INVENTORY CONTROL

First, we are to understand what is meant by "INVENTORY'?

The idle resources like the following are the inventory:

1. Raw Materials
2. Fuels & Lubricants
3. Spare Parts
4. Maintenance Consumables
5. Semi Finished Materials (Work in progress items) etc.

It is highly uneconomical to keep the machines and men idle for want of any of
the above said items. Also, it is absolutely necessary to keep sufficient stock of
inventory for maintaining the production targets by which to achieve considerable
profit for any manufacturing unit.

At this instance, it is coming to everybody's mind - "Why at all inventory control

is essential?"

To keep excess inventory in stock means blocking the valuable money

unnecessarily without any use. Also, insufficient inventory will lead to production
hold up. Hence to reduce the gap between large inventory and insufficient
inventory, the modern tool of inventory control will play a leading role.

It has been practically found that by adopting the latest techniques of inventory
control, any manufacturing unit will certainly get high profit. Holding minimum
inventory and also to keep up uninterrupted production should be the main target
of any manufacturing unit. In these days, no manufacturing unit can survive by
holding high inventory since holding high inventory would only lead to heavy loss.

The following modern tools are available for inventory control:

1. Economic Order Quantity (EOQ)

2. ABC Analysis
3. XYZ Analysis etc.

With the help of EOQ formula, it is fairly possible to work out a minimum
requirement of any inventory. The EOQ formula has been formulated by many
experts after a long study. The formula is as follows:

EOQ= 2AO A= Annual Demand

O= Ordering Cost
SC S= Unit Cost
C= Inventory Carrying Cost
EXAMPLE

LET ANNUAL REQUIREMENT = 5000Nos.

ORDER COST = Rs. 100/-
UNIT COST = Rs. 10/-
INVENTORY CARRYING COST = 20 PERCENT

2A0 2X5000X100 2X5000X100

HENCE EOQ = = =
SC 10X20 PERCENT 10X0.20

Therefore the number of items to be } = 707 Nos Say 750 Nos.

Ordered in one order }]
Hence total number of orders can be } = 5000 = 7 Orders
Placed per year }
750
Further, the ABC analysis is also playing a very leading role in Inventory
Control. ABC Analysis is useful for controlling all raw materials, components etc.
ABC ANALYSIS
Any large manufacturing unit like HVF certainly to have 50,000 to 60,000
number of items. It is really a huge number and it is impossible to keep the same
type of control for all the items. After many years of study, the experts invented
ABC Analysis System. They divided all the items into three categories called A item,
B item and C item as follows:
10% number of items : 70% money involved : A item
20% number of items : 20% money involved : B item
70% number of items : 10% money involved : C item

Supposing a manufacturing units is holding a total number of 50,000 items then,

Approx. 5,000 items (10% of 50,000) will be 'A' item

Approx. 10,000 items (20% of 50,000) will be 'B' item
Approx. 35,000 items (70% of 50,000) will be 'C' item

For 'A' item, even though the number of items are less (when compared to
the total number of items) the total value of A category items is much more. Hence it
is essential to exercise proper control on procurement level, usage level for 'A' items
which will certainly yield high profitability. With the help of this analysis, many
Industrial Units can easily control inventory very effectively which will lead to high
profitability.
XYZ ANALYSIS
 This analysis is useful for the spares required for maintenance of
machineries.
X Category : Vital items
Y Category : Essential items
Z Category : Desirable items