INVENTORY CONTROL MODELS –A CASE STUDY
INVENTORY CONTROL MODELS –A CASE STUDY
LAL BAHADUR GUPTA
ROLL NO: DPGD/A14/1175
SPECIALIZATION: SUPPLYCHAINMANGEMENT
WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH
Year of submission: NOV 2015
Table of contents
- Inventory control systems 04
- Selective approach to inventory control 06
- Selective inventory control 08
(i) A-B-C Analysis 10
(ii)X-Y-Z Analysis 23
(iii)V-E-D Analysis 23
(iv)F-S-N Analysis 25
(v)H-M-L Analysi 27
(vi)S-D-E Analysis 28
(vii)S-O-S Analysis 28
(viii) G-O-F Analysis 29
- Illustration of A.B.C system Analysis 30
- Combination approach 37
(I)ABC with XYZ Classification 37
(II)ABC with VED Classification 46
(III)XYZ with FSN Classification 55
(IV)XYZ with VED Classification 57
- Bibliography 61
1-Types of Inventory control systems
An inventory system provides the organization structure and the operation policies for maintaining and controlling the materials to be held in stock. The systems are responsible for ordering and receipt of goods. The inventory systems controls the level of inventory by determining how much to order (the level of replenishment) and when to order. (Timing the order placement) and also on whom the ordershould be placed .the system must also follow up to answerer such question as:
1-Has the supplier received the order?
2-Has it been shipped by the supplier?
3-Are the dates of shipping correct?
Basis types of inventory control systems
- Fixed –order quantity model
- Fixed –time period model
Feature of fixed –order quantity model
Also called the economic order quantity, EOQ
- Order quantity =constant
- When to place an order =when inventory position drops to a re-order level
- Record keeping = each time a withdrawal or addition is made
- Size of inventory =less than fixed –time period model
Fixed –time period model
The basis distinction is that fixed –order models are “event triggered “
and fixed –time period models are “time triggered “.in a continuous review systems (or fixed –order quantity model)an order is placed for the same fixed quantity whenever the
inventory on hand decreases to a certain predetermined level ,whereas in a periodic review , an order is placed for a variable quantity after specific regular intervals .
when we use a fixed –order quantity model (in which an order is placed when the inventory on hand drops to a predetermined level known as order point or re-order level ) the inventory remaining must be continually monitored . thus the fixed –order quantity model is a perpetual review system which requires that every time a withdrawal from inventory or an addition to inventory is made ,inventory records must be updated to in fixed time period system or model ,counting or stock checking is done only at the predetermined review period
Choice of the inventory system:Some difference between the fixed –order quantity model and fixed time period model that tend to influence the choice of the inventory system or model are listed in the box.
Difference between fixed –order quantity model and fixed –time period model
Feature / Fixed –order quantity model(Q system) / Fixed –time period
Model (P system)
Order quantity
When to place an order
Recorded keeping
Size of inventory
Time to maintain
Type of items / Q-constant (the same quantity ordered each time )
R- when inventory position drops to a re order level )
Each time a withdrawal or addition is made
Less than fixed –time period model
higher due to perpetual record keeping
higher priced .critical or important / Q-Variable (various each time order is placed )
T- when the review period arrives
Counted or checked only at review period
Larger than fixed –order quantity model
--
--
- Order quantity =variable
- When to place an order =when the review period arrives
- Record keeping =counted or checked only at review period
- Size of inventory = large than fixed order quantity
2-Selective approach to inventory control:
Maintaining inventory though stock checking, counting, placing orders receiving stock and the like takes personal time and costs money. When these resources are limited, the logical way is to use the available resource judiciously to control inventory in the best way
This means, the focus should be on the most important items in inventory in order to reduce their inventory levels.
An importance as pact of inventory is that items held in inventory are not of equal importance in terms of money invested in inventory, profitpotential; devote equal attention to each of the items held in inventory. Instead, a more reasonable approach would be to use control efforts according to the relative importance of various items in inventory.
Focus should be on the ost important items in inventory in order to reduce their inventory levels.
Definition of selective inventory control
- Selective inventory control means that the method of inventory control varies
From items to items and the differentiation should be on a selective basis.
Tools and Techniques of Inventory Management
The various concepts of inventories like inventory: major cost component, lead time influences on inventoriesand productivity of inventories have been discussed.
The basic problem of inventory management is to strikea balance between the operating efficiency and the cost of Investment and other associated costs with largeinventories, with the object of keeping the basic conflicts
at the minimum while optimizing the inventory holding.l Thedecisions as to which item to make and when to keepinventories in balance require application of a wide rangeof techniques from simple graphical methods to moresophisticated and complex quantitative techniques. Many ofthese techniques employ concepts and tools of mathematicsand statistics and make use of various control theories from
Engineering and other fields. They are primarily aimed athelping to make better decisions and getting people employedand follow a wiser policy.
Inventory Management Techniques
Various techniques applied for inventory management areas follows:
1- Selective Inventory Control
2-Setting of Various Stock Levels
3-Systems of Inventory Control
4-Economic Ordering Quantity or E.O.Q. Formula
5-Re—order Point and Safety Stock
6-Application of Computers for Inventory
7-Just—in-Time Inventory Management
8- Inventory Audit.
3-Selective inventory control:
Because of the large number of materials used in production at many manufacture plants, it is desirable to classify materials according to the amount of analysis that can be justified. Selective inventory control means that the method of inventory control varies from item to item and the differentiation should be on a selective basis.
The philosophy behind selective inventory control technique is to put the efforts where results are worth putting the efforts. The importance of materials can be due its costs, its consumption value, its criticality, its availability and consumption. A number of selective inventory control technique are used.
Selective inventory control Techniques
(i)A-B-C Analysis
(ii)X Y-Z Analysis
(iii)V-E-D Analysis
(iv)F-S-N Analysis
(v)H-M-L Analysis
(vi)S-D-E Analysis
(vii)S-O-S Analysis
(viii)G-O-F Analysis
Lists the selective inventory control techniques, the criteria on which they are based and their main use or application
SI. NO. / Type of control / Criteria / Application1.
2.
3.
4.
5.
6.
7.
8. / A-B-C Analysis(Always better control)
X-Y-Z Analysis
V-E-D Analysis
F-S-N Analysis
H-M-L Analysis
S-D-E –Analysis(scarce difficult to procure and easy to procure )
S-O-S Analysis(seasonal off-seasonal)
G-O-F Analysis (Government open market, local and foreign source). / annual consumption value of the item
inventory value of items in stores
criticality of the item
consumption pattern of the item
unit price of the item
purchase problems in regard to availability
nature of supplies and seasonality
Source of supply of materials. / To control inventory of raw materials and WIP inventory.
To review the actual inventories, their uses etc.; at scheduled intervals of stock- checking.
To determine the stocking level of spare part for machine and equipments
To control obsolescence.
To control purchase and to develop vendors
Lead time analysis and purchasing strategies
Procurement and holding strategies for seasonal items (agricultural products)
Procurement strategies
(I)- A-B-C-Analysis (or classification)
This is also reference to as “always better control “or Pareto Analysis.
A-B-C analysis is a basis inventory control technique which is often the starting point .it can be applied to almost all aspect of materials management such as purchasing receiving ,inspection,
Storekeeping and issue of materials from stores, verification of bill, inventory control, value analysis etc.
Pareto‘s Law: pareto, a German economist who worked out the distribution of income in east Prussia, found that 20% of the people owned 80% of the country‘s economy. Based on this finding, his law referred to as Pareto’s law states “in any series of elements to be controlled, only a small of results”. It is also usually called 80/20 rule states that, for many events, roughly 80% of the effects come from 20% of the causes.[1]Management consultantJoseph M. Juran suggested the principle and named it after Italian economistVilfredo Pareto, who, while at the University of Lausanne in 1896, published his first paper "Cours d'économie politique." Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that 20% of the peapods in his garden contained 80% of the peas.[2]
It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients." With respect to this article, 80% of the value will come from 20% of the content. Mathematically, the 80–20 rule is roughly followed by a power law distribution (also known as a Pareto distribution) for a particular set of parameters, and many natural phenomena have been shown empirically to exhibit such a distribution.[3]
The Pareto principle is only tangentially related to Pareto efficiency. Pareto developed both concepts in the context of the distribution of income and wealth among the population.
The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing its ratings on the following rules
A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.
Class of items / % of total Number of items / % of Total annual consumption valueA / 10％ / 70％
B / 20％ / 20％
C / 70％ / 10％
Total / 100％ / 100％
A.B.C. Analysis of GOVIK ELECTRICALS PVT.LTD.
For the purpose of A.B.C. classification of inventories And the method of control to be adopted for each category of Items, the company first of all lists out all the items of Inventory and values of each item. The value is obtained by Multiplying the average annual consumption of an item during a period by its unit cost. The items in the list are then rearranged in the descending order of their valuesIrrespective of their quantities. Thus 200 kg. of an itemValued at m.2, 00,000/- should be ranked earlier than 20,000kg. of another item, the value of which isM.l8, 000/-. A running total of all the values is thenTaken. It is found that a large percentage of the totalValue is covered by the first few items in the list. TheyAre grouped in the ‘A' category, the next few items whichHave the next least value under ‘B’ group and the last valueItems are grouped under ‘C’ category. So, by controllingThe ‘A' group items only, a better inventory control isPossible. Table 6.2 shows the classification of inventoriesAnd its annual consumption value of the United ElectricalIndustries Limited.
An analysis of the annual consumption of the Govik electrical Pvt.ltd. Shows that 80 per cent of the total number of itemsAre under category ‘A'. Similarly five per cent ofThetotal annual consumption value accounts for more than70 per cent of the total number of items under category ‘C’And 15 per cent of the total annual consumption valueAccounts for nearly 20 per cent of the total number of items
Classification of Inventories
And its Annual Consumption Value
Of Govik Electrical Private Limited
S1’ / Name of Item / Annual Consumption Value1 / Magnet / 74,00000
2 / 41 S.N.G. / 55,00000
3 / Lamination / 41,00000
4 / Brass Terminals / 22,000000
5 / Magnet Yoke / 10,00000
B Group
1 / Copper Strips / 73,000
2 / M.S. Screws H1 / 72,000
3 / Sealing Led / 71,000
4 / Press-Phan Sheet / 70,000
5 / Charcoal / 68,000
C Group
1 / Grinding Wheel / 14,000
2 / Leather Glouse / 14,000
3 / Screw Drivers / 13,000
4 / Insulation Tape / 12,000
5 / Acid / 11,000
Source: Annual Consumption File, Govik Electricals Pvt.LTD.
A.B.C. Analysis of Govik Electricals Pvt.LTD.
The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing its ratings on the following rules:
A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items
Procedure of Determining Stock Levels in GOVIK ELECTRICALS PVT.LTD.
In Govik Elec. the stock control is made on the basis of three
Levels such as:
(a) Minimum level
(b) Maximum level
(c) Mean level.
A safety stock (minimum stock) is maintained for eachstock item to provide a cushion for the followingemergencies:
(i) Supplies being delayed beyond normal lead time.
(ii) Consumption rate exceeding estimated average rate.
(a)Minimum Level
A .formula which is used by the company for fixing
Minimum level is:
Smin = (Cmax x Lmax) - (Cav x lav)
Where
Smin = Minimum stock
Cmax = Minimum rate of consumption per month
Lmax = Average rate of consumption per month
Cav = Maximum lead time in month or maximum period between two consecutive phased supplies
Lav= Average lead time
b- Maximum level:
Maximum stock is the minimum stock plus the phasedsupply quantity plus one or two month’s consumption (to allow for receipt of the phased supply arriving ahead of the expected time or before the stock reaches the minimum level)
If the actual stock of any item exceeds the maximum level then the next phased supply is deferred or revoked as found necessary.
Formula used for fixing maximum level is
Smin = (Cmax x Lmax) + Qa + B
Where
Smin Minimum stock
Cmax= Maximum consumption per month
Lmax= Maximum lead time
Qa = Quantity receivable for phased supply against annual indent.
B = Extra quantity to be provided for special indent.
(b)Mean Level:
Mean level is the average of maximum and minimum stocklevels. In UEI in the case of ‘B’ items a review of thenext phased supply is made when stocks in hand touch thismean level and necessary action is taken as follows:
(i) If the stocks are not adequate to meet the requirementstill the expected time of receiving the next phasedsupply, the next phased supply will be advanced or
Extra quantity will be procured by special indent.
(ii) If the receipt of the next supply is likely to resultin exceeding the maximum level, the next supply will bedeferred or the quantity reduced. It is found thatstock levels are fixed for all the stores items on thebasis of anticipated annual consumption by January ofevery year.
The formula used for fixing mean level is:
Scon = Smax +Smin
2
Where
Scon = Control stock level
Smax =Maximum stock
Smin =Minimum stock
(3) Systems of Inventory Control
The main systems of inventory control are:
(a) Perpetual Inventory (Automatic Inventory) System
(b) Double Bin System.
(a) Perpetual Inventory System
The control of inventories while in storage is affectedThrough what is known as the perpetual inventory. Thus thetwo main functions of the perpetual inventory are:4
(i)Recording store receipts and issues so as to determineat any time the stock in hand, in quantity or value orboth, without the need for physical count of stock.
(ii) Continuous verification of the physical stock withreference to the balance recorded in the storesrecords, at any frequency, as convenient for themanagement.
In KEL, TELK and UEI, a senior clerk is responsible to the cost accountant for organizing perpetual verification ofthe stores. Various stocks which come under A.B.C. classesare checked in the following ways:
Class 'A' items — Three times per year
Class 'B' items - Once a year
Class 'C' items — once in every two years.
But in the Metropolitan Engineering Company Limited andthe Trace Cable Company Limited, the assistant productionmanager is responsible for organizing perpetual verificationof the stores. Various stocks of these units that comeunder A.B.C. classes are verified in the following manner.
Class ‘A’ items - Two times per year
Class 'B' items - Once in every two years
Class 'C' items - Once in every three years.
Physical verification of an item is carried outwhen the stock is at minimum so that the quantitychecked is as small as possible. The programme forverification is arranged in such a way thatphysical checking is carried out just prior to the nextanticipated phased supply. Whenever feasible, incomingsupplies are stored and stocked separately and will not beissued out until the earlier stocks are completely exhausted.
Perpetual inventory system consists of:
(i) Bin cards
(ii) Stores ledger, and
(iii) Continuous stock taking.
(i)Bin Cards
Bin cards are printed cards used for accountingstock of materials in store. For every item ofMaterials separate bin cards are kept by the concerns.
Details regarding the material such as name ofmaterial, part number, date of receipt and issue, referencenumber, name of supplier, quantity received and issued, value of material, rate, balance quantity etc., are recordedin the bin cards. The bin cards are kept in the binserially according to part number of the component. At theEnd of the financial year the balance quantity in the bincards is taken as closing stock, and it is valued at ratesin the bin cards.
Bin Card Valuation
Stocks in the public sector electrical industrialunits in Kerala are valued under the weighted averagesystem. In this system, the average rate of the item isarrived at by taking into account the value of previousstock. The quantity of the previous stock is added to thereceipt. The total value of the previous stock and newreceipt is divided by the total quantity. The resultantfigure is the weighted average rate of that item, i.e.,