INVENTORY AND CONTROL
Inventory is the physical stock of items held in any business for the purpose of future production or sales. In a
production shop the inventory may be in the form of raw materials. When the items are in production process, we
have the inventory as in-process inventory and at the end of the production cycle inventory is in the form of finished
goods. We shall be dealing only with the finished goods inventory. The problem of determining inventory policies is
not a new concept beginning. It is only in he last two decades that it has been tackled with quantitative techniques
and mathematical models, a method amenable to optimization.
Inventory planning is the determination of the type and quantity of inventory items that would be required
at future points for maintaining production schedules. Inventory planning is generally based on information from the
past and also on factors that would arise in future. Once this sort of planning is over, the control process starts,
which means that actual and planned inventory positions are compared and necessary action taken so that the
business process can function efficiently.
In inventory control, we are primarily concerned with the inventory cost control. The aim is focussed to
bring down the total inventory cost per annum as much as possible. Two important questions are (1) how much to
stock or how much to buy and (2) how often to buy or when to buy. An answer to the above questions is usually
given by certain mathematical models, popularly known as ‘economic order quantity models’ or ‘economic lot/batch
size models (E.O.Q.).’
INVENTORY COSTS
There are four major elements of inventory costs that should be taken for analysis, such as
(1) Item cost, Rs. C1/item.
(2) Ordering cost, Rs. C2/order.
(3) Holding cost Rs. C3/item/unit time.
(4) Shortage cost Rs. C4/item/Unit time.
Item Cost (C1)
This is the cost of the item whether it is manufactured or purchased. If it is manufactured, it includes such
items as direct material and labour, indirect materials and labour and overhead expenses. When the item is
purchased, the item cost is the purchase price of 1 unit. Let it be denoted by Rs. C1 per item.
Purchasing or Setup or Acquisition or Ordering Cost (C2)
Administrative and clerical costs are involved in processing a purchase order, expediting, follow up etc., It
includes transportation costs also. When a unit is manufactured, the unit set up cost includes the cost of labour and
materials used in the set up and set up testing and training costs. This is denoted by Rs. C2 per set up or per order.
Inventory holding cost (C3)
If the item is held in stock, the cost involved is the item carrying or holding cost. Some of the costs
included in the unit holding cost are
(1) Taxes on inventories,
(2) Insurance costs for inflammable and explosive items,
(3) Obsolescence,
(4) Deterioration of quality, theft, spillage and damage to times,
(5) Cost of maintaining inventory records.
This cost is denoted by Rs. C3/item/unit time. The unit of time may be days, months, weeks or years.
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