General information

2. LIMITATIONS OF INVENTORY CONTROL
1. While inventory control allows employees at every level of the company to read
and manipulate company stock and product inventory, the infrastructure required
to build such a system adds a layer of bureaucracy to the process this means a
larger overhead and more layers of management between the owner and the
customer.
2. Large supply chain management systems make products more accessible across
the globe, and most provide customer service support in case of difficulty, but the
increase in infrastructure can often mean a decrease in the personal touch that
helps a company stand out above the rest.
3. inventory control systems give you a better handle on the amount of stock you
have and have sold, the same systems can hide production problems and cause
customer service disasters.

3. MODELS OF INVENTORY CONTROL
•A.B.C. Analysis
•EOQ
•Selection Control
•Price Break
•V.E.D

4. A.B.C Analysis
1. The ABC classification of inventories is
based on the cost or value of items
consumed.
2. Very high value items are “A-class items”
and may require tighter control & close
monitoring
3. Medium-value items are categorized as
“B class” & Low-value items as “C class”
4. C-class items require simple control
mechanisms such as level based
reordering.
5. B-class require moderate level of
control.
Annual
$ value
of items
A
B
C
High
Low
Low High
Percentage of Items

5. Economic Order Quantity (EOQ)
1. The Economic Order Quantity (EOQ) is the number of units that a company
should add to inventory with each order to minimize the total costs of
inventory—such as holding costs, order costs, and shortage costs.
2. The EOQ is used as part of a continuous review inventory system in which the
level of inventory is monitored at all times and a fixed quantity is ordered each
time the inventory level reaches a specific reorder point.
3. It can be a valuable tool for small business owners who need to make decisions
about how much inventory to keep on hand, how many items to order each
time, and how often to reorder to incur the lowest possible costs.

6. Profile of Inventory Level Over Time
Quantity
on hand
Q
Receive
order
Place
order
Receive
order
Place
order
Receive
order
Lead time
Reorder
point
Usage
rate
Time
EOQ GRAPH

7. Assumptions of EOQ Model
• Only one product is involved
• Annual demand requirements known
• Demand is even throughout the year
• Lead time does not vary
• Each order is received in a single delivery
• There are no quantity discounts

8. TC Formulae
Q- How much quantity
D- Annual Demand
H- Holding/Carrying Cost
S- Order/ Setup Cost

9. EOQ Formula
In the equations for TC and TVC, the values of D, H, S and C are known.
The only unknown variable is Q. Our objective is to minimize TC.
TC is minimized at that value of Q, where, Annual Ordering Cost = Annual Holding
Cost. See the equation below.
Solving the above equation for Q, gives the value of EOQ (QO) as shown below.
H
Q
S
Q
D
2

9
H
DS
EOQ
2


10. Problems in EOQ Model
1. The demand is known with certainty & is continuous over time
2. There is an instantaneous replenishment of items
3. The items are sourced from an external supplier
4. There are no restrictions on the quantity that we can order
5. There are no preferred order quantities for he items
6. No price discount is offered when the order size is large

11. Price Break Model
Price Break models are used where the price of inventory
varies with the order size. In these models the economic
order quantity is calculated for each possible price and
compared to the amount of inventory that will be available at
that price. Where the amount of inventory desired is
available at that price this option can be considered by the
organization.

13. SELECTION CONTROL
• ON THE BASIS OF UNIT COST OF THE
ITEMS (XYZ CLASSIFICATION):
a) High Unit Cost (X-class item)
b) Medium Unit Cost (Y-class item)
c) Low Unit Cost (Z-class item)
• ON THE BASIS OF MOVEMENT OF
INVENTORY (FSN CLASSIFICATION)
a) Fast Moving
b) Slow Moving
c) Non Moving
• ON THE BASIS OF CRITICALITY OF
ITEMS (VED CLASSIFICATION)
a) Vital
b) Essential
c) Desirable
• ON THE BASIS OF SOURCES OF
SUPPLY
a) Imported
b) Indigenous ( National Suppliers)
c) Indigenous ( Local Suppliers)
{relevant in case of
maintenance items}

14. V.E.D ANALYSIS
• It attempts to classify the items used into three broad categories, namely Vital, Essential,
and Desirable.
• The analysis classifies items on the basis of their criticality for the industry or company.
a) Vital: Vital category items are those items without which the production activities or
any other activity of the company, would come to a halt, or at least be drastically
affected.
b) Essential: Essential items are those items whose stock – out cost is very high for the
company.
c) Desirable: Desirable items are those items whose stock-out or shortage causes only a
minor disruption for a short duration in the production schedule. The cost incurred is
very nominal.
• VED Analysis is very useful to categorize items of spare parts and components. In fact, in
the inventory control of spare parts and components it is advisable, for the organization
to use a combination of ABC and VED Analysis. Such control system would be found to be
more effective and meaningful.

15. 1. Research existing
periods where
inventory was out of
synch with demand.
2. Study demand
and consumer
spending trends in
the marketplace.
3. Assess inventory
and supply costs.
4. Decide what
processes can be
automated.
5. Evaluate supplier
performance.
6. Categorize your
inventory.
7. Set category
goals.
8. Prioritize
changes.
9. Get an outside
opinion.
10. Establish an
inventory
management policy.
STEPS INVOLVED
IN INVENTORY
CONTROL

16. 1. Research existing periods where inventory was out of
synch with demand.
This could be a point where you experience a shortage or
excess. Looking at these inventory management failures
can be a good place to start. If you figure out where it all
went wrong, you will be able to more easily fix it.
2. Study demand and consumer spending trends in the
marketplace.
Look back on the last couple years at existing retail
statistics to track the various periods where demand
peaked or experienced a significant drop. This can serve
as the basis for forecasting the upcoming seasons.
However, you will also need to track current trends
among consumers, including their buying behaviors,
needs and wants, and consumer confidence to spend
related to the economy.
3. Assess inventory and supply costs.
These costs include numerous expenses scattered
throughout the supply chain, including freight, volume
discounts, and warehousing. See how these have been
impacted by your current inventory system and identify
those places where waste removal can lower these costs.
4. Decide what processes can be automated.
With today’s technology, there’s no excuse for any
manual processes left in your inventory management
system. There are numerous online tools for
everyone. Keeping people out of the inventory
processes reduces the likelihood for human error to
adversely impact your performance.
5. Evaluate supplier performance.
You can make numerous in-house enhancements
only to be sabotaged by your suppliers. Suppliers
who have not added the same best practices to
maintain a steady supply to meet fluctuating
demand.
6. Categorize your inventory.
Create different layers among your products to
address different periods of demand for specific
types of merchandise. You can also categorize your
inventory by type of customer, profit margin it
delivers, and overall cost of having it on hand.
Creating this system provides a way to deliver on
various types of demand while minimizing the costs.
This type of best practice can be achieved through
today’s inventory management software solutions.

17. 7. Set category goals.
To accompany your inventory stratification
mentioned in the last step, establish goals for
each category to measure and track efficiency.
You can also track different issues and determine
if they are category-specific or are signs of a larger
issue. These could be issues that you didn’t
identify in the past performance test from the
first step.
8. Prioritize changes.
You might find that many areas need
improvement. However, you need to continue
meeting your current demand. This is the point
where you will have to decide which things can be
immediately fixed, what will take a much larger
overhaul, and what might need to be handled in
the near future during a quiet demand period.
9. Get an outside opinion.
It may be that you are too far in to see how your
inventory management system could run more
effectively. There are consultants that specialize in
evaluating these types of systems and providing
suggestions. They can also be a good source of
information about the latest technology that would
fit your specific needs, address the visible issues,
align with your growth strategy, and work with your
budget.
10. Establish an inventory management policy.
Whatever changes you make should then become
the basis for a formal inventory management policy.
The policy will define responsibilities and illustrate
how you are balancing cost-effective measures with
optimized customer service that addresses
fluctuating demand. Covering all aspects of inventory
management in a policy emphasizes the new best
practices approach you are taking and reflects your
overall culture that is focused on continual
improvement.