'Inventory Control'

1. Inventory Control
Presenter:
Shikha Basnet
MPH, 2021
BPKIHS

2. Inventory
 Inventory refers to a company’s goods and products that are ready to
sell, along with the raw materials that are used to produce them.
 Inventory is:
 An asset, tangible or intangible,
 An asset that can be realized for revenue generation or has a value for
exchange, or
 An asset which is in process but is meant for sale in the market

3. Inventory control
• Inventory control is the process of keeping the right number of parts
and products in stock to avoid shortages, overstocks, and other costly
problems.
• It focuses on cutting the number of slow-selling products a company
purchases while also increasing the number of high-selling products.
• This saves businesses time and money
• Plus, they avoid devoting precious warehouse space to hold those
products

4. Contd.
• An inventory control system also monitors their movement, usage, and
storage.
• It means managing inventory levels to ensure that we are keeping the
optimal amount of each product.
• Proper inventory control can keep track of purchase orders and keep a
functional supply chain.

7. Importance (1)
Quality control
• Having an inventory management system allows to implement greater
quality control.
• If we can track and manage all aspects of our stock, we better control
quality.
• The longer we hold inventory, the more likely it is to get damaged.
• We can avoid that by ensuring that stock gets rotated through your
warehouse.
• Inventory control also allows to track the quality of stock receive from
suppliers.

8. Importance (2)
 Organizational control
• Inventory control in terms of the organization of our stock is vital for
the proper running of our company.
• It will ensure that we have enough units to fulfill orders and have safety
stock.
• Effective inventory control will also help us to avoid having any dead
stock or overstock.
• Safety stock acts as a buffer to reduce the risk of an item being out of
stock. Dead stock is inventory that doesn’t sell.

9. Importance (3)
 Accounting accuracy
• Keeping an accurate record of inventory is vital for managing assets.
• It will also help in the event of an audit.
• Knowing what we have in assets allows us to know our overall spoilage
and understand the value of our company.

10. Challenges (1)
 Finding the time and resources
• Doing inventory management manually requires substantial resources.
• Money and staff hours are required for manual inventory control.
• However, if we do not prioritize inventory control, we will lose more
time and money later on.
• Take the time to implement a regular schedule to dedicate to inventory
control.

11. Challenges (2)
 Visibility
• Companies with large stock, complex warehousing, or that are selling
on multiple channels can have many moving parts to their inventories.
This can create challenges with visibility.
• Losing sight of inventory can lead to the degradation of inventory
quality and can lead to dead stock.
• The reports that is obtained through inventory control software systems
can help improve visibility.

12. Challenges (3)
 Human error
• Human errors are unavoidable when businesses have a constant flow of
inventory in and out of their warehouses.
• For example, vendors need to send accurate invoices and they need to
be matched with purchase orders and physical inventory. Any
inaccuracies that occur at this stage can impact inventory control.
• it can be mitigated by the optimization of inventory control system and
integrating solutions.

13. Techniques of inventory control
 ABC (Always better control analysis)
 FSN (Fast, slow and non moving analysis)
 HML (High, Medium Low cost)
 VED (Vital, Essential and Desirable analysis)
 SDE (Scarce, Difficult and Easily available analysis)

14. ABC analysis
• It is an inventory management technique where inventory items are
classified into three categories namely: A, B, and C.
• It is an inventory analysis method that categorizes items based on their
annual consumption value.
• Sometimes, inventory managers use Pareto’s Principle for classification.

15. Pareto’s theory on ABC analysis

16. ‘A’Items
 These are small in number but consumes large amount of resources
and are managed by top management.
 These items must have:
• tight control
• rigid estimates of requirements
• strict and closer watch
• require low safety stock
• Managed by top management

17. ‘B’Items
• Intermediate
• They have moderate control
• purchase based on rigid requirements
• Reasonably strict watch and control
• moderate safety stocks
• manage by middle level management

18. ‘C’Items
• Large in number.
• Consumes lesser amount of resources
• Have ordinary control measures
• Purchase based on usage items
• High safety stocks

20. FSN analysis
 It classifies inventory based on quantity, consumption rate, and
frequency of issues and use.
 For analysis, the issuing of items in past two or three years are
considered.
Fast Moving (F) – items that are frequently issued/used. Good control
Slow Moving (S) – items that are issued/used less for a certain period
(10-15 issues)
Non-Moving (N) – items that are not issued/used for more than a
particular duration.
 However the period of consideration and limited no. of issues vary
from organization to organization.

21. HML analysis
 Based on cost per unit
 This is used to keep control over consumption at departmental level for
deciding the frequency of physical verification.
 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.

22. VED analysis
 It is a subjective analysis based on critical value and shortage cost of
an item.
 It is an inventory analysis method whose classification is dependent on
the user’s experience and perception.
 It classifies inventory according to the relative importance of certain
items to other items, like spare parts.

23. • Vital: Shortage cannot be tolerated.. E.g.: O2 supply. These are stored
adequately to ensure smooth operation.
• Essential: Shortage can be tolerated for a short period. Without which
institution can function but may affect the quality of services. E.g.:
antibiotics, IV fluids etc. These items should be sufficiently stocked to
ensure regular flow of work.
• Desirable: Shortage will not adversely affect the functioning because
they can be easily purchased as and when required. They may be
stocked very low or not stocked as well.

24. SDE analysis
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.
Scarce (S) – those which are difficult to obtain generally imported, and
those which are in short supply. Managed by top level management. A
big safety stock is maintained for such items. usually imported items
that require longer lead time.
Difficult (D) – Difficult items, which are available indigenously but are
difficult items to procure. Items which has to come from distant places.
A safety stock is maintained for this items. items that require more than
a fortnight to be available but less than six months lead time.
Easily Available (E) – which are easy to acquire and which are readily
available in the local markets. The supply exceeds the demand. A
minimum safety stock is maintained.

25. Reference
• https://www.investopedia.com/terms/i/inventory.asp
• https://www.zoho.com/inventory/guides/inventory-definition-meaning-
types.html
• https://www.fishbowlinventory.com/solutions/inventory-control
• https://efinancemanagement.com/costing-terms/inventory-management-
techniques
• https://www.syntacticsinc.com/news-articles-cat/inventory-analysis-methods/
• https://www.netsuite.com/portal/resource/articles/inventory-
management/inventory-management-inventory-control.shtml

27. EOQ (Economic order quantity)
• The economic order quantity (EOQ) refers to the ideal order quantity a
company should purchase in order to minimize its inventory costs.
• A company's inventory costs may include holding costs, shortage costs,
and order costs.
• The economic order quantity (EOQ) model seeks to ensure that the right
amount of inventory is ordered per batch so a company does not have to
make orders too frequently and there is not an excess of inventory
sitting on hand.
• EOQ is necessarily used in inventory management, which is the
oversight of the ordering, storing, and use of a company's inventory.

28. Formula

29. • Setup costs refer to all of the costs associated with actually ordering the
inventory, such as the costs of packaging, delivery, shipping, and handling.
Demand rate is the amount of inventory a company sells each year.
• Holding costs refer to all the costs associated with holding additional inventory
on hand. Those costs include warehousing and logistical costs, insurance costs,
material handling costs, inventory write-offs, and depreciation.
• Ordering a large amount of inventory increases a company's holding costs
while ordering smaller amounts of inventory more frequently increases a
company's setup costs. The EOQ model finds the quantity that minimizes both
types of costs.

30. Example
• For example, consider a retail clothing shop that carries a line of men’s
shirts. The shop sells 1,000 shirts each year. It costs the company $5 per
year to hold a single shirt in inventory, and the fixed cost to place an
order is $2.
• The EOQ formula is the square root of (2 x 1,000 shirts x $2 order cost)
/ ($5 holding cost), or 28.3 with rounding. The ideal order size to
minimize costs and meet customer demand is slightly more than 28
shirts.