INVENTORY CONTROL MODELS –A CASE STUDY. LAL BAHADUR GUPTA Admission no INVENTORY CONTROL MODELS –A CASE STUDY LAL BAHADUR GUPTA Admission no. HPGD/JA14/1175 Welingkar institute of management Development & Research Matunga, Mumbai. Year of submission : November 2015

INVENTORY CONTROL MODELS –A CASE STUDY

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 order should 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 . 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 - 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, profit potential; 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.

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 A-B-C Analysis X Y-Z Analysis V-E-D Analysis S-N Analysis H-M-L Analysis S-D-E Analysis S-O-S Analysis G-O-F Analysis

Basis of A-B-C 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. X-Y-Z Analysis: Based on the value of inventory of materials actually held in stores at a given time. XYZ analysis is one of the basic supply chain techniques, often used to determine the inventory valuation inside a Store. It's also strategic as it intends to enable the Inventory manager in exercising maximum control over the highest stocked item , in terms of stock value. A system of categorization, with similarities to Pareto analysis, the method usually categorizes inventory into three bands with each band having a different management control associated. Although different criteria may be applied to each category the typical method of “scoring” an inventory item is that of annual stock value of said item (qty in stock X cost of item) with the result then.

V-E-D Analysis: In this analysis, the items are classified on the basis of their criticality to the production process or other services. In the VED classification of materials: V = Vital items E = Essential items D = Desirable items Features of V-E-D Analysi   Usually applied for spare parts on the basis of criticality. Classification is on the basis of ‘V’ stand for vital,’E’ for essential,’D’ for desirable. H-M-L Analysis: Based on unit price of the item. H= High valve, M= Medium value, L= Low Value Items. based on

F-S-N Analysis: Based on past consumption pattern. F- Fast Moving, S= Slow Moving, N= Non Moving items. frequency of issues and uses F, S & N stand for Fast moving, Slow moving and Non moving items. Fast Moving (F) = Items that are frequently issued/used Slow Moving (S) = Items that are issued/used less for certain period of time Non-Moving (N) = Items that are not issued/used for more than certain duration

S-D-E Analysis: S=scarce, D= Difficult to procure, E= Easy to procure Classification based on the Scarcity and lead time: Scarce (S) = Items which are imported and require longer lead time Difficult (D) = Items which require more than a fortnight but less than 6 months’ lead time. Easily available (E) = Items which are easily available This type of classification helps in reducing the lead time required at least in case of vital and essential items. Ultimately, this will reduce stock-out costs in case of stock-outs Features of S-D-E Analysis   SDE stands for scarce items, difficult to produce items and easy to procure items .

S-O-S Analysis: S= Seasonal, OS =Off-Seasonal items SOS analysis is based on seasonality of items and it classifies all the items into two categories ‘Seasonal ‘ And ‘Off seasonal The analysis helps in: Identifying items that are available only during a limited period of the year .For e.g. Raw mangoes are only available only during a summers Identifying items that are seasonal but available throughout the year however their costs in offseason are relatively high. Non Seasonal items As discussed above there are a number of methods used for selective inventory control and each method highlights a different aspect .The right method should be selected on the purpose for which we wish to carry out the selective inventory control

G-O-F Analysis: G= Government, O=Open Market, L=Local ,F= Foreign source of supply . The GOLF classification of inventory items is done considering the nature of suppliers. As the source of supply of different items are different, with a view to determining the lead time, order quantities, safety stock and terms of purchase and payment. Here, under this classification: G = Government controlled supplies O = Open market supplies L = Local supplies F = Foreign market supplies.   Features of G-O-L-F Analysis GOLF stands for Government, open market local or foreign source of supply .

Advantage of ABC Analysis –   Total Inventory cost can be considerably reduced by controlling the ‘A’ Category items . It ensures control over the costly items in which a large amount of capital is invested. It helps in developing scientific method of controlling inventories. Clerical costs are considerably reduced and stock is maintained at optimum level. It helps in maintaining stock turnover rate at comparatively higher level through scientific control of inventories. It ensures considerable reduction in the storage expenses. It results in stock carrying stock

Combination approach   ABC with XYZ Classification ABC with VED Classification XYZ with FSN Classification XYZ with VED Classification

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