INVENTORY CONTROL POLICIES Dokuz Eylül University Industrial Engineering Department Özge AVCI

CONTENTS What is the Inventory Control Policies? Procurement Valuing Inventory Inventory Accounting System Physical Controls Methods Main Functions

Inventory control policies are decision rules that focus on the trade-off between the costs and benefits of alternative solutions to questions of when and how much to order for each different type of item.

The process of managing the timing and the quantities of goods to be ordered and stocked, so that demands can be met satisfactorily and economically.

The possible reasons for carrying inventories are: Uncertainty about the size of future demands. Uncertainty about the duration of lead time for deliveries. Provision for greater assurance of continuing production,using work-in-process inventories as a hedge against the failure of some of the machines feeding other machines. Speculation on future prices of commodities.

Some of the other important benefits of carrying inventories are: Reduction of ordering costs and production setup costs Price discounts for ordering large quantities Shipping economies Maintenance of stable production rates and work- force levels which otherwise could fluctuate excessively due to variations in seasonal demand.

Uncertainties of future demand play a major role in the cost of inventories. That is why the ability to better-forecast future demand can substantially reduce the inventory expenditures of a firm.

Main Functions Inventory management is the process companies use to order, receive, account for and manage the various products sold to consumers. Business owners and managers focus on this activity because inventory typically represents the second largest expenditure in a company behind payroll.

While standard policies and procedures exist for inventory management, owners and managers have some latitude to develop standards for their own companies.

Procurement Procurement is the purchasing process individuals must use to order and receive inventory. Companies typically require individuals to have a purchase order with a manager's authorization prior to ordering inventory.

A procurement manager is responsible for reviewing the purchase order to ensure it includes authorization and other information relating to the cost of items purchased. While larger organizations can hire individuals to work in the procurement department, smaller companies often have the business owner perform this function.

Valuing Inventory Methods include first-in, first-out (FIFO), last-in, first-out (LIFO) and the weighted average method. FIFO requires companies to sell older inventory first, leaving more expensive inventory in the general ledger and increasing the company's gross profit during an accounting period.

LIFO is the opposite of FIFO; therefore it has the opposite effects in the accounting ledger. The weighted average method does not require older inventory to be sold first as inventory costs are recalculated each time the company purchases inventory.

An inventory accounting system is the specific procedures a company uses to update its accounting ledger. The two types of systems are periodic and perpetual. The perpetual system starts with the opening inventory balance and updates inventory after each purchase, sales or inventory adjustment. Inventory Accounting System

Physical controls relate to how a company stores and counts inventory items. Storage is important because companies must safeguard their inventory against loss, theft and employee abuse. This can include limiting access,locking up valuable products and using tracking devices on products. Physical Controls

Cycle counts and counting a specific number of items each day or week-and annual inventory counts are the most common physical counting methods in the business environment.The benefits of carrying inventories have to be compared with the costs of holding them.

Inventory Control Policy Statement is as follows: It is the responsibility of Inventory department heads to assign a Barcode to all equipment and material in their possession. Each inventory department head is responsible for the equipment and materials purchased and assigned to his or her department. Methods

Inventory managers are also responsible for conducting quarterly inventory on the prescribed Inventory forms and will receive a quarterly inventory showing: Assigned Inventory number Description Serial Number Last known location Value of asset

In order to insure proper inventory control, all inventory managers are to use the proper forms.

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