Inventory

An inventory is a detailed list of all articles on the ward, their

specifications, and standard number of quantity.
High inventory level leads to high cost of inventories by:
Locking the finance
Large storage space
Large handling and administration charges
Obsolescence
Spoilage etc.
Following are the types of inventory:
Raw materials
Components
Work in progress
Finished good
TWO TYPES:
Official inventory
Unofficial inventory
BASIC PRINCIPLES OF INVENTORY CONTROL
SAFETY STOCK (SS ): It is the stock for usage at normal rate during the
extension of lead time. The SS is the difference between the worst-case
Scenario (WCS) and the average weekly usage (forecast) during the LT period.
SS= (WCS-AWU) LT

AVERAGE INVENTORY (INV' stands for Inventory and 'AVG' stands for
Average):
The average inventory is the sum of the SS and half the reorder quantity
(ROQ).
INVAVG = SS + ½ × ROQ
Average inventory at constant usage rate:
Average inventory = opening stock+ closing stock
2
Average inventory at variable usage rate:
Simple average method:
Average inventory = opening stock+ closing stock
2
Six monthly average method:
Average inventory= opening stock+ stock after 6 months+ closing stock
2
Quarterly average method:

Average inventory = sum of 4_- quarterly stock + closing stock

5
Monthly average method:
Average inventory = sum of 12_- quarterly stock + closing stock
13
REORDER POINT (ROP):
The reorder point (ROP) is the sum of the SS and the quantity used during
the LT.
ROP = SS + (AWU x LT)
FUNCTIONS OF INVENTORY CONTROL:
To carry adequate stock to avoid stock-outs
To order sufficient quantity per order to reduce order cost
To make judicial selection of limiting the quantity of perishable items and
costly materials
To order the right quantity at the right time.
To provide safety stock to take care of fluctuation in demand/
consumption during lead time.
To ensure optimum level of inventory holding to minimize the total
inventory cost.
CONCEPTS RELEVANT IN CONTROLLING INVENTORY COSTS:

Periodic/ cyclic system

Two bin system
Lead time
Minimum/safety/ buffer stock
Maximum order level
Re order level
COSTS:
a. Ordering costs
b. Carrying costs
c. Shortage costs
d. Total inventory cost
e. Lead time
SELECTIVE INVENTORY CONTROL:
Selective inventory control means grouping the inventory and classifying
for the purpose of applying the right type of control based on their costs and
functional importance.
Methods of selective inventory control:
a. ABC analysis
b. VED analysis
TECHNIQUES IN INVENTORY CONTROL:
1. Items quality: Value analysis, standardization, codification.
2 Quantity: Purchasing balancing of inventories EOQ.
3. Price: Cost price value analysis.
4. Source: Market research, purchasing techniques selection.
5. Delivery: Procurement technique, follow-up PERT/ operational research.
6. Methods: Work-study system analysis, ABC analysis, etc.
7. People: Organization analysis.
CLASSIFICATION TECHNIQUES FOR INVENTORY CONTROL:
1.ABC analysis (always better control).
2. VED analysis (vital, essential, desirable).
3. FSN analysis (fast, slow moving and non-moving).
4. SDE analysis (scarce, difficult, easy).
5. HML analysis (high, medium, low).
6. XYZ analysis.
7. GOLF analysis (government, ordinary, local, foreign)
8. SOS analysis (seasonal, off-seasonal item).

SIZE OF INVENTORY
The volume of safety stock
Economy on purchase of larger lots
VALUATION OF INVENTORY
FIRST IN FIRST OUT METHOD (FIFO)
The oldest items in stock are assumed to be issued before new
stock, and the issue is priced accordingly.

LAST IN FIRST OUT METHODD (LIFO)

The newest items in stock are assumed to be issued before the
order and priced accordingly. Strictly followed, this method too can have
the same difficulties as FIFO.

AVERAGE UNIT PRICE METHOD

In this method the issue price (and the price of the inventory) is set
by averaging in the quantities and prices of each new purchase of the item.

FIXED LAST PRICE METHOD

In this method, issues and the inventory at stock-taking time are
priced at the price of the last receipt of the item.
MERITS
1. Investment in inventory can be mantained
2. Easy to control the wastage of costly items
3. Helps in maintaining safety to the total cost
4. Easy to maintain stock and turnover rate.
5. Helps to exercise selective control when confronted with large number of items.
6. Rationalizes the number of orders, number of items and reducing clerical cost.
7. Shows visible results in a short span of time.
8. The manger is able to control the inventories specially controlling 'A' items.
9. Helps to pin point the obsolete stocks.

DEMERITS
1. Proper standardization and codification of inventory items is required.
2. 2. Considers only the money value not the importance of items for functioning.
3. 3. Periodic reviews becomes difficult if only ABC analysis is recalled.