAL 100 100

ACCODING TO ABC ANALYSIS:-
Maximum attention should be paid to A
group items as these are critical in terms of
values followed by B and C groups . Thus
ABC analysis provides clue where attention
should be focused in inventory control.
Procedure for ABC Analysis

Make the list of all items of inventory.

Determine the annual volume of usage & money value
of
each item.
Multiply each item’s annual volume by its rupee value.
Compute each item’s percentage of the total inventory
in terms of annual usage in rupees.
Select the top 10% of all items which have the highest
rupee percentages & classify them as “A” items.
Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
The next 70% of all items with the lowest rupee
percentages are “C” items
ADVATAGES OF ABC ANALYSIS
Helps to exercise selective control

Helps to point out obsolete stocks easily.

In case of “A” items careful attention can be paid
at every step such as estimate of requirements,
purchase, safety stock, receipts, inspections,
issues, etc. & close control is maintained.

In case of “C” items, recording & follow up, etc.

may be dispensed with or combined.
Helps better planning of inventory control
Provides sound basis for allocation of funds &
human resources.
DISADVANTAGES
Proper standardization & codification of inventory
items needed.
Considers only money value of items & neglects the
importance of items for the production process or
assembly or functioning.
Periodic review becomes difficult if only ABC
analysis is recalled.
When other important factors make it obligatory to
concentrate on “C” items more, the purpose of
ABC analysis is defeated