CHAPTER : 4 4. Conceptual Analysis of Inventory Management

(i) Meaning and importance of inventory management

(ii) Difference between control and management

(iii) Problems related to inventory Management

(iv) Techniques of inventory management

(v) A brief review of inventory models

Meaning and Importance of Inventory Management

Inventory Management is a basic function of the business

that adds value directly to the product and purchasing like plant

engineering and advertising is a specialized staff activity that helps

as a value adder but does not really add any value to the product

regulating the flow of inventory in relation to changes in variables

like dema1

It aims at (i) minimizing idle time caused by the shortage of

raw materials, stores, or spare parts and loss of sale due to stock out

of finished inventory, (ii) keeping down capital in inventories,

inventory carrying cost and obsolescence losses. The twin

objectives mentioned above are in conflict to each other and

efficiency of inventory management lies in balancing one against

the other with a view to arrive at an optimum overall result. In

other words, where inventory management is efficient the

operational objective is achieved consistent with the financial

objective, otherwise operations may be disrupted for want of

requisite stores and spares or there may be excessive storage of

inventories. Where surpluses may cause financial hardships they tie

up capital while shortages may lead to poor operational results.

Thus in a production process inventory management can be

considered as a preliminary to transformation process. It involves

planning and programming for the procurement of material and

capital goods of desired quality and specification at reasonable

price and at the required time. It is also concerned with market

exploration for the items to be purchased to have upto date

information, stores and stock control, inspection of the inventory

[76]

received in the enterprise, transportation and inventory handling operations related to materials and many other functions. In the

sibility ends when the correct finished 2

STAGES OF INVENTORY MANAGEMENT

The following are the main stages of inventory management activities in an enterprise :

(i) Decision Stage : Co-ordination of purchasing,

supplier development, guiding design decisions,

introducing new inventory and some minor changes

in the production process.

(ii) Sourcing Stage : Make or buy decision,

procurement facilities etc.

(iii) Production Planning Stage : Preparation of master

schedule, calculation of inventory requirements etc.

(iv) Stage of Ordering : Placing the orders, follow-up, packaging and transportation.

(v) Receiving Stage : Receiving the items, inspection

of inventory, quality problems etc.

(vi) Inventory Control : Determination of economic lot sizes, safety margins and inventory costs.

Out of all the functions of inventory management,

purchasing, store-keeping and inventory control are very

important to an enterprise. Stages of inventory management

can also be summarised through the following chart : [77]

Chart No. 4.(i)

Stages of Inventory Management

Decision Stage

Sourcing Stage

Production Planning Stage

Stage of Ordering

Receiving Stage

Inventory Control Importance of Inventory Management

In a modern business organization there are three main

operating sub-systems material, manufacturing and marketing.

The material sub-system converts it into finished product and the

marketing sub-system sells the output. The other sub-systems of an

organization, i.e., finance, personnel etc. serve the needs of the

three operation sub-systems. The three sub-systems are mutually

dependent for their existence, or the output of one sub-system

forms the input of the other. Inventory, which is primarily a stock

of goods, forms a buffer at these interfaces and enables the smooth

transfer of materials from one sub-system to the other. By having

adequate stocks the lines can be balanced even if one of the sub-

systems has a temporary break down the other need not suffer due

to lack of material as these can be supplied from inventory.

Inventory plays an important role in a business organization. The

following factors emphasise the need for inventory. [78]

Variation in demands for products; Variation in production lead time; Variation in delivery lead time of raw materials; Variation in production rates;

Cost associated with shortages or delayed deliveries.

Inventory management has a significant influence over the

profitability of the firm. The primary objective of a business

enterprise is to secure a reasonable return on its capital investment.

Capital invested in fixed assets such as buildings, plant, machinery,

etc., is fixed and very little can be done to reduce it. It leaves us

with the variable capital most of which is invested in inventories.

The Central Statistical Organization (CSO) has brought out a

census of Indian manufactures which shows that a little over 90 per

cent of the working capital in 29 major industries in the country is

invested in different kinds of inventories like finished products,

work in process, components, raw materials, stores, spares etc.

Fortunately, inventory investment is most responsive to control.

Studies made in India have revealed that scientific techniques of

inventory management can reduce inventory investment

considerably sometimes by as much as 50 per cent or even more.

-fold : first

the avoidance of over-investment or under-investment in

inventories; and second, to provide the right quantity of good

standard raw-material to the production department at the right 3 In brief the importance of

inventory management may be summarized through this following

chart : [79]

Chart No. 4.(ii)

Importance of Inventory Management

Operating Importance Financial Importance

Availability of Material Economy of Purchasing

Avoidance of Wastage Reasonable Price

Promotion of Manu. Efficiency Efficient use of Capital

Avoidance of Out of Stock

Danger

Better Service to Customer

Causes of Poor Inventory Management

There may be many causes of poor inventory in any

concern which is also bad to poor profitability though it varies

from concern to concern due to difference in nature of work &

other factors. The following are some of the causes reponsible

for poor inventory management.

Overbuying without regard to the forecast or proper

estimates of demand when a shortage occurs or the market is

temptingly favourable.

Over production or early production of goods even

before the customer requires them. Also, in an endeavour to keep

equipment loaded stocks may accumulate. Unused portions of

the materials drawn from the stores may be held in the works

with the result that when a shortage occurs a batch is pushed

through earlier than otherwise would have been the case.

In an endeavour to keep the inventories low, the fast moving and the slow-moving stock may be indiscriminately

[80]

suppressed. This would result in (lower inventory of slow-

moving items than needed and) higher stocks for the fast-moving items than needed.

To provide better service to the customers there is

always the tendency of the sales department to have

inventories. Production department may also be interested in

longer runs to cut down production costs.

Besides the above causes which are more or less

controllable, stocks may also accumulate owing to cancellations

of orders and minimum quantity stipulations by suppliers.

Sometimes when the market is temptingly favourable

or there is a temporary shortage, then the organisations tend to

overbuy stocks without considering the forecast or proper

estimate of demand.

At times, an organisation may purchase larger batches

of items in order to avail discounts offered by the seller. This

will lead to overstocking of inventory.

In a situation where there is low demand, the

organisation may continue its production in an endeavour to

keep its equipment loaded. Overproduction or early production

of goods even before the customer requires them leads to poor inventory management. DIFFERENCE BETWEEN INVENTORY CONTROL AND INVENTORY MANAGEMENT

Inventory management implies planing (How much should

be kept an Inventory, How many orders, When to order etc.)

formulation, co-ordination and determination of activities in a

manufacturing system necessary for the accomplishment of desired [81]

objectives whereas Inventory control is the process of

maintaining a balance between various activities evolved during

production providing most effective and efficient utilisation of

resources. There are also some similarities between the two i.e.:

Inventory control and management is the technique of

maintaining the size of the inventory at some desired level keeping

in view the best economic interest of an organisation. It involves:

Purchasing items at economic price at a proper time and in sufficient quantity.

Provision of suitable and secured storage location

with sufficient space.

Inventory identification system.

Upto date and accurate record-keeping by responsible staff.

Appropriate requisition procedures.

Inventory management and inventory control are closely

related with each other. But there are many differences between the two; these are :

(a) Management concerns with the formulation of

production, inventory strategies and target for the enterprise

whereas control is vested with actual implementation and

execution of planned objectives. In fact proper inventory

control reduces gap between actual and scheduled inventory.

(b) Inventory manangement means better use of men,

machine, money and material while control means economy in

production, control of stock volume, control of stock

distribution etc. [82]

(c) Inventory management determines the operations

required to manufacture or keeping stock of some product and control regulates and supervises these operations.

(d) Inventory management is the planning, directing

controlling and co-ordinating those activities which are

concerned with materials or inventory requirement from the

point of their inception to their introduction into the

manufacturing process. It begins with the determination of

materials quality and quantity and ends with its issuance to

lowest cost. Inventory control on the other hand is the system

of ordering based on the maintenance of the stock in a store

using a re-order rule based on the stock level.

In brief an effective inventory management and control can

be big assets to the organisation playing significant role in various

activities of the system and providing economy in overall cost of production. PROBLEMS RELATED TO INVENTORY MANAGEMENT

There are internal as well as external problems so far as

inventory management is concerned. These problems are divided into two categories i.e. Internal and External.

1. Internal Problems include : Delay in lead-time;

Improper specifications of materials leading to

surplus or obsolescence;

Lack of coordination among departments dealing

with materials, production, sales, maintenance and [83]

finance;

Overstocking;

Overbuying on account of quantity discounts; and

Improper storage facilities.

2. External Problems :

Lack of full knowledge of demand, risk and uncertainty;

Difficulties in obtaining of commodity because

Delay by suppliers; Improper market research; and

Higher consumption due to poor quality materials.

The characteristics of inventory problems can be classified

as under* :

Chart No. 4. (iii) Item Position Nature

Purchase or manufacturing cost A. Known (a) constant

per unit

Stock-holding cost per unit time B. Estimated (b) variable

Shortage Cost B. Estimated (b) variable

Demand A. Known (a) constant

B. Estimated (b) variable

Quantities required A. (a) constant

B. Continuous (b) variable

quantities

A. Continuous *

[84]

B. (b) Variable rate

Reorder Cycle time A. Known (a) Constant

B. Estimated (b) Variable

Input quantities A. Discrete (a) Constant

B. Continuous (b) Variable

Distribution of inputs over time A. Continuous (a)

B.

rate

The control and maintenance of inventories of physical

goods is a common problem to all business enterprises.

Manufacturing firms have a problem related to procurement,

storage, and stock replenishment.

We can also classify inventory problem on the basis of

control. In industry some variables are controllable and some

are uncontrollable. Controllable variables are those which can

be controlled through proper management like

(1) When should be ordered? (Time) (2) How much should be ordered? (Quantity)

These variables can be controlled by demand forcasting,

trend analysis, resource availability, and through management

skill. Factors which arise as the problem but cannot be

controlled by management include shortage cost (stock out

cost) holding cost, demand variation, supply of goods

(quantity) not in time due to natural or manual reason etc. TECHNIQUES OF INVENTORY MANAGEMENT

An inventory control system is primarily attempt at

answering the two questions i.e. how much inventory to be

replenished? And when to replenish in? Many of these techniques

[85]

employ concepts and tools of mathematical and statistical

methods and make use of various control theories. They are

primarily aimed at helping to make better decisions and getting

people involved and following a wise policy. The present

study covers two types of inventory control techniques viz;

(A) Quality Control Techniques (B) Quantity Control Techniques

To apply these techniques to solve inventory control

problems, which can explained through a chart (no. 4.4). (A) QUALITY CONTROL TECHNIQUES

Quality is the sum total of all characteristics and attributes

of a certain product or an object which go to make it acceptable

to the people for whom it is meant. The quality control process

seeks to bring about a situation where deviation from the

required standards are detected as they develop rather than after

they have occurred. In quality control what matters is,

conformity, design standard and reliability. The first aim is to aid

production in their task of avoiding faulty production. The

second aim is to detect faulty parts which escape the avoiding

measure taken, within the limits of desirability.

(i) Area of Control

The principal areas of stages in the production process

where quality control will be most in evidence as discussed by

Singh and Mahadevan are as under.

(a) Incoming Materials

It may appear to be reasonable, at first sight, for a purchaser

to expect all raw materials and components brought for whatever

purpose to be in full accordance with the design specification

[86]

offered by the supplier. The importance and the need for

incoming material control om the quality point of view is

obvious. Poor quality of incoming materials, when accepted, will

not only affect the quality of the final product, but will also

affect production through increased rejections, machine down-

time, and/or idle time on men and longer processing time.

(b) Outgoing Finished Products

If an effective quality control system is in operation on the

production floor, there is often no need for final inspection before

despatch to the customer. With some classes of product, however,

there is a testing process and final inspection involved. At this

stage, it will be noted, there is inevitably a change of emphasis in

quality control. At the final inspection stage the production

processes have been completed and thus the aim is now to prevent

sub standard goods passing into the hands of the customer.

(ii) Techniques of Quality Control

Quality of a product can be assured or controlled by :

(a) Inspection Techniques (b) Statistical quality control Techniques

(a) Inspection Techniques

Inspection may be carried out at the job place or in a separate

inspection department. When materials, parts and product etc. are

sent to this department for inspection, it is called as central

inspection. Central inspection saves the time of inspection. It

makes possible the use of special inspection and testing machines

and equipments. But many times, persons from various sections

have to wait for a long time, to get the material etc. inspected.

Materials, products etc. are required to be taken to and from [88]

central inspection department, several times, which increases the cost of handling and transportation. Statical Quality Control

is an effective system for coordinating the quality maintenance and quality improvement efforts of the various groups in an organisation so as to enable production at the most

4

Application of statistical techniques is employed for the

maintenance of uniform quality in a continuous flow of

manufactured product. Thus quality control as a technique of

scientific management has the object of improving industrial

efficiency by concentration on better standards of quality and on

controls to ensure that desired as well as appropriate standards are

of quality variations in a production process. It has three main uses

: to determine the capability of the process, to guide modifications, 5. A control chart has three horizontal lines

starting from the right-hand side of the vertical line and parallel to

the base line of the chart. The vertical line is meant for showing the

quality statistics of each sample and is known as quality scale. The

base line is used for making sample numbers and is termed as sub-

group scale. The three horizontal lines (i) central line (ii) upper

control limit and (iii) lower control limit are known as control

lines. Control charts for variables are designed to achieve and

maintain a satisfactory quality level for a process whose product is

amenable to quantitative measurements like the thickness, length or

diameter of a screw or nut, weight of the bolts, tensile strength of

yarn or steel pipes, specific resistance

[89]

of a wire, etc. The observations of such units can be expressed

easily in specific units of measurement. In such cases the

quality control involves the control of variation both in

measures of central tendency and dispersion of the

characteristic. It may be noted that the variables under

consideration here are of continuous character and are assumed

to be distributed. Normally control charts for variables are :

(i) Control chart for mean , (mean chart)

(ii) Control chart for range (R), and (iii) Control chart for standard deviation ( )

Control Chart for Attributes : In spite of wide

applications of X and R and standard deviation charts are a

powerful tool of diagnosis of sources of trouble in a production

process. Their use is restricted because they are charts for variables only and in certain situations they are impracticable and uneconomical.

As an alternative to and R charts we have the control

charts for attributes which can be used for quality

characteristics. It can be observed only as attributes by

classifying an item as defective or non-defective, i.e.,

conforming to specifications or not. The most commonly used

control charts under this category are :

(a) Control chart for fraction defective, i.e., p-chart.

(b) Control chart for number of defectives, i.e., np-chart or d-chart.

(c) Control chart for number of defects per unit, i.e., c-

chart. [90]

QUANTITATIVE CONTROL TECHNIQUES

Quantity of production is expressed in terms of physical

quantity. The quantitative aspect of inventory control deals with

the raw material, semi finished products and finished products. A

systematic control is a must for the efficient functioning of the

organisation. These techniques are based on mathematical

relationship. The reliability of these techniques will be accurate

if sufficient data is available.Various types of techniques have

been used in different types of business undertakings. There are

some of the important techniques used in steel industry as under :

(i) Traditional Techniques of Inventory Management

(ii) Modern Techniques of Inventory Management (i) Traditional Techniques of Inventory Management

The important step in Traditional Techniques of inventory

management is to adopt a selective approach in laying down

inventory levels, order quantities, demand forecasting and the

extent and closeness of the control to be exercised. The systems

which are in vogue for a long time as traditional techniques of

inventory manangement are given as under. (1) Demand Forecasting

A forecast of some type at least implicity exists whenever

management makes a decision in anticipation of future demand.

The objective of forecast of demand may be to build inventory

slack sales-period in anticipation of demand at peak sales periods.

Since production hours in anticipation of peak demands will be

stored in the form of physical inventory made up of particular

items, at least a close estimate of breakdown of the total demand

item by item is needed to keep seasonal inventories well balanced. [91]

device is quite straightforward. In this method we consider moving

average, trend analysis, least square method etc. The time-series

models club together a whole lot of possibilities or reasons for

variations in demand in terms of one factor, that is, time. This

model rather than neglecting the total environmental multiplicity of 6

(2) FIXATION OF INVENTORY LEVELS* (3) REORDERING SYSTEM

The main features of inventory control is reordering or

ordering system or procedures under which orders are placed.

Economic order quantity tells us how much to order, while

ordering system or order level control procedure tells us when

to place a fresh order, i.e. order for replenishment of stock.

These are discussed as under :

(1) Fixed order quantity or two bin system (2) Fixed order interval or review system

(1) FIXED ORDER QUANTITY SYSTEM OR TWO BIN

SYSTEM

In this system, inventory is divided into bins. The first bin

carries inventory to satisfy demand between the arrival of one order

and placing of the next order. When the stock in the first bin is

exhausted a reorder (replenishment order) is placed for the fixed

quantity and the second bin is opened which serves during the lead

time. The total stock in the stock bin represents the reorder level

and it is equal to lead time consumption plus safety stock.

* This point has been discussed in detail in Chapter 7 (ii).

[92]

The safety stock ensures that there will be no stock out even if

lead time is exceeded. The bins may not be physically divided. This may be only done on papers by calculations.

The major advantage of the system is the obvious

reduction of clerical work. In practice if a number of items

have to be ordered from the same supplier, it becomes

necessary to order several items together in order to save

transportation cost. In the both selected steel plants follow this

system for handling low value items. (2) FIX ORDER INTERVAL OR REVIEW SYSTEM

In this system, the order interval (lead time) is fixed but

the order quantity varies. After a fixed interval of time, the

concerned item is ordered. The quantity of this items varies

with the current demand of that items. In this system,

inventory is divided into two parts. (i) The quantity intended to

satisfy the mean expected demand during the interval between

placing of two orders. (ii) A safety allowance which is a

regular system and does not depend on indents. It avoids stock

out, the quantity of stock held is more than that held in the two

bin system. It is found in the course of study that public sector

selected steel plants introduced this system for import items. (4) RATIO ANALYSIS

Ratio analysis is an effective tool for inter-works and inter-

firm comparison and to take corrective measures where needed.

There are different types of ratio which are used by the

management for different purpose. Inventories are affected by sales

as there is a direct relationship between the sales and inventory,

and therefore, it is helpful for determining changes in inventory

[93]

investment in relation to changes in the volume of sales. The

most commonly used ratio to show the relationship between

inventories and sales are inventory turnover ratio, material

utilization ratio, average of inventories ratio etc. The most

popular inventory ratios which considerably affect here

inventory decisions in Steel Industry are discussed hereunder : (1) Inventory Turnover Ratio

Inventory turnover ratio is also known as stock tunrover ratio.

It establishes a relationship between the cost of goods sold during a

reviewing performance and controlling inventories periodically to

check the inventory turnover of each type of raw material supply and 7 The turnover of inventory directly affects the

profitability of a industry. The higher is the turnover, the larger is the

profit of the industry. A higher turnover also indicates that the

industry has conducted more business with proportionately less

amount of inventories, which results in saving of inventory costs.

Therefore, management should speed up the turnover of inventories

by controlling their volume to the extent possible. On the other hand,

inventory turnover ratio acts as an indicator of the liquidity of the

inventory. In other words this ratio helps in determining the liquidity

of a concern in as much as it gives the rate at which inventories are

converted into sales rather than into cash. This ratio helps in judging

rate of inventory turnover, the larger the amount of profit, the smaller

the amount of working capital tied up in inventory, and the more 8 Therefore, a high inventory

turnover ratio is always desirable in normal conditions. [94]

This view was supported by Drebin and Harold when they

9

Certain materials are slow moving. It means that their

consumption rate is quite slow and so capital remains locked

up and storing costs continue to be incurred in such materials

if these materials are stored in excess of the requirement. The

rate of consumption in terms of value or in terms of days is

indicated by Inventory Turnover ratio. The number of days in

which the average inventory is consumed can be ascertained

by dividing the period by the inventory turnover ratio. Inventory Turnover

(a) Inventory Turnover

= Value of material used in the period/Value of Average material held during the period

(b) Finished Stock Turnover

= Value of finished stock sold in the period/Value of Average stock held during the period

Inventory Turnover in tems of Days

= Value of average inventory × Days of period/ Material consumed

Or, Days of period/Inventory Turnover Rate

(2) Input Output Ratio

Input output ratio is the ratio of raw material going into

production and raw standard material control of the actual

output. Input output ratio helps in determining whether the

usage of raw materials is favourable or adverse. If standard

costing is used input output is obtained by :

[95]

Standad Cost of Actual Quanity/Standard Cost of Standard

Quantity.

With the help of this ratio, actual working of an industry

can be assessed easily. A standard ratio must be set under the

circumstances prevailing in the organization. Comparing the

actual ratio with the standard ratio, the real performance can be

judged. Whereas if the actual ratio is lower than the standard

the performance is better than the standard and vice versa.

Another advantage of this method is that with the help of

this ratio, raw material cost of finished output can be found out by multiplying the raw material cost per unit by this ratio.* (5) PHYSICAL VERIFICATION OF STOCKS

Stock verification can be defined as the process of physical counting, weighing or measuring the stock of

materials that is held and making a record of these figures.

Generally in case of physical verification the emphasis is

on quantity but for better control and cost control purposes and

smooth running of the operations it is necessary to lay equal

emphais on the quality of inventory items. Procedure and Methods of Store Verification

The following procedures are commonly used in steel

industry for physical verification of stocks. In technical term,

these are also called methods of taking inventories. Perpetual Inventory System

Perpetual inventory system is also known as automatic

* Analytical description is available in Chapter 5(iv).

[96]

of records maintained by the controlling department which reflects

10

Wheldon has given an exhaustive definition of it. According to

receipt and issue, to facilitate regular checking and to obviate 11

Thus, the perpetual

inventory system means maintenance of records such as stock control cards, bin cards and store ledger. Thus, the basic purpose of perpetual inventory system is to obtain the uptodate information about the inventories. Periodic Inventory System

In case of this system the quantity and value of inventory is

found out only at the end of accounting period after having a

physical verification of units in hand. Under this method of taking

inventories, value of stock is determined by physical counting of

stock on accounting date i.e. date of preparation of final accounts.

It is based on physical stock taking and provides data once in a year

periodically but it does not provide basis for control. Modern Techniques

Different business concerns may apply different inventory

control techniques to meet specific requirement and circumstances. In

practice when a firm maintains large number of items in its inventory

obviously all item cannot and need not be controlled (keeping record

of time interval between successive reviews of demand, order

frequencies, expected demand rate, order quantities etc.) with equal

attention. These techniques are also known as selective multi-item

inventory control techniques. Some such groups are classified as

VED, ABC, HML, FSN, XYZ, SOS, SDE, JIT etc. [97]

Chart No. 4. (v)

Various selective Inventory Management Techniques can

described in this Table form Classification

ABC (Always Better Control) HML (High, Medium, Low) XYZ VED (Vital, Essential, Desirable) FSN (Fast, Slow, Non-moving) SDE (Scare, Difficult, Easy to obtain) GOLF (Government Ordinary, Local, Foreign sources) SOS (Seasonal Off Seasonal) JIT (Just-in-time)

Basis of Classification Purpose Value of consumption To control raw material, components and WIP inventories in the normal course of business. Unit price of the material Mainly control purchases.

Value of item in storage their uses at scheduled intervals

To determine the stocking level of spare parts. Consumption pattern of To control obsolescence. the component Problem faced in Lead time analysis and

purchasing strategies.

Source of the material Procurement strategies.

Nature of supplies To reduce or eliminate inventory and costs associated with carrying

ABC Analysis

In big concerns it is quite impossible to control thousands of different item of stores. In such concerns, stock is classified into categories of importance, so that the concern can concentrate only on stock items of importance. The ABC analysis consists of separating the inventory items into three groups; A, B and C according to their annual cost volume consumption (Unit Cost × Annual Consumption). Although the break point between these groups vary according to individual business condition, a common break down might be as follows :

Category % of item % of total value of inv. [98]

A 10 20

B 20 30

C 60 70

This type of classification is also known as the principle of law of vital few and trivial many. ABC analysis means analysis of the yearly consumption value item wise in the store in order to identify the vital few items which are generally referred to as items. Generally these items accounting for about 70% of the total money value of consumption. Items accounting for about 25% of

remaining ones accounting for about 5% consumption value items. We can show it by following diagram :

Carrying out the ABC analysis of the store items helps in

70%

10%

Chart No. 4. (vi) 20%

Medium 10%

Cost

Inventory Low Cost Inventory

20% 70%

[99]

identifying the few items that are vital from financial point of view.

Chart No. 4. (vii)

TABLE SHOWING FEATURES OF ABC ANALYSIS Nature A items B items C items

(Med. value) (Low value)

1. Rigid control Moderate control Loose control

2. Safetry stock Low safety stocks Medium safety Large safety stocks

stocks

3. Frequency of Frequently Less frequently Bulk ordering

order

4. Degree of Individual posting Small group Group postings

posting postings

5. Period of Every fortnight Quarterly Yearly

review

6. Sources of Good number of Few reliable One or two sources

supplies sources sources

7. Follow-up Vigorous Periodic Occasional

8. Control Weekly control Monthly control Quarterly control

9. statements reports reports

Forecasting Emphasis on Focus on past trend Rough estimate

accurate forecast

10. Level of Senior Middle Stores supervisor

management management

11. Lead time Moderate efforts Minimum clerical

12. efforts

Annual usage Rs. 50,000 or more Rs. 10,000 and Below Rs. 10,000

value above

13. % of stock of 5% 10% 85%

14. % of value of 50% 35% 15%

item

VED Analysis : (Vital, essential and desirable)

This analysis helps in separating the inventories item

into three groups according to their criticality, usually called

V, E and D items in that order, VED classification of items as

vital, essential and desirable.

[100]

and without these items the whole system becomes inoperative. Thus adequate stock is required all the time.

stands for essential which is for the efficient running of the system and non-availability of these items reduces the

efficiency of the system.

nor reduce its efficiency, but availability of such items will

lead to increase in efficiency and reduction of failure.

This type of analysis is useful in controlling inventory of

spare parts. It can also be used in case of such raw material whose

availability is rare. VED analysis can be very useful to capital-

intensive process industries. As it analyses items based on their

criticality, it can be used for those special raw materials which are

difficult to procure. VED analysis and ABC analysis can also be

combined to control the stocking of spare parts based on the

desired customer service level as shown in the table below:

Chart No. 4. (vii)

VED Classification

V E D

Classification

A Attempt to reduce Attempt to

B the stock convert Z-items

Review stock and Items are within

consume more control twice a year

C often Check and

Dispose of the maintain the

surplus items control

HML Analysis : (High price, Medium price and Low price)

It is based on unit price of items. This analysis is helpful to

control purchase of various items for inventory. It throws light on

low value components but having substantial consumption. Such

[101]

components may not be revealed in ABC analysis but deserve

due management attention in the process of Inventory Contorl.

To illustrate, say 50,000 numbers of small screw costing only

Re. 1 each are required for production of an electronic item. The

total cost may be quite small but need to be controlled properly. FNSD Analysis : (Fast, Normal, Slow and Dead)

This analysis is based on consumption (or uses rate) of

items. It is divided into four categories in the descending order of

their usage rate. Fast moving items and stock of such items are

consumed in a short span of time. Normal moving items are

exhausted over a period of a year or so. Slow moving items;

existing stock of which would last for two years or more at the

current rate of usage but it is still expected to be used up. Dead

stock and for its existing stock no further demand can be foreseen.

This analysis helps in controlling obsolescence of various items by

determining the distribution and handling patterns.

This analysis is based on the consumption figures of the

items. The items under this analysis are classified into three

categories : F (fast moving), S (slow moving) and N (non-moving).

This analysis takes into account the period usually in terms

of number of months, either the last date of receipt or the last date

of issue in that month that has elapsed since the last movement is

recorded. Such an analysis helps to identify. (i) Active items which

require to be reviewed regularly; (ii) Surplus items whose stocks

are higher than their rate of consumption; and (iii) Non-moving

items which are not being consumed. The last two categories are

reviewed further to decide for disposal action to deplete their

[102]

detailed analysis is made of the third category in regard to

their year-wise stocks and the items can be sub-classified as non-moving for 2 years, 3 years, 5 years and so on. XYZ Analysis

This classification is based on the closing value of items in

storage items whose inventory values are high and moderate and

classified as X items and Y items respectively, while items with

classification is to review the stock of items and its use at

scheduled intervals. This helps in identifying the items which are

being stocked extensively. FSN and XYZ classification can also

be combined as shown in the table below :

Chart No. 4. (ix)

XYZ F S D Classification

X Light inventory Reduce stock to very

Y control low level

Normal inventory Low level of stock

Z Can reduce labour by Low level of

stock increasing stock

Quick disposal of item at optional price Should be disposable as early as possible Can affort to dispose of at lower price

SOS Analysis : (Seaconal and Off-seasonal)

This classification is based on the nature of supplies of

items. Here S represents the seasonal items and O S represents

for off seasonal items. Such classification helps in determining

suitable procurement strategies for seasonal items. The

analysis identifies items which are :

(i) Seasonal and are available only for a limited period; for

example agriculture produce like raw mangoes, raw

material for cigarette and paper industries etc. are [103]

available for a limited time and therefore such items

are procured to last a full year;

(ii)

prices, however, are lower during the harvest time.

The quantity of such items requires to be fixed after

comparing the cost savings due to lower prices 12

(iii) Non-seasonal items whose quantity is decided on

different considerations.

Sugar industry is dependent on the raw material

sugarcane which is seasonal. SDE Analysis : (Scarce, Difficult and Easy to obtain)

It is based on the nature of procurement of items. Such

classification helps in determining suitable purchasing

strategies and to control lead time. This analysis of inventory

is based on problems of procurements, namely (1) Non-

availability (2) Scarcity (3) Longer lead-time (4) Geographical

location of suppliers and (5) Reliability of suppliers etc.

Therefore, if an item is scarce, one has to procure and store it

irrespective of its value, volume and frequency of movement

to avoid the critical situation of holding the production. Also,

the seasonal and off-seasonal availability of an item should be

viewed properly and decision has to be taken accordingly. GOLF Analysis : (Government, Non-Government, Local, Foreign)

This analysis is based on the source of an item, i.e., through Government controlled quota or locally available in foreign countries, i.e., to be imported.

[104]

suppliers such as the STC, Government departments, public

sector undertakings like, SAIL, MMTC and FCI. Transactions

with this category of supliers involve a long lead-time and

payments in advance or against delivery.

-

category of suppliers involve moderate delivery time, and

availability of credit, usually in the range of 30 to 45 days.

th such suppliers :

(i) Involve a lot of administrative and procedural work; (ii) Require initial clearance from Government agencies such

as DGTD; (iii) Necessitate search of foreign suppliers; (iv)

Require opening of letter of credit; and (v) Require making of

arrangement for shipping and port clearance. MRP Analysis : (Material Requirement Planning)

This is basically a planning tool, which is based on sales

forecast used in the production schedule. Whether the production

schedule is based on the data of historical past sales or market

forecast, it takes into account the changes in the demand for the

end-products. The demand for the end products is independent as

also some service parts and some other higher order assemblies

are sold directly to customers. Other requirements of materials,

components and parts have dependent demands based on end

products, which are quantitatively expressed in the production [105]

schedule. The MRP system uses the master production

schedule as its basis, and then it proceeds to consider materials

requirement through a three-tier sub-system approach. They

are planning, execution, and control. JIT : (Just-in-Time)

Just-in-Time inventory conrtol system was invented by

in Japan. It implies, that the delivery of

material by the supplier in a firm should immediately precede their

use. With more frequent deliveries by the suppliers, the stock can

opposite to the traditional inventory management. It advocates

maintaining a massive stock pile to safeguard against production

bottlenecks on account of inventory shortage. That is why some

authorities termed the traditional inventory control management as 13

This system results in saving in the

material handling expenses. Japanese counter-parts in the

international markets are now taking a turn towords the JIT

inventory control system. This manufacturing system requires

production of goods or services only when the customer, internal

and external requires it. It reduces or eliminates inventory and the

cost associated with carrying the inventory.

This system applies to raw material inventory. But in practice

companies using JIT inventory generally have a backlog of order or

stable demand for their product to assure continued production. The

fundamental objctive of JIT is to produce and deliver what is

required. It is an ideal and therefore a worthy goal. The benefits are

low inventory, high manufacturing cycle rates, high output per

[106]

employee, minimum floor space requirement, minimum indirect

labour and perfect in process control. An associated requirement of

a successful JIT operation is the pursuit (a) in its demand for close

rapport between workers and management and between supplier

and company (b) in its requirement for strict self discipline. It is

revealed that RIL and BSSL are using this inventory system for

purchasing of raw material but in Japan it has yielded quite

considerable benefits Japanese companies generally hold for 4 or 5

hours inventory under this system whereas in India companies store

one week inventory. (Diagram on next page) Differences between J-I-T and MRP

J-I-T is, many a times, compared to Materials Requirement

Planning (MRP), perhaps because both lay emphasis on the

systems are used for different types of demand. While MRP can

be used for a dynamic situation, that is, when the demand could

change significantly in the future, J-I-T is incapable of taking

large and sudden variations. J-I-T is basically, for repetitive

manufacturing system. Secondly J-I-T is single unit production,

whereas MRP involves lot sizes at all levels of the product.

Thirdly in MRP there is not as much stress on vendor relations as

in J-I-T. In short MRP can work with all the conventional

benefits about and approaches to people; whereas, J-I-T is a

system requiring radical re-orientation in our approach to people

within and outside the company. Lastly, planning in J-I-T is

simple one needs to plan only the smoothened production of

the finished products; whereas, in MRP one needs to plan for

every intermediate product and process as well. [107]

Chart No. 4. (x)

JUST-IN-TIME PRODUCTION

Increased Return on Investment

Better

Adaptability

IN

Vendors

Production

Suitable

W 1 P Lot Quality

Problems

Jobs

Problem Solving by

Labour & Mgt.

Circles, etc. [108]

Pareto Analysis

Pareto Analysis is based on the 80 : 20 rule that was a

phenomenon first observed by Vilfredo Pareto, a nineteenth

century Italian economist. He noticed that 80% of the wealth

of Milan was owned by 20% of its citizens. This phenomenon,

or some kind of approximation of it say, (70 : 30 etc.) can be

observed in many different business situations. The

management can use it in a number of different circumstances

to direct management attention to the key control mechanism

or planning aspects. Pareto analysis is useful to :

Prioritize problems, goals and objectives Identify root causes Select and define key quality improvement programs Select key customer relations and service programs Select key employee relations improvement programs Select and define key performance improvement programs

Maximize research and product development time Verify operating procedures and manufacturing processes Product or services sales and distribution Allocate physical, financial and human resources

The Pareto Analysis indicates how frequently each type

of failure (defect) occurs. The purpose of the analysis is to

direct management attention to the area where the best returns

can be achieved by solving most of quality problems, perhaps

just with a single action. It is revealed that both the plants

under study arrange their raw material from the local market

on the basis of Just-in-time. Obviously these plants are not

following this method.

[109]

COMPUTERS AND INVENTORY MANAGEMENT

computations rapidly facilitates an entirely new approach to

the solution of inventory problems. This approach to inventory

management produces two important results. First, it makes

possible a reduction of inventory levels in traditional operating

situations through the more frequent use of more precise and

refined cost minimization formulas. Second, the approach

makes it practical to use large scale selective processes.

beneficial to firms that (1) carry a large number of diversified materials in inventory, (2) process a large number of purchase orders, (3) buy a large number of different items, or (4) deal

14

The first observable change a computer-based system makes

in the normal purchasing office routine is in the generation and

processing of purchase requisitions. As a rule, more than half of the

purchase requisitions are prepared by the computer, including most

of the requisitions for materials carried in inventory.

A second, and related, change produced by an automated

system focuses on the utilization of people. A computer-based

system frees buyers and other professional personnel from a

vast amount of routine work associated with the initiating and

processing of requisitions. One company found that prior to

the installation of an automated system, the average buyer

spent nearly 50 per cent of his or her time processing purchase

requisitions. After installation of the system, requisition

processing required only a fraction of this time. [110]

During the past decade and a half, society has witnessed

the evolution of one of the most important trends in the history of organized society the increasing use of computers.

Inventory control is an area in which computers can be put

to beneficial use. Since computerization of inventory control will

provide better control and profitablility, there is rich potential for

computerization in inventory management. At the inventory

management stage, computers are used to control the level of

inventories and to provide materials at the right time. Computers

can very easily handle various data such as price, lead-time, cost

of ordering, cost carrying historical data on delivery performance

and so on. Various techniques i.e. ABC analysis, EOQ. etc. can

be easily programmed into the computer so that tedious and

time-consuming calculations are avoided. Programmes as

available for performing ABC analysis, EOQ calculations,

reorder point computations and delivery schedule printing.

Receipt and issue documents can be easily computerized. This

keeps in record product costing, materials accounting and

maintaining perpetual inventory records. This results in better

physical verification. In inventory management also, computers

play a vital role from forecasting of demand to control of

inventory. Look at the following chart : [111]

Chart no.4. (xi)

COMPUTERS IN INVENTORY MANAGEMENT Sales history

FORECASTING Sales forecast

forecasting

Finished goods

Finished goods

forecast

MATERIALS

Bill of

PLANNING materials

Materials

Requirements

hand

Materials to

PURCHASING

be purchased

Supplier history

rating delivery

rating price etc.

Purchase orders

follow up

Delivery schedules

INVENTORY Reorder points

MANAGEMENT

Min. Levels

EOQ. Scrap,

obsolete, receipt

Analysis

[112]

References

1. Agarwal K.K., Inventory Management Control, Knishka

Publish & Distributors, Kailash Nagar, Delhi, 1993, p. no. 43. 2. Gupta, O.P. and Goel, B.S., Production management,

Pragati Prakashan, Meerut 1976, p. no. 236. 3. Datta A.K., Integrated Materials Management, Prentice Hall

of India,New Delhi , 1986,p.50. 4. Goel, B.S., op. cit. p. no. 239.

5. Gopal Krishan P., Sudarsain M. : Material Mangement,

Prentice Hall of India Pvt. Delhi,1995, p.180.

6. Agarwal K.K., Inventory Management Control, Knishka

Publish & Distributors, Kailash Nagar, Delhi, 1993, p. no. 43. 7. Patel M.D., Chenuwala S.A., Patel D.R., Integrated

Material Management, Himalaya Publishing House,

Edition Ist

, 1984 p. no. 319. 8. Kapoor, V.K., Operation reserach technique for

management, 2001, Sultan Chand & Sons, p. no.12.8.

9. Starr and Miller, Inventory Controls Theory and Practice,

Engle-wood Cliffs, N.O. Prentice Hall Inc.,1969,p. 236. 10. Whitin Thomson, M., The Theory of Inventory Management,

Princeton New Jersey, Princeton University Press, 1992, p. 97. 11. Harold T. Amriul, John A. Ritchay and Oliver S. Hullya,

Manufacturing Organisation and Management, Prentice

Hall Inc., New Jersey, 1977, p. 157. 12. Toy, O.M., Introduction and Financial Management,

Home Wood Illinois, 1977, p. 467. [114]

13. Moore and Handraic : Production and Operation

Management Richard and Irwin Publication, Delhi, 1977 p. 423.

14. Black, Champion and Miller : Accounting in Business

Decision, Theory, Methods and Use, 3rd

edition, Prentice Hall Inc., New Jersey, 1967, p. 52.

[115]