Inventory control

INVENTORY/ STOCK
Inventory are of various forms
Raw materials
Finished goods
Work in progress
Tools
Spares
Zero inventory is not possible
Electricity – Zero inventory
S.Kacker, IHM, Mumbai

DEFINATION
Inventory control is defined as safe
guarding of company’s property in the form
of inventory & maintaining at the optimum
level considering the operating
requirements and financial resources of
business.

AIM
To achieve maximum efficiency in
management of inventory
IMPORTANCE
Cost of materials constitutes a large
proportion of product cost, hence for
economy.

OBJECTIVES
Effective use of capital
Service to the customer
Promotion of manufacturing
efficiency
Minimizing risk of loss through
obsolescence

OBJECTIVES
Avoidance of out of stock danger
Economy in purchasing
Storage of inventory
Minimize the loss to price
fluctuation

TECHNIQUES
Proper purchase procedures
Proper storage system
Physical inventory system
Perpetual inventory system
Economic order quantity

TECHNIQUES
Level settings
ABC analysis
System of Budgets
Review of slow & non moving items
Forecasting of sales
Production schedules

Review of items
Fast moving items
Slow moving items
Dormant items
Obsolete items

EFFECTS OF HIGH INVENTORY
 Locking up of capital
 More storage space
 High insurance charges
 High taxes
 Greater handling & distribution
costs

EFFECTS OF HIGH INVENTORY
 Increase in record keeping
 Deterioration in quality
 Chances of pilferage, theft
 Evaporation or shrinkage

EFFECTS OF LOW INVENTORY
 Production stopages
 Idle machine capacity
 Burden of fixed overhead
 Failure to deliver as per schedule

REQUIREMENT OF
INVENTORY CONTROL
Proper co-ordination & co-operation
from various depts.
Centralized purchasing
Planning of material requirements
Classification of materials and its
SPS

REQUIREMENT OF INVENTORY
CONTROL
Efficient book control and storage
Issue system and records
Perpetual inventory
Levels of stock
Audits

PHYSICAL INVENTORY
STOCK TAKING
The process of taking into account the
inventory that is actually present and
comparing with the book value, the
requisitions, the receipts and finding
out the capital tied up.
Actual Stock in hand.

OBJECTIVE OFTAKING STOCK
 To determine the value of goods held
in stock
 To compare the value of goods actually
in stores with Book value
 List slow moving items
 To compare usage with sales to access
cost percentage

OBJECTIVE OFTAKING STOCK
Check against loss and pilferage
To determine the rate of stock turnover
RST= Cost of food consumed
Average Inventory
Average inventory = Opening stock + Closing Stock
2

POINTS TO REMEMBER BEFORE
STOCK TAKING
Have the control sheets ready with
the opening stock
Enter all purchases on the fresh
stock sheet
Total all issues

POINTS TO REMEMBER BEFORE
STOCK TAKING
Add all purchases to open stock and
deduct all issues
Make sure no issues are made till
stock taking is complete
Plan and time the stock taking
efficiently

POINTS TO REMEMBER DURING
STOCK TAKING
Ensure that all places are
known where stock is stored
Check for reasons of dead stock
Record every detail

POINTS TO REMEMBER DURING
STOCK TAKING
Use accurate weighing scales &
measures to achieve right figures
Check that closing stock is not
greater than opening stock +
purchase issues

POINTS TO REMEMBER AFTER
STOCK TAKING
Work systematically specially the
calculations
When multiplying unit by unit price ensure
that you have the correct unit price
Apply FIFO principles to stock
If any result is incorrect verify through
Order sheets.

PERPETUAL INVENTORY SYSTEM
A system of records maintained by
controlling department which reflects the
physical movement of raw materials and
their current balances.
It ascertains balance after every receipt
and issue of the materials through stock
records.

ADVANTAGES OF PERPETUAL
INVENTORY
• It is not necessary to stop production
to carry out stock-taking.
• The long & costly stock-taking is
avoided.
• Discrepancies are detected easily &
quickly
• Bin cards & stock ledgers give ready
figures S.Kacker, IHM, Mumbai

ADVANTAGES OF PERPETUAL
INVENTORY
• It helps in preparation of final
accounts even at short notice
• Stock levels can be revised from time to
time in order to avoid under or over
stocking.
• Obsolescence can be avoided
Capital investments can be under control.

DISCREPANCIES IN INVENTORY
Avoidable Causes
• Clerical error in making records
• Pilferage, theft
• Placing of stores in wrong bins
• Careless materials handling
• Short or excess issue due to wrong
method or negligence
• Mistake in identifying items.

DISCREPANCIES IN INVENTORY
Un Avoidable Causes
• Evaporation, shrinkage etc
• Loss due to breaking the bulk or cutting
to sizes
• Loss on account of fire
• Loss due to approximation

METHODS OFINEVNTORY CONTROL
• Open store rooms
• Bin cards
• Dual bins
• Store ledger

OPEN STORE
Stores are kept open
No individual responsible
Problem of theft & shortages
BIN CARD
Bin tags/ Stock card
Quantitative record of receipts,
issues, balances
Hung on shelves/ Bin

DUAL BINS
Two stocks are kept
One for use
Second in emergencies
Safety stock
STOCK LEDGERS
Stock Registers

GENERAL PROBLEMS
Spoilage of merchandise
-Natural spoilage
-Spoilage register
Estimating value of merchandise
-Finished products
-Leftovers
Goods in process
-Partially used items
-Partially processed
Sold at lower price

SR
NO
NAME OF
THE ITEM
CODE
NO
BIN
NO
STORES BALANCES SHORTAGE SURPLUS ADJUSTMENTS
PHYSICAL BIN
CARD
STORES
LEDGER
STORES VERIFICATION SHEET
DATE OF VERIFICATION:

STOCK TAKING REPORT
To,_____________________
Date:
Period:
Purchases Rate of Stock
turnover
Perishables
Non Perishables
Remarks
Slow moving items
Obsolete item

Monthly F & B Cost Statement for the period
ending

STOCK LEVELS
Factors helping in fixation of these levels
Rate of consumption
Lead time
Storage capacity
Availability of funds for investment in
inventories
Cost of storage
Risk of loss due to deteriorations, theft,
fire,etc.
Seasonal factors
Fluctuations in market prices
Insurance cost

TYPES OF STOCK LEVELS
1.Maximum level
Max level =(Reorder level + Reorder Qty) – ( Min
consumption X Min Reorder Period)
2.Minimum level or Safety level
Min level= (Reorder level)- (Normal consumption X Normal
Reorder Period)

3. Reorder level
Reorder level= (Max Consumption X Max
Reorder Period)
4. Danger level
TYPES OF STOCK LEVELS

EXAMPLE
Reorder Qty = 3600units
Max Consumption=900units/week
Min Consumption=300units/week
Normal Consumption=600units/week
Reorder Period=3week min
or
Lead time= 4 week normal
5 week max
Calculate:
1.Reorder level
2. Min level
3. Max level

SOLUTION
1.Reorder Level = (Max Consumption* Max Reorder
Period) 900 *5 = 4500 units
2. Minimum Stock Level= (Reorder Level)- (Normal
Consumption * Normal Reorder Period)
4500-(600*4)=2100units
3. Maximum Stock Level= (Reorder Level+ Reorder
Qty)-(Min Consumption * Min Reorder Period)
= (4500 +3600)-(300*3) = 7200units.

ABC ANALYSIS
Analytical Method
Concentration on items where more attention
is needed.
Small number of items represent bulk money.
Large number of items represent small
portion of money.
High degree of control small number of
items.

STOCK IS CLASSIFIED INTO THREE
CATEGORIES
GROUP A– Small number of items of high
value.
GROUP B- Relatively less important
GROUP C- large number of items of low
value

CLASSIFICATION
CLASSIFIATION A
10 % of store items
It contributes 70% of total inventory.
CLASSICATION B
20% of store items
It contributes 20 – 25% of the total store
inventory.
CLASSIFICATION C
70% of the store items.
It contributes of 10% of the share in the
total inventory.

ABC Analysis
STEPS OF CLASSIFYING THE ITEMS:
Calculate the rupee annual issue of
each item.
Sort all items in descending order.
Prepare a list from this showing the
units issued, unit price total price.

ABC Analysis
STEPS OF CLASSIFYING THE ITEMS:
Top 5%-10% of top number account
70% of consumption value (A)
Next 15 %to20% of items accounts
20% of consumption value(B)
The balance amount of the items account
10% of consumption value (C)

PURPOSE OF ABC ANALYSIS
‘A’CLASS OFITEMS:(High Consumption
Value)
• Very strict control
• Frequent ordering (weekly)
• Maximum follow up
• Rigorous value analysis
• Accurate forecasts in material planning

• Minimum waste, obsolete & surplus
(review regularly)
• No safety stock or very low
• Weekly control statements
• Individual costing
• Min lead time
• Handled by senior staff

‘B’ CLASS OF ITEMS: (Moderate
Consumption Value)
• Moderate control
• Ordering once in three months
• Periodic follow up
• Moderate value analysis
• Forecast based on past dates & present
plans

• Quantity control over surplus
• Low safety stock
• Monthly control reports
• Small group costing
• Moderate lead time
• Handled by middle level staff

‘C’CLASS OF ITEMS:(Low Consumption
Value)
• Loose control
• Bulk ordering once in 6 months
• Follow up once in a while
• Minimum value analysis
• Rough estimates

• Annual review over surplus or obsolete
stock
• High safety stock
• Yearly control reports (Bi annually)
• Big group costing
• Max lead time
• Can be fully delegated
‘C’CLASS OF ITEMS:(Low Consumption
Value)

Category No of items % of Total no
of items
Value Rs % of Total
value
Average
Value
A 75 6 70,000 70 933
B 375 30 20,000 20 53
C 800 64 10,000 10 12
1,250 100 1,00,000
ABC Analysis

ADVANTAGES
1.Closer and strict control on major value
2.Investment in inventory is utilized
properly
3.Saving in stock carrying cost
4.Helps in maintaining safety stock of C
category of items
5.Control helps in high stock turnover
rate

Inventory control

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