1. Inventory cost control techniques
Listed below are few important tools and techniques to control inventory cost
● ABC Analysis
ABC analysis is a important tools in hand of purchase manager who has to handle
thousands and lakhs of items of any manufacturing units as per scale .
Purchase manager can ask for ABC analysis for items for the unit and can put greater
control or do more value analysis for the items which are categorised A , other categories
are B and C .
These categories can be made by analyzing annual consumption of items in terms of volume
and cost done in descending order and calculating the % contribution of items on total cost
. Results would throw items which taken in account would constitute 70- 80% of the total
value , these items would fall in categoryA , Balance which contributes to 25% would be put
into CategoryB where as balance items can be classified into categoryC .
Importance of these Categories
Category A items : Frequently ordered items with minimum of stock .Weekly control
statements . Centralised purchasing and storage for any manufacturing unit . Material
planning runs should accurately predict the quantity to be procured . Reduce the lead time
for such items . Eg Bearings in any light engineering unit. To be handled by senior
procurement executive .
Category B items: These items are moderately controlled and orders issued would be
maximum up to four or five . Periodic follow up and estimates done on annual consumption .
Category C items: These items can be stocked for larger period and can be ordered in bulk
with one or two purchase order . Controls are least for such items and can be handled by
junior executives .
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Though most of the items which may fall in category C are of low volume and low cost but
sometimes become critical if not monitored . For eg Belts in any light engineering unit . Stock
out situation can occur if stocks are not monitored . For such instance one should have a
general vendors which can supply these items on a sort notice even though one have to pay
some premium for such service.

2. ● Standardisation and Codification
Any manufacturing unit have several items which are procured for prodction it can be raw
material , packaging , engineering items , stationeries , misc items ,chemicals , general
equipments etc , spare parts etc . All these items need to be tracked for annual consumption
and last price , stock hand , price compariso between two sources , po . Codification and
standardisation helps in getting all this information through ERP software which are now
almost installed in every organisation . As these software requires codes for ordering ,
issuance and despatch. Even finished good are codified for price variance , material
variance , records , invoices and other datas related to production .
Codification is a process of representing each item by a where by the digits indicates a
group , subgroup , location , nature of item etc . It could be numerical as well as alphabet
numeric .
Each code should be unique and represent one item . Easy to understand . Codification
should be concise , compact and consistent.
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Popular systems for Codification are
● Kodak System
● Brisch System
Standardisation
Standardisation is necessiated by the fact that the one cannot have numerous items for
same usage hence standards are set for each items . It can be arrived upto by discussing it
with user s and vendors who can give enough insights on the most common standards used

3. in industry . Hence each items is defined by correct specifications such as length , wt ,
density , thickness , power , capactites ,so on
The process of Standardisation can help in simplyfing procurement process and variety
reduction . It would result in reducing unnecessary varieties and stadardising into most
economical size , grades , shapes ,colors , types etc.
Thus Stadardisation helps in reducing inventory , better communication to vendors and
users .
● EOQ - Economic Order Quantity
Conventional order system relied on annual and monthly consumption pattern hence
increasing inventory level in stores , more large companies and organisation now have put
some sort of mathematical equation in there materials module purchase system where in one
cannot order than more the economic order quantity .Its mathematical value arrived with an
equation where values for cost of ordering , carrying cost, annual total demand and unit
price is taken into account to arrive at EOQ .
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Some of the definitions of EOQ
EOQ is a mathematical formula designed to minimize the combination of annual holding costs
and ordering costs. There is a lot of hype about just in time inventory systems (JIT), which
achieve smaller inventories through very frequent orders, but frequent ordering can often
result in an over-spending on ordering costs. Even though companies often miscalculate
their ordering costs, which makes frequent ordering seem costly, EOQ is an important tool for
determining what inventory should be.
source
www.industrysource.com
EOQ stands for Economic Order Quantity. EOQ is basically a level of inventory which will

4. minimize the cost of holding the inventory and ordering it.While using this framework, it is
assumed that the ordering cost is constant and the rate of demand is also constant. Apart
from that the purchase price and lead time are also fixed. The level of inventory and ordering
and carrying costs are equal while using EOQ.
Here is the formula
E =SQRT OF 2xMxCo/sxCc
WHERE
SQRT = Square root of
M= Annual demand
Co = Ordering Cost
Cc = Inventory carrying cost
s = Unit Price
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EOQ can be adjusted in following cases where saving potential are very high or there
operational benefits for eg .
● Imported items have to be procured in bulk as entire cycle takes 4-5 months time for
● delivery.
● Seasonal supply factor - In case of food commodities the price in harvesting seasons
● are low in comparison to other seasons hence it would save cost if we buy in bulk
● during these periods.
● Ordering as per packing : Certain manufacturers give items in pack only hence it
would
● better if we buy in that packing configuration.
● Discount offered in bulk quantities

5. ● For Perishable items : These items have to procured as per the shelf life as we
cannot
● procure them as per our wish
● Big discount on bulk quantity
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