Inventory Control: Functions, Terms and Advantages (2024)

After reading this article you will learn about:- 1. Causes of Poor Inventory Control 2. Functions of Inventory Control 3. Terms and Definitions 4. Advantages.

Causes of Poor Inventory Control:

1. Over buying without consideration of demand estimates in order to take advantage of favourable market conditions leads to poor control.

2. Over production or keeping inventory stocks of finished products without consideration of customer requirements.

3. In order to provide quick and better service to consumer over stocking may take place. Also to cut down the cost of production, bulk production will result in huge inventories both these shall lead to poor inventory control.

4. Cancellation of orders may also give rise to large inventories thus may result in poor inventory management.

Functions of Inventory Control:

The functions of inventory control are listed below:

1. To Develop Policies, Plans and Standards Required:

So as to achieve the inventory control objectives.

2. Effective Running of Stores:

This may include problems of layout, utilization of storage space, issuing and receiving procedures of items kept in stock.

3. Technological Responsibility for the State of Different Materials:

This may include the method of storage, maintenance procedures, studies of deterioration and obsolete materials and corrective action required.

4. Stock Control System:

This includes purchase procedures of materials, ordering policies, physical verification and records of items stored.

5. To Ensure the Timely Availability:

Of requisite input materials and avoid building up of stock levels of final product.

6. Maintenance of Specified Inputs:

Specified raw materials, finished components/parts work m process, general supplies in sufficient quantities are maintained to meet the production requirements of the enterprise.

7. Protection of Inventories:

The inventories are to be protected from improper material handling; wrong and unauthorized removal from the stores.

8. Pricing:

Pricing of all input materials being supplied to various shops is essential for further cost estimation of final products.

Terms and Definition in Inventory Control:

(i) Demand:

It is the number of items required per period. The demand is the most critical, yet an uncontrollable component, without demand there would be no need for maintaining inventory.

(ii) Lead Time:

It is the time between placing an order and its receipt in stock. It may be assumed deterministic or probabilistic depending upon the reputation of supplier or his past behaviour.

It is the period that elapses between placing an order and receiving the same. These can be classified as administrative lead time, transporting lead time and inspection lead time. Consideration of lead time is one of the important factors to be taken into consideration in inventory control.

(iii) Quantity Discount:

It is an allowance granted by the vendor to the purchaser of the materials for encouraging large size orders. Sometimes there is an agreement between the vendor and the purchaser that quantity discount will be allowed by the vendor on purchase of certain specified quantity of items.

This is allowed by a supplier on account of the savings in his cost which arise from production on a mass scale and distribution on to the purchaser by means of a quantity discount.

(iv) Safety Stock:

It is also known as minimum stock level of material/items below which the actual stock should not be allowed to fall. This much quantity of material pertaining to a particular item must be kept in stores all times. The fixation of this level acts as safety measure and hence, it is also known as “Safety Stock’ or ‘Buffer Stock’.

In case the actual stock falls below this level, there is a danger of interruption in production and the management has to give top priority to the acquisition of its fresh supplies. The main objective of fixing the minimum level of materials is to ensure that required quantity of various input materials are available in stores at all times.

The main factors which are taken into account in fixing the level are:

(a) The average rate of consumption of materials during production.

(b) The time required to obtain fresh supplies under top priority conditions.

(c) Reorder level/point.

(d) The production requirements of materials.

(e) The minimum quantity of materials which could be produced advantageously.

For calculating minimum or safely stock level, the following formula is applied.

Minimum Stock Level = Reorder Level – (Normal Consumption x Normal delivery time)

For example. Normal Consumption = 300 units per week.

Normal delivery time = 7 weeks. Reorder level = 2800 units per week

By putting the values in the above formula

Minimum stock level = 2800 – (300 x 7)

= 2800 – 2100 = 700 units.

(v) Lot Size & Economic Ordering Quantity (EOQ) or Economic Lot Size (E.L.S.):

The amount of material procured or quantity produced during one production run by an enterprise is known as lot size. The quantity to be ordered depends upon a number of factors. It is evident that with increase in inventory size, expenditure on storage, deterioration and spoilage of goods obsolescence etc. is likely to increase whereas expenditure on setting up of the plant, procurement of materials etc. will decrease.

Thus with lot size, there are two sets of factors having opposite contributions towards the expenditure i.e. one encourages the lot size and other discourages. The total cost related with particular lot size is a combination of expenditures on all these factors as is illustrated in Fig. 12.1.

Total Cost = Materials Cost + Cost due to factors whose cost increases with lot size + Cost due to factors whose cost decreases with lot size.

The lot size for which the total cost per period is minimum is known as economic lot size or economic order quantity i.e. E.L.S. or EOQ.

Advantages of Inventory Control:

A properly planned and administered system of inventory control shall provide the following advantages:

Improvement in Customers Satisfaction:

This may be achieved through quick and reliable delivery service which in turn results from:

(i) A maintenance of better inventor stock of finished products in hand.

(ii) Better geographical development of field warehouse for inventories of finished goods.

Improved Manpower Management:

This results from a greater leveling of production peaks and depth and with the consequent improvement in employment stability.

Improvement in Effectiveness of Key Personnel:

(i) The time spent in expediting critical input/raw materials, corrective action in continuous production processes, tackling the serious back order problems with important customers by personnel are saved if effective inventory control is employed.

(ii) The effectiveness of field salesmen is also improved due to reduction in the amount of time spent in pacifying and satisfying the customers.

Reduction in Manufacturing Costs:

A well planned inventory control system can lead to reduction in manufacturing costs by:

(i) Proper utilization of man power and other infrastructural facilities through elimination of idleness caused by shortage of input materials.

(ii) By adopting economical production runs in place of batch or job order manufacturing.

(iii) By minimizing machine down time caused by shortage of maintenance and repair inventories.

(iv) By minimizing inventory losses which may result from decline in market value, pilferage, spoilage, deterioration of the products.

(v) Better utilization of available materials by providing inter-departmental transfer of materials.

(vi) By having proper check on material requirements, duplications of orders can be avoided resulting in reduction of materials costs.

(vii) Reduction of inventories leading to decrease in inventory holding costs.

Strengthening the Financial Position:

Sound inventory control shall lead to preservation of more liquid working capital position and reduction in overall capital requirements for field warehouses other storage facilities and for plant and machinery to meet peak production requirements.