TECHNIQUES OF INVENTORY CONTROL

TECHNIQUES OF INVENTORY CONTROL

The Techniques of Inventory control are as follows:

• Economic purchase order quantity (how much to order)

• Re-order level[when to order]

• Minimum inventory or safety stock

ECONOMIC PURCHASE ORDER QUANTITY

In order to control the inventory a decision model has been to determine the optimum quantity of material to be purchased on each purchase order.

The model determines the optimum working stock level to be maintained. Each time a purchased order is placed, the company incurred certain cost.

In order to minimize the cost of placing purchase order, the company could increase the order quantity to meet the company’s needs for the year at one time, incurring only the cost of one purchase order.

However, such a practice will lead to having a large average inventory of working stock, resulting increased carrying cost.

The cost of ordering and the cost of any inventory may be summarized as follows:

COST OF ODERING:

i. Preparing purchase or production orders, receiving and preparing and processing of related document.

ii. Incremental cost of purchasing or transportation for frequent order (purchase in small lots is often costlier and transportation cost also increase).

iii. Out of pocket cost of postage, telephones, telegrams, cost of stationary, travelling etc.

iv. Extra cost of numerous small production runs. Overtime, setups, training etc

COST OF CARRYING

I. Interest of investment

II. Losses from obsolesce and deteriorations, spoilage.

III. Storage space cost including rent, rate, tax, electricity etc

IV. Insurance, in addition- fixed cost in form of salaries, wages etc of employees connected with work in-stores and material handling departments.

RE-ORDER LEVEL

Lead time is the time interval between placing an order and receiving delivery. If the lead time and the quantity of demand during lead time are known with certainty the recorder point may be determined.

If in the above example, lead time is 2 weeks and the average usage is 18 per week, the re-order point will be 18 × 2 = 36 units. The day the level of stock falls to 36 units, an order for 173 units will be placed.

By the time these are delivered, the stock will be nil and on the day of delivering it will shoot up again to 173 units and so on.

MINIMUM INVENTORY OR SAFETY STOCK

In our previous paragraph, we had assumed with certainty that 18 units would be used per week. In practice, we seldom come across such a situation and demand cannot be forecast accurately. Actually the demand may fluctuate from period to period.

If, therefore the usage per week at any time goes beyond 18 units per week, the company will be out of stock for sometime hence arise the need for providing for some safety i.e some minimum or buffer as inventory as a cushion against such stock outs.

The re-order point is inter-related with the safety stocks because as the re-order point is moved upward, the amount of the cushion is increased.

Thus the re-order point is the resultant of the demand during lead time plus safety stock. By increasing the safety allowance the re-order point is increased by the same amount. It should be noted that the economic order quantity does not come into the picture and is independent of safety stock analysis.

Key words: Techniques of Inventory control

REFERENCE

Adeniyi.A.(2010). Cost accounting: A managerial approach. Lagos: El-Today venture limited.

Ama. G. A. N. (2006). Management and cost accounting. Nigeria:Amason
publication venture.

Atkison.c.(2005). Inventory Management Review. London: Heinemann
publisher.

Chukwuma.C.U. (2010).Management Accounting. Enugu:Dikasinma
publisher.

Drury.C. (2009).Management and Cost Accounting. Fifth edition; London:
Thomson publisher.