Inventory Control

By: Bhagyesh Balkrishna Kasle

 What is Inventory

• Generally refers to material in stock

• Also called idle resource of an enterprise
• What to order
• When to order
• How much to order
 Definition

• Inventory control is supervision of supply, shortage accessibility of

items in order to ensure an adequate supply without excessive
oversupply.
• The goods or the materials are the essential elements of any of the
organization, right from hospital, industry, private enterprise or the
government department.
• Thus inventory control is the method of maintaining of stock at a
level at which purchasing and stocking costs are at the lowest possible
without interference with the supply.
 Types of Inventories

1. Raw Materials
2. Bought out parts
3. Work-in-process inventories (WIP)
4. Finished goods inventories
5. Maintenance, repair and operating stores
6. Tools inventory
 Reasons for keeping inventories

1. To stabilise production
2. To take advantages of price discounts
3. To meet the demand during replenishment period
4. To prevent loss of orders (Sales)
5. To keep pace with changing market conditions
 Objectives of inventory control
1. To ensure adequate supply of products to customer and avoid shortages as far as
possible.
2. To make sure that the financial investment in inventories is minimum (i.e., to see that
the working capital is blocked to the minimum possible extent).
3. Efficient purchasing, storing, consumption and accounting for materials is an
important objective.
4. To maintain timely record of inventories of all the items and to maintain the stock
within the desired limits.
5. To ensure timely action for replenishment.
6. To provide a reserve stock for variations in lead times of delivery of materials.
7. To provide a scientific base for both short-term and long-term planning of materials.
 Benefits of inventory control
1. Improvement in customer's relationship because of the timely delivery
of goods and services.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilisation of working capital.
4. Helps in minimising loss due to deterioration, obsolescence damage
and preliferage.
5. Economy in purchasing.
6. Eliminates the possibility of duplicate ordering.
 Costs associated with Inventories
• Purchase (or production) Cost: The value of an item is its unit
purchasing (production) cost. This cost becomes significant when availing
the price discounts. This cost is expressed as Rs./unit.
• Capital Cost: The amount invested in an item, (capital cost) is an amount
of capital not available for other purchases. If the money were invested
somewhere else, a return on the investment is expected. A charge to
inventory expenses is made to account for this unreceived return. The
amount of the charge reflects the percentage return expected from other
investment.
 Costs associated with Inventories
• Ordering Cost: It is also known by the name procurement cost or
replenishment cost or acquisition cost. Cost of ordering is the amount of
money expended to get an item into inventory. This takes into account all the
costs incurred from calling the quotations to the point at which the items are
taken to stock
i. Purchasing
ii. Inspection
iii. Accounting
iv. Transportation costs
 Costs associated with Inventories

• Inventory Carrying Costs (Holding Costs): These are the costs associated
with holding a given level of inventory on hand and this cost vary in direct
proportion to the amount of holding and period of holding the stock in stores.
• Shortage Cost: When there is a demand for the product and the item needed
is not in stock, then we incur a shortage cost or cost associated with stock out
 Inventory control terminologies
• Demand: It is the number of items (products) required per unit of time.
The demand may be either deterministic or probabilistic in nature.
• Order Cycle: The time period between two successive orders is called
order cycle.
• Lead Time: The length of time between placing an order and receipt of
items is called lead time.
• Safety Stock: It is also called buffer stock or minimum stock. It is the
stock or inventory needed to account for delays in materials supply and
to account for sudden increase in demand due to rush orders.
 Inventory control terminologies
• Inventory Turnover: If the company maintains inventories equal to 3
months consumption. It means that inventory turnover is 4 times a year,
i.e., the entire inventory is used up and replaced 4 times a year.
• Re-order Level (ROL): It is the point at which the replenishment
action is initiated. When the stock level reaches R.O.L., the order is
placed for the item.
• Re-order Quantity: This is the quantity of material (items) to be
ordered at the reorder level. Normally this quantity equals the economic
order quantity.
Inventory cost relationship