What is Inventory control management and how do you apply it in an organization?
The most important objective or inventory control is to determine and maintain an optimum level of investment in the inventory. Most companies have now successfully installed one or the other system of inventory planning and control. The inventory control models range from very simple methods to highly sophisticated mathematical inventory models.
In the simplest method, the purchase man periodically reviews the stock, perhaps visually; to see what inventory items are in short supplies and places order when he thinks a minimum level has been reached or when the inventory of a particular item is exhausted. No inventory levels are kept on records. Obviously, such a method is likely to incur excessive purchasing and carrying costs on the one hand and stock out costs on the other. While excess purchase would lead to excessive investment in obsolete or slow moving goods, shortage or inventory may disrupt production or sales may be permanently lost.
To improve upon the visual method a re-order line may be drawn in the bin or storage area so that when stock reaches this line, order will be placed. The re-order line in the bin would be high enough to cover normal usage until the new order arrives. A variation of this method is to use the two bins systems: an order is placed when the working stock bin is empty.
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.
Techniques of inventory control:
Economic purchase order quantity (How much to order)
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 followsl:
Cost of Ordering :
Preparing purchase or production orders, receiving and preparing and processing
Costs of Carrying:
Interest on Investment.
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.
Inventory or Safety Stock:
There are several methods determining safety stock levels. A rough and ready method followed by many companies is to provide a constant safety stock of say, one or two months usage requirements regardless of the item. Another method mainly based on intuition is to have large safety stock when quantity usage is high, lead time is long or the ordering schedule is frequent. Small safety stocks can be maintained when there is low usage, short lead time or infrequent ordering.
Another method makes a statistical analysis of the probability of a stock out by predicting the dispersion of usage around average usage and the dispersion of lead times around the average lead time. The above discussions of inventory control are based on the two bins or constant order quantity system.
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