Inventory Control &amp Cost Reduction Technique - 001

Inventory Control & cost
reduction Technique
INVENTORY CONTROL
• Inventory means --all the materials , parts,
suppliers, expenses and in process or
finished products recorded on the books
by an organization and kept in its stocks,
warehouses or plant for some period of
time.
. Definition of inventory control
• Definition of inventory control is the
technique of maintaining the size of the
inventory at some desired level keeping in
view the best economic interest of an
organization.
Objectives of inventory control
Objectives of inventory control --
• Protection against fluctuations in demand;
• Better use of men, machines and material;
• Protection against fluctuations in output;
• Control of stock volume;
• Control of stock distribution.
Major activities of inventory control
.
• Planning the inventories;
• Procurement of inventories;
• Receiving and inspection of inventories;
• Storing and issuing the inventories;
• Recording the receipt and issues of inventories.
Physical verification of inventories;
• Follow-up function ;
• Material standardization and substitution.
Inventory Decisions
• Executive decide two basic issues while dealing with
inventories;
• (a) How much of an item to order when the inventory of
that item is to be replenished.
• (b) When to replenish the inventory of that item.
• By definition, inventory facilitate production or satisfy
customer demands. Inventory system is a set of policies
and controls which monitors and determines the levels of
inventory..
Steps in Inventory control
• Steps in Inventory control.-- Decides the
maximum- minimum limits of inventory;
• Determination of Reorder point;
• Determination of reorder quantity;.
Maximum stock level
• Maximum stock level Quantity of inventory above
which should not be allowed to be kept.
----disadvantages of overstocking;
• Factors to be considered:
• Amount of capital available.
• Godown space available.
• Possibility of loss
Minimum stock level
• Minimum stock level- This represents the quantity
below which stocks should not be allowed to fall . The
level is fixed for all items of stores and the following
factors are taken into account:
• 1.Lead time-
• 2. Rate of consumption of the material during the lead
time.
Re-ordering level
• Re-ordering level It is the point at which if
stock of the material in store approaches,
the store keeper should initiate the
purchase requisition for fresh supply of
material. This level is fixed some where
between maximum and minimum level.
Economic Order Quantity
• Economic Order Quantity It is also known
as standard order quantity , optimum
quantity or economic lot size. By definition
economic order quantity that size of order
for which the total cost is minimum.
Perpetual Inventory System
• Perpetual Inventory System It is a method
of recording stores balances after every
receipt and issue, to facilitate regular
checking and obviate closing down for
stock taking.
Factors which helpful to make
system successful
• Factors which helpful to make system
successful –
• Stores ledger,
• stores control,
• cards or bin cards are properly maintained ;
• Quantity balance store shown in the store ledger;
• stock control and bin cards are reconciled;
• Exploring the cause of discrepancies if any physical
balances and book balances.
Inventory Turnover method
• Inventory Turnover method It means how
many times a company inventory is sold
and replaced (finished product)
inventory turn ratio
• The inventory turn ratio lets investors calculate
how fast a company is selling through its
inventory and efficiently managing its
resources. Discover how to calculate ...
• The inventory turnover ratio, also known as inventory
turn, tells an investor how often a company sells through
its inventory. Generally, the faster inventory is turned,
the less risk of loss and the more efficient management
is handling capital.
• Calculating Inventory Turns / Inventory
Turnover Ratio
• = cost of Goods sold
Average Inventory for the Period:
• This is found on the income statement, not
the balance sheet
2: Average inventory is calculated by
taking the last period's inventory plus the
current period inventory and dividing them
by two.
Example of Inventory Turns / Inventory
Turnover
• Let's look at a real world example. financial statements
of Coca-Cola. The cost of goods sold is $6,204,000,000.
The average inventory value between 1999 and 2000 is
$1,071,000,000 (average the values from 1999 and
2000). Plug them into the formula for inventory turn.
Current Year's Cost of Goods Sold of $6,204,000,000 ÷
Average Inventories of $1,071,000,000
• The answer is the number of inventory turns - in Coca-
Cola's case, 5.7927. What this means is that Coca Cola
sells all of its inventory 5.79 times each year. Is this
good? To answer this question, you must find out the
average turn of Coke's competitors and compare. If you
do the research, you find out that the average turnover of
a company in Coke's industry is 8.4.
standardization
Introduction—
The object of industry is to set –up
economic ways and means of satisfying
human wants and in so doing to reduce
everything possible routines requiring a
min. amount of human efforts.
standard
• A standard is defined as a model or

general agreement or rule established by
authority or customs and used by various
levels of interest.
• Standardization– is the orderly and

systematic formation ,adoption, application
and review of industrial standard which
leads to simplification or variety reduction.
Objectives of standardization
• 1- manufacture’s perspective.
• 2-Trader’s perspective
• 3-User’s perspective.
• 4-Social perspective
• 1- Manufacture’s perspective– Economy in
manufacturing maintenance.
-Reduce time & expenses by selecting standard
product technology.
2-Trader’s perspective—easy identification of
suppliers,
Rationalization of product & components.
3 -User’s perspective—Confidence & trust in
quality & reliability.
4- Social perspective- Avoidance of wastage
• Wealth maximization
Codification
• Codification is the systematic concise
representation of equipment, raw materials
tools, spares, supplies, etc. in an
abbreviated form employing alphabets,
numerical, colours, symbols. etc,
Benefits of codifications
• 1- Accurate and logical identification.
• 2-avoidence of long and unwieldy decryption
• 3- prevention of duplication.
• 4-product simplification.
• 5- Efficient purchasing.
• 6- Minimization of clerical work.
• 7-effective stores keeping.
• 8-Accurate and reliable recording accounting.
• 9-Easier computerization.
Stages of Codification.
• Three basic stages of scientific codification are .
• 1- identification.
• 2- classification
• 3-Codification
• 1- identification– is the process of assigning
correct nomenclature to the item-
• Exp-Drill,H.S.S.Taper shank20D*std length
• 2-classification-is the arrangement of items into
groups according to a pre-standard pattern
• 3-, Codification-is the allocation of specific code
to the items within the broad framework of
selected system
Systems of codification
• 1-Alphabetical system.
• 2- Numerical system.
• Alpha- Numerical system.
• 4- Colour coding system.
• Most popular systems are-
• 1- British sysyem.
• 2- kodak system
Value engineering and value analysis
• Value engineering (VE) is a systematic

method to improve the "value" of goods or
products and services by using an
examination of function.
• Value, as defined, is the ratio of function
to cost. Value can therefore be increased
Function
• Function specifies the purpose of the
product or what the product does ,what its
utility with some cost or by decreasing its
cost for the same function.
• 1) primary function,
• 2) Secondary function.
• 3) Tertiary function
Types of value
• Cost value-It is the cost manufacturing a
product /components
• Use value -It is also be called Functional
Value. It consider the work function.
• Esteem Value -it involves the qualities and
appearance of a product .(Like T.V.,car)
Exchange value -A product is said to posses
exchange value if the same can be exchanged
for some thing else.
Aim of Value analysis
• Value analysis is a special type of cost
reduction technique It critically investigate
and analysis the different aspect of
materials.

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Inventory Control & cost

• A standard is defined as a model or

• Standardization– is the orderly and

• Value engineering (VE) is a systematic

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