Inventory Control Technologies

PAN AFRICAN INSTITUTE FOR
DEVELOPMENT-WEST AFRICA
(PAID-WA) BUEA
SLIDE LECTURES FOR STRATEGIC

LOGISTICS TECHNOLOGY
02/04/2018 1
STRATEGIC LOGISTICS
TECHNOLOGY
PRESENTED BY
NGANG PEREZ
(MAJOR ONE)
APRIL 2020
02/04/2018 2
CHAPTER THREE
INVENTORY CONTROL
TECHNIQUES OR
TECHNOLOGIES
02/04/2018 3
Brief Introduction
➢Technology ("science of craft",) is derived from a

Greek word techne ( τέχνη) & logia, (λογία)
➢Techne ( τέχνη) means an "art, skill, cunning of

hand or tools“
➢logia, (λογία) is the sum of knowledge, methods,

and processes used in the production of goods or
services or in the accomplishment of objectives.
02/04/2018 4
Brief Introduction
➢Technology merges the art, skill, or tools with

knowledge to improve a process or do a task
with less stress.
➢It refers to the discovery of a technique to

improve production, accounting, learning,
transportation, agriculture, service delivery,
communication and anything of value.
02/04/2018 5
Brief Introduction
➢It could be the result of mastery gained from

consistently doing a repetitive job .
➢It could be the result of an inspiration from the

human spirit.
02/04/2018 6
Brief Introduction
➢Whatever be the case, technology make life

easy and interesting, thus people will always
seek for new ways to improve one thing or
another.
➢Logistics need such technologies to improve its

function
02/04/2018 7
Brief Introduction
➢These technologies refer to the tools which facilitate the process

of the movement of goods or service or persons from on point
of the supply chain to another
➢Some are outdated, others are still in use even

though their usage is traditional or manual while
others command advance tools of facilitating the
flow of materials
02/04/2018 8
Objectives

By the end of this session, students should be able to;
• Explain the Material Resource Planning concept

• Dependent and independent demand in logistics
• Explain the MRP approach
• Outline the benefits and disadvantages of MRP
• Traditional Inventory Control Tools/Techniques
• Challenges with Traditional Inventory Control
Technologies
• Modern Inventory Control Techniques
9
DEFINITION OF KEY TERMS
➢(a) Material requirements planning:

➢Material requirements planning is a way of
matching the supply of logistics to actual
demand
02/04/2018 10
DEFINITION OF KEY TERMS
➢(b) Technology:
Technology constitutes specific knowledge,

abilities, methods and equipment, facilitating
deployment of scientific and engineering
knowledge
02/04/2018 11
3.3.1: Material Resource Planning
❖Material requirement planning is a way of matching the

supply of logistics to actual demand.
❖In other words, we want some way of finding the known,

actual demand rather than using unreliable forecasts.
❖This might seem rather optimistic, but there are several

circumstances when we can know the actual demand in
advance.
02/04/2018 12
3.3.1.1: Dependent and independent demand.
❖The conventional approach to planning assumes that

overall demand for a product is made up of individual
demands from many separate customers.
❖These demands are independent of each other, so the

demand from one customer is not related to the demand
from another customer.
❖If you are selling Nike shoes, the overall demand comes
from hundreds of separate customers, all independently
asking for a pair of shoes. 13
❖There are, however, many situations where demands are

not independent.
❖One demand for a product is not independent of a

second demand for the product.
❖When a manufacturer uses a number of components to

make a product, the demands for all components are
clearly related.
14
Traditional approach VS MRP
❖Traditional approach in a Restaurant Setting.
❖The chefs see what ingredients they used in previous

weeks.
❖Use these past demands to forecast future demands
❖Make sure there is enough ingredients in the reserve to

cover these forecast demands
15
❖MRP approach in a Restaurant Setting.
❖Chefs look at the meals they are going to cook each day.
❖Analyze these to see what ingredients they need.
❖Then order the ingredients to arrive at the right time.
16
❖Difference between the two approaches
❖With independent demand systems, stocks are not

related to production plans.
❖So they must be high enough to cover any likely

demand.
❖These stocks decline during operations, but are soon

replaced to give the pattern. 17
❖Difference between the two approaches
❖With MRP, stocks are generally low.
❖They rise as orders are delivered just before operations

starts.
❖The stock is then used during production and declines to

its normal, low level.
18
3.3.1.2: The MRP approach.
❖MRP uses a lot of information about schedules,

products.
❖This comes from three main sources.
❖Master schedule,
❖Bill of materials
❖Inventory records
19
❖Master schedule, giving the number of every product to

be made in every period
❖Bill of materials, listing the materials needed for every

product
❖Inventory records, showing the materials available.
20
❖Master schedule, giving the number of every product to

be made in every period
❖Bill of materials, listing the materials needed for every

product
❖Inventory records, showing the materials available.
21
The Bill of Materials
❖A bill of materials is an ordered list of all the parts

needed to make a particular product.
❖It shows the materials, parts and components – and also

the order in which they are used.
❖ The bill of materials contains the specification of every item

required for the manufacture of the end products. Hence, not only
the raw materials but also subassemblies, subcomponents, sub-
parts, and consumables are enlisted therein.
The Bill of Materials
❖A bill of materials is an ordered list of all the parts

needed to make a particular product.
❖It shows the materials, parts and components – and also

the order in which they are used.
Structure of BOM
❖1 – Single-Level.
❖It is simple to prepare and use. However, in case of

failure of the product, it is challenging to investigate that
which item requires replacement or repair. Further,
such a structure of BOM is unsuitable for complicated
products.
Structure of BOM
❖1 – Single-Level.
Structure of BOM
❖2 – Multi-Level.
❖Here the data is presented in a detailed tabular format

with each column for Part Number, Part Name,
Description, Quantity, Cost, additional specifications,
etc.
Structure of BOM
❖2 – Multi-Level
Elements of BOM
❖Following elements are required to create the same –
❖Quantity: The BOM should specify the number of parts

to be procured or manufactured for each assembly.
❖Unit of Measurement: Per-unit, inches, grams,

kilograms, liters, square-feet, cubic-feet, etc. should be
specified for each quantity. It ensures that exact
quantities are ordered.
Elements of BOM
❖BOM Level:: BOM level provides the number or

ranking for each part. It may be Single-level BOM or
Multi-level BOM.
❖BOM Notes: This provides for additional information

regarding the bill of material other than the description
of parts..
Elements of BOM
❖Part Name: The unique name of each item with a

specific part number helps identify the item easily and
more effectively.
❖Raw Material: BOM should specify the exact quality or

type of raw material required in the manufacturing
process.
Elements of BOM
❖Description: Each part should have an adequate

explanation about the part. It helps to distinguish
between similar parts.
❖Images: Images of the end product help easy

understanding of each component. It helps to cross-
verify the BOM details with the image.
Elements of BOM
❖Description: Each part should have an adequate

explanation about the part. It helps to distinguish
between similar parts.
❖Images: Images of the end product help easy

understanding of each component. It helps to cross-
verify the BOM details with the image.
3.3.1.3: Benefits of MRP.
❖Lower stock levels, with savings in capital, space,

warehousing, and so on
❖Higher stock turnover
❖Better customer service – with no delays caused by

shortages of materials
3.3.1.3: Benefits of MRP.
❖More reliable and faster delivery times
❖Less time spent on expediting and emergency orders
❖MRP schedules can be used for planning other logistics

activities.
3.3.1.4: Disadvantages of MRP.
❖Reduced flexibility to deal with changes
❖Needs a lot of detailed and reliable information
❖Systems can become very complex

3.3.1.4: Disadvantages of MRP.
❖The order sizes suggested by MRP can be inefficient
❖MRP may not recognize capacity and other constraints
❖Can be expensive and time consuming to implement.

3.3.2 Traditional Inventory Control
Tools/Techniques.
❖Inventory control refers to a process of ensuring that

appropriate amount of stock is maintained by a
business, so as to be able to meet customer demand
without delay while keeping the costs to a minimum
Tools/Techniques.
❖Inventory control signifies a planned approach of

finding
❖when to stock,
❖what to stock,
❖how much to stock and
❖So that costs in buying and storing are optimally

minimum.
Tools/Techniques.
❖Inventory control signifies a planned approach of

finding
❖when to stock,
❖what to stock,
❖how much to stock and
❖So that costs in buying and storing are optimally

minimum.
Tools/Techniques.
❖To solve these problems of inventory management

various techniques are there.
❖Modern techniques and Traditional techniques
❖Traditional inventory management tools have largely

been phased out by technologically advanced, software-
driven systems.
Tools/Techniques.
❖To solve these problems of inventory management
various techniques are there.
❖Modern techniques and Traditional techniques
❖Traditional inventory management tools have largely

been phased out by technologically advanced, software-
driven systems.
Tools/Techniques.
❖Traditional tools rely on hand-counted or basic
reporting of stock levels, manual order placement and
storage.
❖These are those techniques which are prevalent before

the evolution of the modern tools for calculating stock
Tools/Techniques.
(a) Visual control Technique:
Visual control enabled the manager to observe the

inventory level visually to determine if additional
inventory is required.
This technique was used in the primitive days where

observation was a critical skill for estimation.
Records were not needed at all or only for slow moving or

expensive items.
Tools/Techniques.
(b) Tickler control Technique:
Tickler control enabled the manager to physically

count a small portion of the inventory each day so
that each segment of the inventory is counted on a
regular basis.
Tools/Techniques.
(c) Click sheet control Technique:
Click sheet control enables the manager to record

the item as it is used on a sheet of paper.
Such information is then used for reorder

purposes.
Tools/Techniques.
(d) Perpetual Inventory System:
Also known as continuous stock checking.
The application of perpetual inventory control

system involves –
(i) Attaching bin cards with bins.
(ii) Continuous stock taking to compare the

actual stock.
Tools/Techniques.
(e) Inventory Control Ratios:
Ratios related to inventory are calculated and

further used as a measure of control.
Stock Turnover = Cost of goods sold / Average

Stock
Tools/Techniques.
(f) Two Bin System:
All the inventory items are stored in two separate
bins.
In the first bin, a sufficient amount of inventory is

kept to meet the current requirement
In the second bin, a safety stock is maintained for

use during lead time.
Tools/Techniques.
(f) Two Bin System:
When the stock of first bin is completely used, an
order for further stock is immediately placed
Tools/Techniques.
(f) Two Bin System:
When the stock of first bin is completely used, an

order for further stock is immediately placed
Tools/Techniques.
(h) Periodic Order System:
The stock levels of all types of inventories held, are

reviewed after a fixed time interval.
Time interval may be weekly, fortnightly, monthly,

quarterly depending upon the criticality of the item
Tools/Techniques.
(h) Periodic Order System:
Critical items may require a short review cycle and
On the other hand, lower cost and non-moving

items may require long review cycle
Tools/Techniques.
➢(c) First In, First Out (FIFO)
➢Inventory produced or acquired first are sold,

used, or disposed of first.
➢It follows the logic that to avoid obsolescence, a

company would sell the oldest inventory items
first and maintain the newest items in inventory
3.3.2 Traditional Inventory Control Tools/Techniques.
➢Under FIFO, it is assumed that the cost of

inventory purchased first will be recognized first.
➢For example, if 100 items were purchased for $10
and
➢100 more items were purchased next for $15,
➢FIFO would assign the cost of the first item
resold of $10. After 100 items were sold, the new
cost of the item would become $15

and

and
➢(d) Last In, First Out (LIFO)
➢If a firm uses LIFO valuation when it files taxes,

it must also use LIFO when it reports financial
results to shareholders, which lowers net income
and, ultimately, earnings per share.
➢ • LIFO is not a good indicator of ending inventory value because it may

understate the value of inventory.
3.3.3 Modern Inventory Control Techniques.
➢(a) Economic Order Quantity (EOQ)
➢The optimal size of an order for replenishment of

inventory is called economic order quantity.
➢Economic order quantity (EOQ) or optimum

order quantity is that size of the order where
total inventory costs (ordering costs + carrying
costs) are minimized.
➢Formula Method: It is also known as ‘SQUARE
ROOT FORMULA’ or ‘WILSON FORMULA’ .
➢R = Annual Requirement or consumption in units

➢O = Ordering Cost per order
➢C = Carrying Cost per unit per year
➢No. of orders = R/EOQ
➢Graphic Method:
➢Under this method, ordering costs, carrying costs

and total inventory costs according to different
lot sizes are plotted on the graph
➢The intersection point at which the inventory

carrying cost and the ordering cost meet, is the
economic order quantity.
➢Graphic Method:
➢(b) Re-Order Point (ROP):
➢It specifies the point of time when the order

should be placed.
➢Re-order level is that level of inventory at which

an order should be placed for replenishing the
current stock of inventory.
➢(b) Re-Order Point (ROP):
➢The determination of re-order point depends

upon the lead time, usage rate and safety stock.
➢1. Lead Time: Lead time refers to the time gap between
placing the order and actually receiving the items ordered.
➢2. Usage Rate: It refers to the rate of consumption of raw

material per day.
➢3. Safety Stock: It is the minimum quantity of inventory

which a firm decides to maintain.
➢(c) Fixing Stock Levels:
➢Fixing of the stock levels is necessary to avoid

increased cost on account of high inventory levels
➢ To avoid loss of sales or stoppage of production

due to low level of inventory
➢Efforts should be made to keep the inventory

level within the specified minimum and
maximum limits
➢Stock levels are fixed after considering the

following factors:
➢Availability of ample storage space.
➢Lead time involved i.e. time required in receiving

the goods ordered.
➢Availability of working capital to meet the routine

expenses.

following factors:
➢Average rate of consumption of material
➢Cost of storage and insurance of inventory.
➢Risk of obsolescence and deterioration of the

inventory.

following factors:
➢Economy in prices such as making bulk purchases

during period of low prices.
➢Re-order level.
➢Danger Level:
➢Danger level refers to the level below the

minimum stock level
➢ The following factors should be considered to determine

the danger level:
➢Danger Level:
➢Causes for failure of regular supplies
➢Easy and quick sources of supply
➢Rescheduling of work- order in the light of
such exigencies
➢Quickest means of transportation
➢Emergency period of procurement
➢(d) Selective Inventory Control:
➢(i) ABC Analysis
➢Here inventories are analyzed with respect to

their value
➢So that costly items are given greater attention

and care by the management
➢(i) ABC Analysis
➢Costly items are categorized ‘A’ and highest

control is exercised on these items.
➢ Least valuable items are categorized ‘C’ and

least control is exercised on them
➢Remaining items are categorized as ‘B’ on which

moderate control is exercised..
➢(i) ABC Analysis
➢Three categories are created namely A, B and C.
Category % of Total Value % of Total Quantity

A 70-80 5-10
B 20-25 20-30
C 5-10 60-70
➢(i) ABC Analysis and Pareto
➢Businesses get 80% of their sales revenue from

20% of the customers.
➢80% of the problems are caused because of 20%

of the employees
➢20% of the items accounts for 80% of the firms

expenditure
➢Businesses get 80% of their sales revenue from

20% of the customers.
➢80% of the problems are caused because of 20%

of the employees
➢20% of the items accounts for 80% of the firms

expenditure
➢20% of the impactful items should fall into ‘A’

classification category.
➢80% of the less impactful items should fall into

‘C’ classification category.
➢20% of the impactful items should fall into ‘A’

classification category.
➢80% of the less impactful items should fall into

‘C’ classification category.
3.3.3 Modern Inventory Control Techniques
(d) Selective Inventory Control:
➢(i) Other Analysis
➢(ii) VED Analysis:
➢VED stands for Vital, Essential and Desirable.
➢Highest control is over vital items,

➢Medium control is exercised over essential items and
➢Least control is inferred over desirable items.
➢(iii) SDE Analysis:
➢SDE stands for Scarce, Difficult and Easy.
➢Highest control is over scarce items,

➢Medium control is exercised over difficult items and
➢Least control is inferred over easily available items.
➢(iv) FSN Analysis:
➢FSN stands for Fast Moving (F), Slow Moving (S)

and Non Moving (N).
➢Highest control is kept over fast moving items,

➢Medium control is exercised over slow moving items
➢ Least control is inferred on non-moving items
➢(v) Just-in-Time (JIT) System:
➢Just-in-time system, is a pull-type inventory

control system.
➢Demand stimulates production
➢The production of goods is to meet customer
demand exactly in time, quality and quantity.
➢Producing with minimum waste.
2.6 Review Question
1. To
2. errt
1.6 Review Question
3. What are the main options for a logistics strategy? (20mks)
4. What factors affect the choice of logistics strategy? Take an

organization that you are familiar with, and say exactly how you
would set about designing a logistics strategy? (20mks)
02/04/2018 83

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PAN AFRICAN INSTITUTE FOR

SLIDE LECTURES FOR STRATEGIC

➢Technology ("science of craft",) is derived from a

➢Techne ( τέχνη) means an "art, skill, cunning of

➢logia, (λογία) is the sum of knowledge, methods,

➢Technology merges the art, skill, or tools with

➢It refers to the discovery of a technique to

➢It could be the result of mastery gained from

➢It could be the result of an inspiration from the

➢Whatever be the case, technology make life

➢Logistics need such technologies to improve its

➢These technologies refer to the tools which facilitate the process

➢Some are outdated, others are still in use even

• Explain the Material Resource Planning concept

➢(a) Material requirements planning:

Technology constitutes specific knowledge,

❖Material requirement planning is a way of matching the

❖In other words, we want some way of finding the known,

❖This might seem rather optimistic, but there are several

❖The conventional approach to planning assumes that

❖These demands are independent of each other, so the

❖There are, however, many situations where demands are

❖One demand for a product is not independent of a

❖When a manufacturer uses a number of components to

❖Traditional approach in a Restaurant Setting.

❖The chefs see what ingredients they used in previous

❖Use these past demands to forecast future demands

❖Make sure there is enough ingredients in the reserve to

❖MRP approach in a Restaurant Setting.

❖Analyze these to see what ingredients they need.

❖Then order the ingredients to arrive at the right time.

❖Difference between the two approaches

❖With independent demand systems, stocks are not

❖So they must be high enough to cover any likely

❖These stocks decline during operations, but are soon

❖Difference between the two approaches

❖With MRP, stocks are generally low.

❖They rise as orders are delivered just before operations

❖The stock is then used during production and declines to

❖MRP uses a lot of information about schedules,

❖This comes from three main sources.

❖Master schedule, giving the number of every product to

❖Bill of materials, listing the materials needed for every

❖Inventory records, showing the materials available.

❖Master schedule, giving the number of every product to

❖Bill of materials, listing the materials needed for every

❖Inventory records, showing the materials available.

❖A bill of materials is an ordered list of all the parts

❖It shows the materials, parts and components – and also

❖ The bill of materials contains the specification of every item

❖A bill of materials is an ordered list of all the parts

❖It shows the materials, parts and components – and also

❖It is simple to prepare and use. However, in case of

❖Here the data is presented in a detailed tabular format

❖Quantity: The BOM should specify the number of parts

❖Unit of Measurement: Per-unit, inches, grams,

❖BOM Level:: BOM level provides the number or

❖BOM Notes: This provides for additional information

❖Part Name: The unique name of each item with a

❖Raw Material: BOM should specify the exact quality or

❖Description: Each part should have an adequate

❖Images: Images of the end product help easy

❖Description: Each part should have an adequate