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OM/U3 Topic 6 Inventory Control Techniques- EOQ, ABC and others

Five Techniques of Inventory Control

  1. Economic Order Quantity

A problem which always remains in that how much material may be ordered at a time. An industry making bolts will definitely would like to know the length of steel bars to be purchased at any one time.

This length is called “economic order quantity” and an economic order quantity is one which permits lowest cost per unit and is most advantages.

This can be calculated by the following formula:

Q = √2AS/I

Where Q stands for quantity per order

A stands for annual requirements of an item in terms of rupees

S stands for cost of placement of an order in rupees; and

I stand for inventory carrying cost per unit per year in rupees.

  1. Inventory Models

Inventory models determine when and how inventory to carry.

(i) Inventory models handle chiefly two decisions:

  • How much to order at one time.
  • When to order this quantity to minimize total costs.

(ii) Lowest-cost decision rules for inventory management pertain to either buying products from outside or producing then within the company.

(iii) Single inventory models assume no delivery delay and that demand is known.

(iv) Probabilistic models handle situations of risks and uncertainty.

  1. ABC Analysis

In order to exercise effective control over materials, A.B.C. (Always Better Control) method is of immense use. Under this method materials are classified into three categories in accordance with their respective values. Group ‘A’ constitutes costly items which may be only 10 to 20% of the total items but account for about 50% of the total value of the stores.

A greater degree of control is exercised to preserve these items. Group ‘B’ consists of items which constitutes 20 to 30% of the store items and represent about 30% of the total value of stores.

A reasonable degree of care may be taken in order to control these items. In the last category i.e. group ‘Q’ about 70 to 80% of the items is covered costing about 20% of the total value. This can be referred to as residuary category. A routine type of care may be taken in the case of third category.

This method is also known as ‘stock control according to value method’, ‘selective value approach’ and ‘proportional parts value approach’.

If this method is applied with care, it ensures considerable reduction in the storage expenses and it is also greatly helpful in preserving costly items.

  1. Material Requirements Planning

MRP is a computational technique that converts the master schedule for end products into a detailed schedule for raw material and components used in the end products. The detailed schedule indentifies the quantities of each raw material and component items. It also tells when each item must be ordered and delivered so as to meet the master schedule for the final products.

  1. VED Analysis

Vital essential and desirable analysis is used primarily for the control of spare parts. The spare parts can be divided into three categories:

(i) Vital

(ii) Essential

(iii) Desirable

(i) Vital: The spares the stock out of which even for a short time will stop production for quite some time and future the cost of stock out is very high are known as vital spares.

(ii) Essential: The spare stock out of which even for a few hours of days and cost of lost production is high is called essential.

(iii) Desirable: Spares are those which are needed but their absence for even a week or so will not lead to stoppage of production.

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