Inventory Control & cost reduction Technique

INVENTORY CONTROL

• Inventory means --all the materials , parts, suppliers, expenses and in process or finished products recorded on the books by an organization and kept in its stocks, warehouses or plant for some period of time.

. Definition of inventory control

• Definition of inventory control is the technique of maintaining the size of the inventory at some desired level keeping in view the best economic interest of an organization.

Objectives of inventory control

Objectives of inventory control --

• Protection against fluctuations in demand;

• Better use of men, machines and material;

• Protection against fluctuations in output;

• Control of stock volume;

• Control of stock distribution.

Major activities of inventory control

.• Planning the inventories; • Procurement of inventories; • Receiving and inspection of inventories;• Storing and issuing the inventories; • Recording the receipt and issues of inventories.

Physical verification of inventories; • Follow-up function ; • Material standardization and substitution.

Inventory Decisions• Executive decide two basic issues while dealing with

inventories; • (a) How much of an item to order when the inventory of

that item is to be replenished.• (b) When to replenish the inventory of that item. • By definition, inventory facilitate production or satisfy

customer demands. Inventory system is a set of policies and controls which monitors and determines the levels of inventory..

Steps in Inventory control

• Steps in Inventory control.-- Decides the maximum- minimum limits of inventory;

• Determination of Reorder point;

• Determination of reorder quantity;.

Maximum stock level• Maximum stock level Quantity of inventory above

which should not be allowed to be kept. ----disadvantages of overstocking;

• Factors to be considered: • Amount of capital available. • Godown space available.• Possibility of loss

Minimum stock level

• Minimum stock level- This represents the quantity below which stocks should not be allowed to fall . The level is fixed for all items of stores and the following factors are taken into account:

• 1.Lead time- • 2. Rate of consumption of the material during the lead

time.

Re-ordering level

• Re-ordering level It is the point at which if stock of the material in store approaches, the store keeper should initiate the purchase requisition for fresh supply of material. This level is fixed some where between maximum and minimum level.

Economic Order Quantity

• Economic Order Quantity It is also known as standard order quantity , optimum quantity or economic lot size. By definition economic order quantity that size of order for which the total cost is minimum.

Perpetual Inventory System

• Perpetual Inventory System It is a method of recording stores balances after every receipt and issue, to facilitate regular checking and obviate closing down for stock taking.

Factors which helpful to make system successful

• Factors which helpful to make system successful –

• Stores ledger, • stores control,• cards or bin cards are properly maintained ; • Quantity balance store shown in the store ledger;• stock control and bin cards are reconciled;• Exploring the cause of discrepancies if any physical

balances and book balances.

Inventory Turnover method

• Inventory Turnover method It means how many times a company inventory is sold and replaced (finished product)

inventory turn ratio

• The inventory turn ratio lets investors calculate how fast a company is selling through its inventory and efficiently managing its resources. Discover how to calculate ...

• The inventory turnover ratio, also known as inventory turn, tells an investor how often a company sells through its inventory. Generally, the faster inventory is turned, the less risk of loss and the more efficient management is handling capital.

• Calculating Inventory Turns / Inventory Turnover Ratio

• = cost of Goods sold

Average Inventory for the Period:

• This is found on the income statement, not the balance sheet 2: Average inventory is calculated by taking the last period's inventory plus the current period inventory and dividing them by two.

Example of Inventory Turns / Inventory Turnover

• Let's look at a real world example. financial statements of Coca-Cola. The cost of goods sold is $6,204,000,000. The average inventory value between 1999 and 2000 is $1,071,000,000 (average the values from 1999 and 2000). Plug them into the formula for inventory turn. Current Year's Cost of Goods Sold of $6,204,000,000 ÷ Average Inventories of $1,071,000,000

• The answer is the number of inventory turns - in Coca-Cola's case, 5.7927. What this means is that Coca Cola sells all of its inventory 5.79 times each year. Is this good? To answer this question, you must find out the average turn of Coke's competitors and compare. If you do the research, you find out that the average turnover of a company in Coke's industry is 8.4.

standardization

Introduction—

The object of industry is to set –up economic ways and means of satisfying human wants and in so doing to reduce everything possible routines requiring a min. amount of human efforts.

standard

• A standard is defined as a model or general agreement or rule established by authority or customs and used by various levels of interest.

• Standardization– is the orderly and systematic formation ,adoption, application and review of industrial standard which leads to simplification or variety reduction.

Objectives of standardization

• 1- manufacture’s perspective.

• 2-Trader’s perspective

• 3-User’s perspective.

• 4-Social perspective

• 1- Manufacture’s perspective– Economy in manufacturing maintenance.

-Reduce time & expenses by selecting standard product technology.

2-Trader’s perspective—easy identification of suppliers,

Rationalization of product & components.3 -User’s perspective—Confidence & trust in

quality & reliability.4- Social perspective- Avoidance of wastage• Wealth maximization

Codification

• Codification is the systematic concise representation of equipment, raw materials tools, spares, supplies, etc. in an abbreviated form employing alphabets, numerical, colours, symbols. etc,

Benefits of codifications• 1- Accurate and logical identification.• 2-avoidence of long and unwieldy decryption• 3- prevention of duplication.• 4-product simplification.• 5- Efficient purchasing.• 6- Minimization of clerical work.• 7-effective stores keeping.• 8-Accurate and reliable recording accounting.• 9-Easier computerization.

Stages of Codification.• Three basic stages of scientific codification are .• 1- identification.• 2- classification• 3-Codification• 1- identification– is the process of assigning

correct nomenclature to the item-• Exp-Drill,H.S.S.Taper shank20D*std length

• 2-classification-is the arrangement of items into groups according to a pre-standard pattern

• 3-, Codification-is the allocation of specific code to the items within the broad framework of selected system

Systems of codification

• 1-Alphabetical system.

• 2- Numerical system.

• Alpha- Numerical system.

• 4- Colour coding system.

• Most popular systems are-

• 1- British sysyem.

• 2- kodak system

Value engineering and value analysis

• Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function.

• Value, as defined, is the ratio of function to cost. Value can therefore be increased

Function

• Function specifies the purpose of the product or what the product does ,what its utility with some cost or by decreasing its cost for the same function.

• 1) primary function,

• 2) Secondary function.

• 3) Tertiary function

Types of value• Cost value-It is the cost manufacturing a

product /components

• Use value -It is also be called Functional Value. It consider the work function.

• Esteem Value -it involves the qualities and appearance of a product .(Like T.V.,car)

Exchange value -A product is said to posses exchange value if the same can be exchanged for some thing else.

Aim of Value analysis

• Value analysis is a special type of cost reduction technique It critically investigate and analysis the different aspect of materials.