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Inventory Definition

Stock or inventory refers to the products and resources that a company is able to store for the purpose of resales, production, or use. The management of inventory focuses on defining the form and arrangement of the stocked items.

Classification of Inventories:

Inventories are classified as follows:

  1. Direct inventories
  2. Indirect inventories

1. Direct Inventories:

These inventories play an integral part in the production of a product and eventually are a vital component of the final product.

Direct inventories are of different kinds:

(a) Raw Materials:

These are the primary materials that are used to make components, parts, and even products made by companies.

(b) In-Process Inventories (Work in Progress):

They are semi-finished items at different stages of manufacturing. Raw materials become work-in-progress at the end of the first process and stay that way until they become piece parts or finished goods.

(c) Purchased Parts:

These are the components, sub-assemblies, completed parts, and so on, bought from outside suppliers.

(d) Finished Goods:

These are the products of the process of production and are the final (final) items ready for delivery to customers.

2. Indirect Inventories:

They are the materials that aid in the transformation of raw materials into the final product but don't become an integral part of the end product.

Indirect inventories are further categorized as:

(a) Tools:

These could be (i) common tools such as drills, lathes, taps, milling cutters, etc., or (ii) hand tools, such as chisels, files, pliers, spanners, hand saws, and so on.

(b) Supplies:

These are the components that are used in the running of equipment, machines, or plants. However, they do not go into the finished product.

These could be:

(i) Consumables, such as Broom, cotton waste, etc.

(ii) Materials used for welding

(iii) Materials that are abrasive like emery cloth, sandpaper, etc.,

(iv) Brushes

(v) Supplies for general office use

(vi) Oils, greases, and other fluids.

(vii) Printing forms and other forms

What Is Inventory Management?

The management of inventory helps businesses determine the quantity and type of inventory to order at a given point. It monitors inventory from purchase until the time of sale of goods. The process identifies and responds to changes in the market to ensure that there is plenty of stock to satisfy the demands of customers and to provide proper warning of an inventory shortage.

Inventory Definition

Once it is sold, inventory transforms into revenue. Before it is sold, inventory (although classified as an asset in the balance sheet) ties up cash. So, too much inventory is costly and can affect the flow of cash.

One measure of good inventory management is the turnover of inventory. A measurement in accounting that measures inventory turnover is the frequency at which the stock is sold over the course of time. A company doesn't need more inventory than sales. A low turnover of inventory can cause deadstock or stocks that are not sold.

What is Inventory Control?

It can be described "as the systematic location storage and recording of goods in such a way that desired degree of service can be made to the operating shops at minimum ultimate cost."

The Need for Inventory Control

The purpose of inventory control is to keep an inventory (store) of items that will allow manufacturing according to the plan of production in accordance with sales requirements and at the least possible final cost.

Incorrect inventory control can cause losses. These are a result of purchases that exceed what is required, as well as the costs of production slowing down from the material not being in stock at the time needed. Every time a machine is shut down because of a shortage of materials, or every time a sale is postponed or canceled due to a lack of goods that are finished. This means that a business is unable to make money.

In order to ensure a smooth operation of the factory and to avoid the accumulation of inventory or idle machine time, the right amount of material should be available at the time it is required. An effective inventory control system can limit these losses to a significant extent.

Functions of Inventory Control

The following are the most significant functions of Inventory Control:

(a) To Run the Stores Effectively: It includes the layout of storage media (bins or shelves), open spaces, the use of storage space, receiving and issuing procedures, and more.

(b) To ensure the timely availability of materials and prevent the accumulation of stock levels.

(c) Technical Responsibility for the State of Materials: This covers methods of storage and analyzing maintenance procedures and research studies on deterioration and obsolescence.

(d) Stock Control System: Physical verification (stock-taking) records, purchasing policies, and procedures for purchasing products.

(e) Maintaining the specified raw materials, general supplies, work-in-process, and components in sufficient quantity to satisfy the demands of production.

(f) Protection of the Inventory from loss due to incorrect handling and storage of products and their unauthorized removal from the stores.

(g) Costing all the materials that are supplied to shops to determine the cost of materials.

Essential Steps in Inventory Control

It is vital that all the materials needed to be available when needed and equally vital that hat no more stores shall be carried as is necessary. The maximum and minimum amounts of each store should, accordingly, be determined with great attention. Most of the time, the limits are determined only through knowledge and observation. It has been observed that this leads to an enormous reduction in stock.

Elective Techniques of Inventory Control

(1) A-B-C Control Policy

It's difficult and expensive to devote an equal amount of attention to every item in the inventory. The A-B-C method is designed to provide an inventory control that is relative. In this way, the greatest attention is given to items that use the most money, and also, a reasonable amount of attention could be paid to items of medium value, and the focus on items of lower value items can become a routine process only. This strategy can also be utilized in different aspects of the management of materials.

If all the items in the company's store are analyzed by the annual consumption of each item in rupees, it can be seen that close to 10% (sometimes even less) of the items make up about 70% of total annual consumption costs. , about 20% of the items will require about 25% of the total cost of consumption, and the remaining 70% of the items will only require 5% of the total annual consumption cost.

The first category, a small number of items with high consumption costs, is called item A; the second category is an item with average consumption value called B-items, while the third category, i.e., a large number of items with low annual consumption costs, is C-items.

It should be clarified that the A-B-C analysis does not depend on the unit price of the commodity but on its annual consumption. Furthermore, it is also made clear that it does not indicate the importance of any item or category and that each item is of equal importance.

For example, when installing a large rupee slush machine, some foundation bolts (costs can be as little as Rs.100 or 200) are not available in stores, so this machine will not be able to be erected. So these bolts are as important as the machine even though one is type A and the other is type C.

A-B-C analysis is a fundamental materials management technique and can be applied to most aspects of materials management, such as purchasing, sales, inspection, inventory control, and warehouse keeping. , etc.

Thus, we see that the policy of controlling factors A, B, and C is based on two principles, which are:

(i) Keep fixed capital and inventory as low as possible,

(ii) Ensure that all documents are available when needed. Control policies based on these two principles are described below.

Policy for category A:

(i) Since these items represent 70% of the total value, they should therefore be ordered more often but in small quantities to always reduce the capital tied up.

(ii) The demand for these items must be planned in advance for expected future consumption, such that only the required quantities arrive just before they are required for consumption.

(iii) The purchase of items in the A category must be reviewed by senior management executives in the purchasing department.

(iv) Since A items should be stocked as little as possible, maximum efforts should be made to expedite delivery. Delivery within a specified order period must be adhered to so that the A items are always being cleared out.

(v) Two or more suppliers for each item can be hired to eliminate dependence on one supplier to avoid supply failure. This will ensure the timely delivery of products.

(vi) Order quantities, reorder points, and minimum inventory levels should be subjected to regular review.

Policy for category B:

(i) B Item policies are generally somewhere between those of A items and C items.

(ii) Orders for these items should be placed less frequently than for A items. Normally, 3-6 orders per year are placed for B items.

Policy for C-items:

(i) Since C items are not capital intensive, many of these items can be stocked (i.e., six months to a year in stock).

(ii) Orders should be placed annually or semi-annually to reduce paperwork and ordering costs and to qualify for volume discounts on bulk purchases.

The purpose of ABC analysis:

The purpose of ABC analysis is to develop policy guidelines for selective control. ABC analysis allows materials managers to exercise selective control when faced with a large number of items. Stricter and more precise procedures are essential for items with an "A" value.

The level of control must be strict for 'A' items and should be as low as possible for 'C' items. ABC analysis can help determine the number of orders and can lower the cost of inventory overall. It is also commonplace to further divide 'A' items into A 1 and A 2 or A + and A + as well as groups for B as well as C' items to ensure greater control.

For items marked 'A', there must be weekly statements of control and rigorous value analysis. Accurate forecasts for material planning; Central buying and storage; multiple sources; and should be handled by an officer in charge of the senior level, while for 'C' items, there must be a follow-up process and speeding up in extreme circumstances; Decentralized purchases and storage; Minimum Value Analysis; rough estimates for planning, and are able to be delegated completely.

(2) VED Analysis:

The objects can be classified based on their usage, consumption, or value. A-B-C classification is the most ancient and widely used method; however, nowadays, VED, along with SDE analysis, is also utilized. VED analysis is performed to assess the importance of having spares.

  • V refers to vital elements without which production would stop.
  • E stands for Essential Items, without which dislocation of production work occurs.
  • D is for Desirable Items; the items that do not result in a loss of production fall into this category.

So, in this analysis system, the base is the criticality of products, whereas, in the A-B-C analysis, the basis is consumption figures.

(3) SDE Analysis:

It is calculated based on the availability position of every item. Here,

  • S means Scarce Items that are not in stock, and therefore, their availability is limited. This includes imports.
  • D means the difficult items that are unable to be purchased easily.
  • E is a reference to easily accessible items.

(4) MNG Analysis:

In this analysis,

  • M refers to Moving items. These are items that are consumed at different times.
  • N refers to items that are not moving. These are the items that aren't consumed during the year.
  • G refers to Ghost items. These are items that had no balance at the start and the close of the previous fiscal year and had zero transactions (receipts and/or issues) in the course of the year. These are items that do not exist and for which the storekeeper has bin cards that show a balance of zero.

These four techniques for controlling are frequently employed. But there are some additional methods that assist the material management team in controlling the many objects and efficiently managing the huge quantity of items, and efficiently redirecting his efforts to the troublesome areas, resulting in the best utilization of his efforts.

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