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Inventory Control Techniques

The document describes several inventory control techniques: ABC analysis categorizes inventory into A, B, and C categories based on value and control level needed; Just in Time focuses on holding only inventory needed for current production; Material Requirements Planning uses sales forecasts to order inventory; Economic Order Quantity calculates optimal order quantities to minimize costs; other methods classify inventory based on vital/essential/desirable parts, fast/slow/non-moving items, unit price, or availability. The techniques help organizations effectively manage inventory levels and costs.

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49 views

Inventory Control Techniques

The document describes several inventory control techniques: ABC analysis categorizes inventory into A, B, and C categories based on value and control level needed; Just in Time focuses on holding only inventory needed for current production; Material Requirements Planning uses sales forecasts to order inventory; Economic Order Quantity calculates optimal order quantities to minimize costs; other methods classify inventory based on vital/essential/desirable parts, fast/slow/non-moving items, unit price, or availability. The techniques help organizations effectively manage inventory levels and costs.

Uploaded by

SHENU
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Inventory Control techniques

ABC Analysis

• ABC analysis stands for Always Better Control Analysis.


• It is an inventory management technique where inventory items are classified
into three categories namely: A, B, and C.
• The items in A category of inventory are closely controlled as it consists of high-
priced inventory which may be less in number but are very expensive.
• The items in B category are relatively lesser expensive inventory as compared to
A category and the number of items in B category is moderate so control level is
also moderate.
• The C category consists of a high number of inventory items which require lesser
investments so the control level is minimum.
Just In Time (JIT) Method

• In Just in Time method of inventory control, the company keeps only as much
inventory as it needs during the production process.
• With no excess inventory in hand, the company saves the cost of storage and
insurance. The company orders further inventory when the old stock of inventory
is close to replenishment.
• This is a little risky method of inventory management because a little delay in
ordering new inventory can lead to stock out situation.
• Thus, this method requires proper planning so that new orders can be timely
placed.
Material Requirements Planning (MRP) Method

• Material Requirements Planning is an inventory control method in which the


manufacturers order the inventory after considering the sales forecast.
• MRP system integrates data from various areas of the business where inventory
exists.
• Based on the data and demand in the market, the manager would carefully place
the order for new inventory with the material suppliers.
Economic Order Quantity (EOQ) Model

• Economic Order Quantity technique focuses on taking a decision


regarding how much quantity of inventory should the company order
at any point of time and when should they place the order. In this
model, the store manager will reorder the inventory when it reaches
the minimum level. EOQ model helps to save the ordering cost and
carrying costs incurred while placing the order. With the EOQ model,
the organization is able to place the right quantity of inventory.
Economic Order Quantity
• Economic order quantity (EOQ) is the ideal order quantity a
company should purchase to minimize inventory costs such as
holding costs, shortage costs, and order costs. 
• The formula assumes that demand, ordering, and holding costs all
remain constant.
• One important disadvantage of economic order quantity is that it
assumes the demand for the company’s products is constant over
time.
Formula of EOQ method
• The goal of the EOQ formula is to identify the optimal number of product units to order. If
achieved, a company can minimize its costs for buying, delivering, and storing units.
 

• Q= 2DS​​/H)
where:
Q=EOQ units
D=Demand in units (typically on an annual basis)
S=Order cost (per purchase order)
H=Holding costs  (per unit, per year)​
• EOQ can help minimize the level of inventory, and the cash savings
can be used for some other business purpose or investment.
• The EOQ formula determines a company's inventory reorder point.
When inventory falls to a certain level, the EOQ formula, if applied to
business processes, triggers the need to place an order for more
units.
Limitations of EOQ method
• The EOQ formula assumes that consumer demand is constant. The
calculation also assumes that both ordering and holding costs remain
constant.
• So, it does not account for business events such as changing
consumer demand, seasonal changes in inventory costs, lost sales
revenue due to inventory shortages, or purchase discounts a company
might realize for buying inventory in larger quantities.
Minimum Safety Stocks

• The minimum safety stock is the level of inventory which an organization


maintains to avoid the stock-out situation. It is the level when we place the new
order before the existing inventory is over.
VED Analysis

• VED stands for Vital Essential and Desirable. Organizations mainly use this
technique for controlling spare parts of inventory.
• Like, a higher level of inventory is required for vital parts that are very costly and
essential for production.
• Others are essential spare parts, whose absence may slow down the production
process, hence it is necessary to maintain such inventory.
• Similarly, an organization can maintain a low level of inventory for desirable
parts, which are not often required for production.
•  The VED analysis helps in focusing the attention of the management on vital
items.
Fast, Slow & Non-moving (FSN) Method
• This method of inventory control is very useful for controlling obsolescence.
• All the items of inventory are not used in the same order; some are required
frequently, while some are not required at all.
• So this method classifies inventory into three categories, fast-moving inventory, slow-
moving inventory, and non-moving inventory.
• The order for new inventory is placed based on the utilization of inventory.
• The non-moving items (usually, not consumed over a period of two years) are of great
importance. It is found that many companies maintain huge stocks of non-moving
items blocking quite a lot of capital.
• Fast Moving (F) – items that are frequently issued/used.
• Slow Moving (S) – items that are issued/used less for a certain period.
• Non-Moving (N) – items that are not issued/used for more than a particular duration.
HML Analysis
• Then, we have the HML analysis method. It is another inventory
analysis method that classifies inventory according to a product’s unit
price.
• As such, this method for inventory writes or lists down products or
items under the following classifications:
• High Cost (H) – items with high unit value.
• Medium Cost (M) – items with medium unit value.
• Low Cost (L) – items with low unit value.
SDE Analysis

• Lastly, you can use the SDE analysis method. The method classifies inventory
based on the availability (freely available or scarce) of an item. It also considers
the number of days of its lead time. Thus, this is how you classify using this type
of inventory analysis method:
• Scarce (S) – usually imported items that require longer lead time.
• Difficult (D) – items that require more than a fortnight to be available but less
than six months lead time.
• Easily Available (E) – readily available items.

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