Inventory Control Techniques
Chapter Twelve
Syllabus topic 2, "Meaning, Need for and Importance of Materials, Procedures, Documentations and Inventory Control techniques"
Pages 30 to 32 of 82
In one line
Control is selective: ABC analysis concentrates effort on the few items that carry most of the value, and perpetual inventory keeps the records right without stopping the factory.
ABC analysis
The idea. In almost any store, a small number of items account for most of the money. Treating every item alike wastes effort on the trivial and starves the critical.
| Class | Share of items | Share of value | Control |
|---|---|---|---|
| A | Few | Most | Tight: close monitoring, low stocks, frequent review, senior authorisation |
| B | Moderate | Moderate | Ordinary: routine review |
| C | Many | Little | Loose: large orders, infrequent review, simple reordering |
The proportions vary with the business and should not be quoted as fixed percentages. What is fixed is the shape: value is concentrated in few items.
The measure is annual VALUE, not price. An item costing a rupee, consumed a million times a year, is a class A item. An expensive item bought once is not.
Method, in four steps. Compute annual consumption value for each item; rank them descending; cumulate the value; draw the lines where the cumulative value justifies a change of treatment.
VED analysis
Classifies by criticality rather than value:
| Class | Meaning | Consequence of a stock-out |
|---|---|---|
| Vital | Production stops | Cannot be tolerated |
| Essential | Production is impaired | Serious |
| Desirable | Production continues | Tolerable |
VED and ABC answer different questions and are used together. A cheap gasket may be class C by value and vital by criticality, and it is the combination that decides the stock held.
Perpetual and periodic inventory
| Perpetual inventory | Periodic inventory | |
|---|---|---|
| Records | Continuously, as each receipt and issue happens | Only at the period end |
| Balance known | At any moment | Only after a count |
| Physical verification | Continuous, a few items at a time, all year | One annual count |
| Production | Not interrupted | Usually stopped for the count |
| Discrepancies | Found early, when the cause is traceable | Found late, when it is not |
Perpetual inventory is a system of records; continuous stock-taking is the physical verification that proves them. They go together and the phrase usually means both.
Why it matters more than it sounds. A discrepancy found in March, when the item was issued in June, cannot be investigated. Found in June, it can.
The other techniques named in practice
Two-bin system. Stock is kept in two bins; when the first empties, that is the signal to reorder, and the second carries production until delivery. Crude, cheap, and effective for class C items.
Just-in-time. Material arrives as it is needed, so stock approaches nothing. It lowers carrying cost to almost zero and raises the cost of any failure in supply, so it needs reliable suppliers and short, certain lead times.
Setting stock levels, which is the next chapter but one, and fixing the order quantity, which is the next chapter. Those two are the arithmetic of control; these are its policy.
The rest of this chapter
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The rest of this subject
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