TOOLS OF INVENTORY CONTROL
PHILOSOPHY Neither can one control everything nor should one try to do so. Uniform control is rarely effective. Effectiveness results when important aspects of a problem are pursued more rigorously than others. A major portion of managerial time should be spent in p erforming more important jobs. Less important tasks should be delegated to a lower level. NEED FOR INVENTORY CONTROL Uniform control of items is: Expensive Gives diffused effect SELECTIVE INVENTORY CONTROL Variances in the method of control from item to item based on selective basis. The criteria used for the purpose may be cost of the item, criticality, lead time, consumption procurement difficulties, etc. Various classifications are employed to render selective treatment to different type of materials, each classification emphasizes on a particular aspect. Policies of control For ABC Analysis Degree of control: - Senior level should be made responsible for regular reviewing of the A level of items - Attempts should made to reduce both internal & e xternal lead time. - For B Items normal control is required - For C Items little control is required & inspection for these items should be delegated to lower level managers
Ordering Procedure: - „A‟ Items require careful & accurate determination of Order quantities & order points based on exact requirements. -A reasonable good analysis for order points is required for „B‟ Items but the stocks may be reviewed less frequently. - No such computations are necessary for „C‟ Items. Staggering of delivery schedule: One of the best strategies to reduce the inventory investment and ensure un-interrupted inflow of materials.
These deliveries reduce cost of order writing but increase cost of inspection & receiving. Annual contract with scheduled deliveries are desirable for „A‟ & „B‟ class of items. „C‟ class of items should be purchased in bulk on single-order-basis. Stock records: Detailed records of goods ordered, received, issued & goods on hand should b e maintained for „A‟ category items Any routine method that ensures good and accurate record is enough for „B‟ category of items. No such detailed records are necessary for „C‟ Items. Normal office procedure is sufficient. Two -bin system is most suitable for these items. Priority Treatment: - VIP treatment may be accorded to „A‟ Items in all activities such as purchase orders, receiving, inspection, movement on the shop floor, etc - No such treatment is necessary for „B‟ Items. Normal Plant procedures takes care of inward & outward flow of items. “Control by exception” may be exercised for critical items. - No priority is assigned to „C‟ items. Personnel at lower level takes care of these items Safety Stock: All items of consumption are equally important from production point of view. Shortage occurs even when accurate & realistic order points have been computed. Safety stock is provided to safeguard against these shortages. Safety stock should be less for „A‟ items & closer forecasting & frequent reviewing must be done. „C‟ items should have sufficient safety stock A moderate policy is required for „B‟ items. Safety stock is neither too high nor too lo w. Price discounts: Manufacturers offer discounts if more units are ordered. A price discount which compensates for more than the additional stock holding cost is desirable for „A ‟ & „B‟ Items. No such arithmetic calculations are required for „C‟ Items. Stores layout:
„A‟ category (fast moving items) - near the point of issue. Time & effort can be saved „B‟ Items which are active can be put slightly farther.
Most of „C‟ Items can be put in less accessible areas. The process of issuing can be simplified by adopting so me form of control by exception Physical stock-taking: Can be made more efficient by application of usage value classification. All items are subjected to 100% check with frequency. This is time consuming, laborious & leads to production stoppages. It is not necessary to have a uniform physical stock-taking for all items - „A‟ items may be checked more often & „C‟ items least often - „A‟ items should be checked every 2 months, „B‟ items every 3 months & „C‟ Items every 6 months Value Analysis: This is done to find out those items which offe r the highest scope for cost reduction. The usage value classification (ABC Analysis) is useful for this. - „A‟ & „B‟ Items are selected for detailed value analysis - „C‟ Items should not be value analysed VED Analysis
Represents classification of items based on their criticality Classifies items into 3 groups called „Vital‟, „Essential‟ & „Desirable‟ - „Vital‟ category consists of those items for want of which production would come to a halt. - „Essential‟ group includes items whose stockouts costs is very high. - „Desirable‟ group consists of items which do not cause any immediate loss of production. An item may be vital fo r a number of reasons: If the non availability of the item can cause serious production losses. Lead time for procurement is very large It is a non standard item & it is custom made. The sources of supply is only one & is located far off from the buyer‟s plant Steps Identify the factors to be considered for VED Analysis Assign points/weightages to the factors according to their importance to the company Divide each factor into 3 categories & allocate points to each category
Prepare categorisation plan Evaluate items one by one against each factor & assign points to the item Place the V,E &D categories depending upon the points scored by them S-D-E Analysis
It is based on problems of procurement like: Non availability Scarcity Longer lead time Geographical location of suppliers Reliability of suppliers It is classified in 3 categories called “Scarce”, “Difficult” & “Easy”. The information is used to decide purchasing strategies. “Scarce” classification comprises items which are short in supply, imported or cannalised through government agencies. “Difficult” classification includes those items which are available indigenously but are not easy to procure. “Easy” classification covers those items which are readily available. S-D-E Analysis is employed by the purchase department: To decide on the method of buying: Eg: Forward buying method for some of the items in the “Scarce” group; “Scheduled buying” & “contract buying” for “Easy” group To fix responsibility of buyers: Eg: Senior buyers may be given responsibility of „S‟ & „D‟ groups while „E‟ group may be handled by junior buyers or directly by the storekeeper.
G-NG-LF/GOLF Analysis
Its like S-D-E Analysis It is based on nature of suppliers which determine quality, lead time, terms of payment, continuity or otherwise of supply & administrative work involved.
The analysis classifies the items into 4 groups G-NG-L & F. “G” group covers items procured from “government”. Transactions with this category of suppliers involve long lead time & payments in advance or against delivery. “NG” or O in (GOLF) group covers items procured from “non-government”. Transactions with this category of suppliers involve moderate delivery time & availability of credit usually in the range o f 30-60 days. “L” group contains items bought from “local suppliers”. The items bought from these suppliers are cash purchased or purchased on blanket orders.
“F” group contains those items which are purchased from “foreign” suppliers. The transactions with such suppliers: involve a lot of administrative work necessitate search of foreign suppliers require opening letter of credit require making of arrangement for shipping & port clearance S-O-S Analysis
Its based on seasonality of items. It classifies items into 2 groups S (seasonal) & OS (Off Seasonal) The analysis identifies items which are: Seasonal & are available only for a limited per iod of time eg raw mangoes, etc. Such items are procured to last the full year. Seasonal but are available throughout the year. Their prices are lower in the harvest season. Non seasonal items whose quantity is decided on different considerations M-N-G Analysis
This analysis is based on stock turnover rate & it classifies the items into M (Moving items), N (Non-moving items) & G (Ghost items). M (Moving items) are items consumed from time to time. N (Non-moving items) are items not consumed in the last year. G (Ghost items) are those items which had nil balance, both in the beginning & at the end of the financial year. All pending/open purchase orders (if any) of such items should be cancelled. F-S-N Analysis F-S-N Analysis is based on consumption figures of the items.
It is classified into 3 groups: F (Fast moving), S (Slow moving) & N (Non-moving) To conduct these analysis, the last date of receipt or the last d ate of issue whichever is later is taken into account. The period, is usually in terms of number of months that has elapsed since the last movement record.
