tools and techniques of inventory management

8/18/2019 Tools and Techniques of Inventory Management

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Tools and Techniques of Inventory Management The various concepts of inventories like inventory: amajor cost component, lead time inuences on inventoriesand productivity of inventories have been discussed in thefth chapter. The basic problem of inventory management is to strikea balance between the operating eciency and the cost of investment and other associated costs with largeinventories, with the object of keeping the basic conictsat the minimum while optimiing the inventory holding.l Thedecisions as to which item to make and when to keepinventories in balance re!uire application of a wide rangeof techni!ues from simple graphical methods to moresophisticated and comple" !uantitative techni!ues. #any of these techni!ues employ concepts and tools of mathematics

and statistics and make use of various control theories fromengineering and other elds. They are primarily aimed athelping to make better decisions and getting people employedand follow a wiser policy.$nventory #anagement Techni!ues%arious techni!ues applied for inventory management areas follows:&'(&)(&*(&+(

&(&-(&(&/(&'(0elective $nventory 1ontrol0etting of %arious 0tock 2evels0ystems of $nventory 1ontrol3conomic 4rdering 5uantity or 3.4.5. 6ormula7e8order 9oint and 0afety 0tock

pplication of 1omputers for $nventory ;ust8in


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&f(&>(&h(.?.1. nalysis@.#.2.

A5B5C5nalysisnalysis%.3.D. nalysis6.0.E. nalysis0.D.3. nalysisF.4.2.6. nalysis0.4.0. nalysis. Table -.'1lassication of $nventories0'.Eo. T i t l e ? a s i s #.a i n u s el.).*.+.. G -../...?.1.

&lways?etter1ontrol(@.#.2.&@igh, #edium2ow(A.B.C.%$3$D$&%ital, 3ssentialDesirable(6.0.E.

&6ast moving,0lowHmoving,Eon8moving (0.D.3.&0carce,Dicult,3asy to obtain(F.4.2.6.&Fovernent $4rdinary, 2ocal,

6oreign 0ources(0.4.0.


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&0easonal,4=


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agricultural products0ource 0andilya, #.0. and Fopalakrishnan, 9., lnventoryG #anagement Te"t andKgases &Delhi: #ac#illan $ndia 2imited, '>/'( p.l'- The motive behind the above analyses and

classications is to tackle important aspects morerigorously. #oreover, an e!ually critical analysis of allitems will be very e"pensive and will have a di=used e=ectregardless of priorities. Table -.' shows the availableclassications, their bases and their uses..?.1. nalysis The method follows the general principles of 9areto&Lilfredo 9areto, $taly, '/>-( that Min any series of elements to be controlled, a selected small fraction interms of numbers of elements would always account for alarge fraction in terms of e=ect.M* Lith some practices,the limits of HH, N?O and H1H can be easily determined by a9areto nalysisP namely HH items do not e"ceed more than Qper cent of the investment, N?O items account for only amoderate share, and H1H items for less than 'Q per cent of total investment. The .?.1. nalysis is a rational approach fordetermining the degree of control that should be e"ercisedon each item in inventories. 4bviously, HH class itemsshould be subjected to strict management control undereither Hcontinuous review or periodic review with short

review cycles. H1H class items re!uire little attention and HRcan be relegated down the line for periodic review say, justonce a year. 1ontrol over H?H class items should besomewhere in8between. The method of .?.1. classication for managinginventories has been adopted in the public sector electricalindustrial units in Serala. $nventories of theseundertakings are classied into various categories on thebasis of their importance, namely their value and fre!uencyof replenishment during a period. 4ne category called groupNO items, consists of only a small percentage of the total

items handled but has a combined value that constitutes amajor or large portion of the total stock holding of theconcern. The second category consisting of group H?H itemsis relatively less important. The third category consistingof H1H items is of least importance, i.e., the groupconsists of a very large number of items, the value of whichis not very high..?.1. nalysis of I3$6or the purpose of .?.1. classication of inventoriesand the method of control to be adopted for each category of

items, the company rst of all lists out all the items of inventory and values of each item. The value is obtained by


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multiplying the average annual consumption of an item during'Qa period by its unit cost. The items in the list are thenrearranged in the descending order of their valuesirrespective of their !uantities. Thus )QQ kg. of an item

valued at m.),QQ,QQQJ< should be ranked earlier than)Q,QQQ kg. of another item, the value of which is#.l/,QQQJ


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QQ,QQQQQ,QQQQQ,QQQQQ,QQQ*,QQQ

),QQQ',QQQQ,QQQ-/,QQQ'+,QQQ'+,QQQ'*,QQQ'),QQQ'',QQQ0ource: nnual 1onsumption 6ile, I.3.$.') Table -.*.?.1. nalysis of Inited 3lectrical $ndustries 2imited1lass Eu&mbe or fo ft o$tteaml( %&alu oef o tfo $ttaelm( ?1 )'QQQ '/Q0ource: nnual 1onsumption 6ile, I.3.$. Table -.* is depicted graphically in 6igure -.'.&)( 0etting of %arious 0tock 2evels The various stock levels "ed for e=ective managementof inventories are ma"imum level, minimum level, ordering orreordering level and danger level. These levels serve as

indices for initiating action on time so that the !uantityof each item of material, i.e., the inventory holding iscontrolled.0tock levels are not "ed on a permanent basisbut are liable to revision in accordance withthe changes in the factors determining the levels.'*6igure -.U ? 1 nalysis in I.3.lVG N/1a , -> &Q 46 $T3#0 < 46 %2I3(W N5O &)Q 46 $T3#0 < ' 46 %2I3(

&'Q 46 $T3#0 < /Q 46 %2I3(Q QT ' X'XXXQ X T)X H OQ O O H *'XOQMX * +6 'Q H H O O O QO H O O- O O QO OM ' O OQ H OO /O O OQ O O O> O H QO O O 'O N OQM MQH'93713ETF3 46 $T3#0'+' The formulae used for "ing various levels are:#a"imum 2evelY 7e


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obtain delivery#inimum 2evelY 7e


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supply !uantity plus one or two months consumption &to allowfor receipt of the phased supply arriving ahead of thee"pected time or before the stock reaches the minimumlevel($f the actual stock of any item e"ceeds the ma"imum

level then the ne"t phased supply is deferred or revoked asfound necessary.6ormula used for "ing ma"imum level is0min Y &1ma" " 2ma"( Z 5a Z ?Lhere0min #inimum stock1ma" #a"imum consumption per month2ma" #a"imum lead time5a Y 5uantity receivable forGphased supply against annualindent.? Y 3"tra !uantity to be provided for special indent.&c( #ean 2evel#ean level is the average of ma"imum and minimum stocklevels. $n I3$ in the case of N?O items a review of thene"t phased supply is made when stocks in hand touch thismean level and necessary action is taken as follows:&i( $f the stocks are not ade!uate to meet the re!uirementstill the e"pected time of receiving the ne"t phasedsupply, the ne"t phased supply will be advanced ore"tra !uantity will be procured by special indent.'

&ii( $f the receipt of the ne"t supply is likely to resultin e"ceeding the ma"imum level, the ne"t supply will bedeferred or the !uantity reduced. $t is found thatstock levels are "ed for all the stores items on thebasis of anticipated annual consumption by ;anuary of every year. The formula used for "ing mean level is:0ma" Z 0min 0con Y


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The control of inventories while in storage is e=ectedthrough what is known as the perpetual inventory. Thus thetwo main functions of the perpetual inventory are:+&i( 7ecording store receipts and issues so as to determineat any time the stock in hand, in !uantity or value or

both, without the need for physical count of stock.&ii( 1ontinuous verication of the physical stock withreference to the balance recorded in the storesrecords, at any fre!uency, as convenient for themanagement.$n S32, T32S and I3$, a senior clerk is responsible tothe cost accountant for organising perpetual verication of the stores. %arious stocks which come under .?.1. classesare checked in the following ways:1lass HH items 8 Three times per year1lass H?H items < 4nce a year1lass H1H items 8 4nce in every two years.?ut in the #etropolitan 3ngineering 1ompany 2imited andthe Traco 1able 1ompany 2imited, the assistant productionmanager is responsible for organising perpetual vericationof the stores. %arious stocks of these units that comeunder .?.1. classes are veried in the following manner.'>1lass NO items < Two times per year1lass H?H items < 4nce in every two years1lass H1H items < 4nce in every three years.

9hysical verication of an item is carried outwhen the stock is at minimum so that the !uantitychecked is as small as possible. The programme forverication is arranged in such a way thatphysical checking is carried out just prior to the ne"tanticipated phased supply. Lhenever feasible, incomingsupplies are stored and stocked separately and will not beissued out until the earlier stocks are completelye"hausted.9erpetual inventory system consists of:&i( ?in cards

&ii( 0tores ledger, and&iii( 1ontinuous stock taking.&i( ?in 1ards?in cards are printed cards used for accountingstock of materials in store. 6or every item of materials separate bin cards are kept by the concerns&6igure -.)(.'/Q

Details regarding the material such as name of

material, part number, date of receipt and issue, referencenumber, name of supplier, !uantity received and issued,


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value of material, rate, balance !uantity etc., are recordedin the bin cards. The bin cards are kept in the binserially according to part number of the component. t theend of the nancial year the balance !uantity in the bincards is taken as closing stock, and it is valued at rates

in the bin cards.?in 1ard %aluation0tocks in the public sector electrical industrialunits in Serala are valued under the weighted averagesystem. $n this system, the average rate of the item isarrived at by taking into account the value of previousstock. The !uantity of the previous stock is added to thereceipt. The total value of the previous stock and newreceipt is divided by the total !uantity. The resultantgure is the weighted average rate of that item, i.e.,Leighted average%alue of stock in hand Z %alue of the materials receivedJpurchasedm5uaatenrtiiatyl ionf Z 5uantity of material receivedJpurchasedhand'/)&ii( 0tores 2edger2ike bin cards, stores ledger is maintained torecord all receipts and issues in respect of materialswith the di=erence that along with the !uantities,the values are entered in the receipt, issue and

balance columns. dditional information as noted in the bincards regarding !uantity on order and !uantity reserved,together with their values may also be recorded in thestores ledger.&iii( 1ontinuous 0tock Taking The perpetual inventory system is not complete withouta systematic procedure for physical verication of stores. The bin cards and stores ledger record the balances buttheir correctness can be veried by means Gof physicalverication only. There is a proper procedure for the physical

verication of stocks in the public sectorelectrical industrial units in Serala. The e"cessJshortage found in the verication is reported tohigher authorities for action and to avoid di=erences instock.'/*$n the uditors 7eport for the nancial year'>>Q', it is recorded that Mthe procedures of physicalverication of stocks followed by the management arereasonable and ade!uate in relation to the sie of

the undertakings and the nature of its &sic( business. The discrepancies as shown by the records, between the


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physical stocks and the book stocks, which were notmaterial, have been properly dealt with in the books of account.M 9hysical %erication 7eport$t is necessary to record the result of stock

verication in a separate record or report &6igure -.*(. These reports are maintained date


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avoids the necessity of taking physical inventories as inthe case of perpetual inventory system. 0ince thestorekeeper knows automatically when to initiatereplenishment action, this being the time when he is forcedto dip his hand into the minimum stock bin.

$n the "ed order !uantity or double bin system, thereis built


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consumed by the time the newshipment arrives. The amount of safety stock at the time of receiving fresh supplies will be 'QQ units. The safetystock will be largely eaten up but there will be no stockout.

'//6igure -.+Double ?in 0ystem in S32'/>3A931T3D #4ET@2B I0F3 Y )QQ IE$T0 23D T$#3 Y * #4ET@0$)QQ 73 < 47D37 5IET$TB 23%32 Y $QQQ IE$T0'QQQ[[\-Q73Q


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vi., the set up costs, ordering costs and carrying costs This is known as 3conomic 4rder 5uantity &345( 0!uare7oot 6ormula, developed by 7.@. Lilson around the thirtiesand may be modied according to necessity345 or D

Lhere 5 :a Y1 YD Y This can be veried with reference to the following)5&a(cnnual re!uirement in unitsInit cost of placingnnual carrying cost4ptimum lot !uantity or batch sietable assumptions:1ost of each article is one rupee nnual demand+Q,QQQ units. 1ost of carrying inventory is )Q per cent1ost per order is V.'QJ


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)Q ),QQQ) ',-QQ*Q ',***@olding)Q,QQQ

'Q,QQQ-,--,QQQ+,QQQ),QQQ',**+',QQQ/QQ--$nventory 4rdering Total1arrying 1ost &7s . ( 1ost1ost &m.(+,QQQ),QQQ',***',QQQ/QQ+QQ)-)QQ'-Q

'**&7s.('Q)Q*Q+QQ'QQ'Q)QQ)Q

*QQ+,Q'Q),Q)Q',*-*',Q+Q/QQQ+'+QQ+'Q

+**iiN


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The graphical presentation of the behaviour of orderingand carrying costs is shown in 6igure -..'>)6igure -.?ehaviour of 4rdering and 1arrying 1osts

$D32 47D37 0$C3 T4[T2 140 T JNR177B$EF 140T G ; 47D37$EF 140TQ 'QQ $Q )QQ )Q *QQIE$T0 937 47D37'>*&( 7e


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consumption.&1(&d($mportance of the item in the manufacturing programme.6re!uency of the suppliers not honouring commitments on

delivery.&e( 0tock out cost.0afety stock level can also be determined throughstatistical formula, although there is a good deal of controversy regarding its outright application. There aretwo commonly employed probability apprdaches to inventorycontrol in which demand varies. They are: .&a( 6i"ed 5uantity8%ariable 1ycle 0ystem, and&b( 6i"ed 1ycle8%ariable 5uantity 0ystem.'>6i"ed !uantity8variable cycle system considersbuying a "ed lot sie at varying intervals. The "ed !uantity may be determined by the use of the 345 formula. This approach is most often used formedium and low value items, where lesser control isallowable.6i"ed cycle8variable !uantity system is followed forcontrolling of high value, critical and rapidly depreciableinventory items where close control is a must. Inder thissystem, it is necessary to vary the lot sie as demandchanges, while keeping the interval for placement orders

constant.6igure -.- demonstrates how inventory should uctuatewhen forecasts of lead time and usage are accurate. Lhenstock level reaches the order point N9O, the !uantity to beordered is H5H. $t arrives e"actly when stock reachesNeroO balance. The ma"imum stock, therefore, is N5O andthe minimum stock is NCeroO. $n such ideal conditions,there would be no fear of shortages and no need for safetystocks. "ed amount would be re8ordered at "edintervals.'>-

+, ' GGlOG #A$#I# 0T41S &5(R W]R6igure -.-6luctuation of R ]# + in ]i#^] _EE] ^ ]RR #$E`#I# 0T41S C & 374(

T$#3$nventory


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47D37 23%32'>&-( pplication of 1omputers for $nventory The scope of application of computers in areas likeinventory management is really immense. ?ut very few of the

public sector electrical undertakings in $ndia have appliedthe computer for inventory management and other decisionmaking purposes. The bulk of the applications are in theareas of mundane pay>

;$T as a philosophy has apparently worked well in ;apanese manufacturing conte"t but its applicability in


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the public sector electrical industrial units in Seralaneeds to be investigated.ll The basic principal of thisphilosophy is to produce at each manufacturing stageonly the necessary products at the necessary time inthe necessary !uantity to hold the successive

manufacturing stages together. $t provides asmoother production ow with the goal to achievea single unit lot sie. n organisation cannot adopt ;$T in isolation from its environment


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highlight troublespots are used.a. $ndian workers3very man forhimself thinking.

Isually does notidentify himself with the company,comparative lack of motivation.2iteracy low.0pecialisedworkers.b. $nteraction betweenthe people atvarious levels.%ery less automationP1DJ1# roboticslargely absent.Froup Technologyabsent. These techni!uesabsent.Eot used*. 5uality1ontrol

+. 9roduction#anagement. 9roductand its%alue0ource: 9renlvrat, 0aurabh.#ittal and Savi Tyagi, M$mplementation of G ;$T in $ndian 3nvironent: .Delphi 0tudy,M 9roductivity1ompanies have thereown tocl makers tobuild machines.4rderliness,

cleanliness andarrangement practised5uality at the source,defect prevention.Lorkers and 6oremenhave primaryresponsibility for!uality.'QQ !uality present.Sanban &9ull 0ystem( .

9reventive maintenance9roduction line slow


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up for !ualityproblems, speed upwhen !uality is right1ustomer orientedproduct, provides real

value.?elief in large termgains, low protmargin.#achines brought fromoutside usually onthe basis of what isavailable.1omparatively untidyand disorganised.0tatistical samplingafter lot has beenproduced, defectdetection.5uality is theresponsibility of 5uality 1ontrolDepartment.bsent.#79 &9ush 0ystem( .'QQ preventive

maintenance absent.9roduction line runsat "ed rateP !ualityproblems are sent o= line.7 D lacking, productdesigns depend uponwhat is availablerather than what thecustomer demands.0trive for shorter

term gains.%ol. *+, Eo. ), ;uly80ept. '>>*: p.).)Q) The various problems identied and imperative to betackled in the public sector electrical industrial units inSerala for the implementation of ;$T are:&a(&b(&1(&d(

7eduction of set


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Delivery &from vendor( of e"act !uantity on e"act time9reventive maintenance, and&e( Froup technology.ll these problems can be tackled only with a veryserious planned e=ort. Lorkers motivation and literacy

need to be enhanced. These are important for reducingset


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stores and spare parts&e( loose tools and others, and&f( by8products and scraps.$nventory audit of an industrial unit is to be chalkedout with the following programmes &6igure -.(:

&a(&b(&c(&d(uditing the process of manufactureudit of raw materialsudit of stores and sparesuditors observations and conclusions.&a( uditing the 9rocess of #anufacture The cost auditor should be aware of thetechnical aspects of the process of manufacture of the main products and by8products and scraps of the industrial unit under audit. @e should accountthe cost aspects involved in the process of manufacture and try to evaluate the possibility of e=ecting economy of the costs involved in the process of manufacture.)Q6 igurc -.$nventory udit 9rogramme$E%3ET47B

ID$Tm9fagnceusfsa 5cft u7ragw 0 mpa/tefr/ia lpsa 0rttQs$ H/40b a0nd>lH%I/ditti44lMl0H'and conclusioni]wH_G_X8 n S ' m88_8lHGL Niiii L$Hk NiM^H p ro$gre ss i6in isshed cgoodrs ?aymproducsts a nd$0ource />: 9+>+)Q-&b( udit of 7aw #aterials

The cost auditor should ascertain whether theindustrial unit follows standard purchase procedure forpurchasing of raw materials. The cost of major rawmaterials consumed both in terms of !uantity and valueshould be technically evaluated with similar rms in theindustry. This will bring into light the ways and means of utilising scarce resources in a fruitful manner. The!uantity and value of imported and indigenous raw materialsused in the manufacturing process andJor production purposesmay be reviewed and the usage of main raw materials should

be evaluated. The non


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be seriously viewed and a report covering all the aboveaspects is to be prepared.&c( udit of 0tores and 0pares The procurement and utilisation of stores and spareparts should be carefully gone through for e=ecting

savings. The movement of stores and spare parts atdi=erent intervals should be audited. $t should beascertained whether scientic method of procuring isfollowed. The non

tools and techniques of inventory management

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