The word inventory means a physical
stock of material or goods or
commodities or other economic
resources that are stored or reserved or
kept in stock or in hand for smooth and
efficient running of future affairs of an
organization at the minimum cost of
funds or capital blocked in the form of
materials or goods (Inventories).
The function of directing the movement of
goods through the entire manufacturing
cycle from the requisitioning of raw
materials to the inventory of finished goods
in an orderly manner to meet the
objectives of maximum customer ”
with minimum investment and efficient (low
cost) plant operation is termed as inventory
5. Inventory valuation involves two
Determination of quality of
each type of inventory held.
Assignment of the values
units items of inventory
6. Objectives of Inventory Control
The objective of controlling the inventories is to enable the
materials manager to place and order at right time with the right
source at right price to purchase right quantity.
• To meet unforeseen future demand due to
variation in forecast figures and actual
• To average out demand fluctuations due to
seasonal or cyclic variations.
• To meet the customer requirement timely,
effectively, efficiently, smoothly and
• To smoothen the production process.
• To facilitate intermittent production of
several products on the same facility.
• To gain economy of production or purchase
7. • To reduce loss due to changes in prices
of inventory items.
• To meet the time lag for transportation of
• To meet the technological constraints of
• To balance various costs of inventory
such as order cost or set up cost and
inventory carrying cost.
• To balance the stock out cost/opportunity
cost due to loss of sales against the costs
• To minimize losses due to deterioration,
obsolescence, damage, pilferage etc.
• To stabilize employment and improve lab
our relations by inventory of human
resources and machine efforts.
8. CLASSIFICATION OF
Inventories those play direct role
during manufacture or which can be
identified on the product
Inventories those which are required
for manufacturing but not as a part
of production or cannot be identified
on the product
Raw material inventories:
The inventory of raw materials is the materials used in the manufacture
of product and can be identified on the product.
In inventory control manager can concentrate on the
(a) Bulk purchase of materials to save the investment,
(b) To meet the changes in production rate,
(c) To plan for buffer stock or safety stock to serve against the delay in
delivery of inventory against orders placed and also against
Work-in -process inventories or in process inventories:
These inventories are of semi-finished type, which are accumulated
between operations or facilities.
These inventories serves the following purpose:
(a) Provide economical lot production,
(b)Cater to the variety of products,
(c) Replacement of wastages,
(d) To maintain uniform production even if sales varies.
10. Finished goods inventories:
After finishing the production process and packing, the finished
products are stocked in stock room. These are known as finished
These are maintained to:
(a) To ensure the adequate supply to the customers,
(b) To allow stabilization of the production level and
(c) To help sales promotion programme.
Spare parts inventories: Any product sold to the customer, will be
subjected to wear and tear due to usage and the customer has to
replace the worn-out part. Hence the manufacturers always calculate
the life of the various components of his product and try to supply the
spare components to the market to help after sales service.
The use of such spare parts inventory is:
(a) To provide after sales service to the customer,
(b) To utilize the product fully and economically by the customer.
Scrap or waste inventory: While processing the materials, we may
come across certain wastages and certain bad components (scrap),
which are of no use. These may be used by some other industries as
raw material. These are to be collected and kept in a place away from
11. INDIRECT INVENTORIES
Inventories or materials like oils, grease, lubricants, cotton
waste and such other materials are required during the
production process. But we cannot identify them on the
product. These are known as indirect inventories
12. Inventories may also be classified
depending their nature of use. They are:
Fluctuation Inventories: These inventories are carried out to safeguard the
fluctuation in demand, non-delivery of material in time due to extended lead-time.
These are some times called as Safety stock or reserves. In real world inventory
situations, the material may not be received in time as expected due to trouble in
transport system or some times, the demand for a certain material may increase
unexpectedly. To safeguard such situations, safety stocks are maintained. The
level of this stock will fluctuate depending on the demand and lead-time etc.
Anticipation inventory: When there is an indication that the demand for
company’s product is going to be increased in the coming season, a large stock
of material is stored in anticipation. Some times in anticipation of raising prices,
the material is stocked. Such inventories, which are stocked in anticipation of
raising demand or raising rises, are known as anticipation inventories.
Lot size inventory or Cycle inventories: This situation happens in batch
production system. In this system products are produced in economic batch
quantities. It some time happens that the materials are procured in quantities
larger than the economic quantities to meet the fluctuation in demand. In such
cases the excess materials are stocked, which are known as lot size or cycle
13. Transportation Inventories: When
an item is ordered and purchased they
are to be received from the supplier, who
is at a far of distance. The materials are
shipped or loaded to a transport vehicle
and it will be in the vehicle until it is
delivered to the receiver. Similarly, when
a finished product is sent to the
customer by a transport vehicle it cannot
be used by the purchaser until he
receives it. Such inventories, which are
in transit, are known as Transportation
Decoupling inventories: These
inventories are stocked in the
manufacturing plant as a precaution, in
14. Scope of inventory control:
SCOPE OF INVENTORY
economic order size
Safety or buffer
the work of
15. Benefits of Inventory Control
• Ensures an adequate supply of materials
• Minimizes inventory costs
• Facilitates purchasing economies
• Eliminates duplication in ordering
• Better utilization of available stocks
• Provides a check against the loss of materials
• Facilitates cost accounting activities
• Enables management in cost comparison
• Locates & disposes inactive & obsolete store items
• Consistent & reliable basis for financial statements
16. • A careful materials manager may take advantage of price
discounts and make bulk purchase at the same time he can keep
the inventory cost at minimum.
• It enables a manager to select a proper transportation mode to
reduce the cost of transportation.
• Avoids the chances of duplicate ordering.
• It avoids losses due to deterioration and obsolescence etc.
• Causes of surplus stock may be controlled or totally avoided.
• Proper inventory control will ensure the availability of the required
material in required quantity at required time with the minimum
17. INVENTORY CONTROL SYSTEMS
There are various methods of controlling inventory. In this section, let
us consider some of the important methods of controlling the inventory.
They are listed below:
(a) p - System or Fixed Period System, (
(b) b) q - System or Fixed quantity system, These are also known as
perpetual inventory control Systems.
(c) pq - System,
(d) ABC Analysis,
(e) VED Analysis,
(f) XYZ Analysis,
(g) FNSD analysis,
(h) Economic Order Quantity. (In manufacturing models, this is known
as Economic Batch Quantity.)