Inventory management is the management of inventory and stock. It is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale.
Buying too much means expensive storage and there is a risk of loss by deterioration and falling prices. Buying too little may mean short time working, loss of sales, and even a shut-down owing to lack of materials. Close and continuous coordination is required here with the store department who should maintain minimum and maximum figures of all items of stock.
The Scope of Stock Control
Materials control can be said to be the same as stock control, except that it involves purchasing as well.
Stock control is concerned with:
- Keeping stocks in such a way that they can be easily located when required and so that they are kept in good condition.
- Receiving all goods and materials, checking, identifying and recording them.
- Keeping stock records of receipts and issues.
- Assist in stock taking at regular intervals.
- Make requests from re-ordering when stocks are below minimum levels.
- Making issues from stores as and when required and on proper authority.
Importance of Stock Control
The importance of proper stock control cannot be underestimated.
- The stock is a valuable asset of the concern, and can easily change the whole picture of a balance sheet.
- Stock control forms an essential part of efficient work in the organization and is likely to affect production if carelessly performed.
- Unless good storekeeping is practiced it may be expensive to the concern in lost and pilfered goods.
- Stock control is linked with buying and the purchasing officer lies in an efficient information service from the store’s department.
- Goods stores staff can ensure proper and prompt claims for damages shortages and defects in foods received.
Kind of Stock
Sometimes separate stores are maintained for different kinds of goods and these can be classified as:
- Raw materials, though this may include part-finished or even finished components (e.g., electric motors), purchased for the purpose of continuing production in the factory.
- Consumable stores, which include materials not returnable, such as oil, soap stationery etc.
- Non-consumable goods such as small tools jigs and fixtures. Some large factories often have a special tools store.
The two main methods of stock-taking are:
- Annual: End of financial year stock-taking when a programme should be laid down on methods of stock-taking, length of time allowed, over time, etc.
- Perpetual Inventory: The checking of small sections of stock at regular intervals throughout the year (the particular section not being publicized in advance), so that during the year, the whole of the stock is checked, it is important that any discrepancy discovered should be reported to management immediately. At the end of the year, the stock-book figures are then taken as the physical closing stock without further stock-taking.
The technique adopted for stock-taking will naturally vary with the type of stock with the size and diversity of the concern and with the staff available, but instructions for a year-end stock-taking might well include:
- A timetable specifying the dates when the stock-taking is to start and when it has to finish; allowance should be made for all checking pricing and extending etc.
- Allocation of responsibility for the actual stack-taking; who is to be in charge of different sections of it.
- A check to ensure that all bin cards and stock records are entered up to date.
- A note specifying which consumable goods are not to be included in the stock-take (usual things like string brown paper, cleaning material).
- Separate lists setting out goods on approval or consignment or any other goods not taken into stock.
- Instructions on the method of approach to the job e.g., top racks first from left to right, and working down to floor level.
- An indication of the accepted ways of counting certain goods e.g., nuts and bolts and wire by weight.
- Instructions about entering on separate lists all goods received and issued while the stock-take is in progress.
- The basis of valuation for stock purposes (cost or market price or whichever is the lower is accepted by the Board of Inland Revenue).
- A clear sign for bin cards to be appropriately marked when the stock has been taken of the contents of the bins.
- A list to be made of differences between stock-take and stock records.
- A meeting of the committee concerned both before and after stock-take to discuss matters arising.
- A certificate on stock in a bonded warehouse to be obtained and a check to be made on purchase invoices received and goods still in transit (not normally included in stock, but there might be reasons of policy why they should be included).
Stock records are important because they act as a check on the issuing system they can give the balance of stock of any item required at any time and they act as a check on the physical stocktaking. Ideally, stock records should not be kept by the storekeeper but by a clerk in a separate office; this is obviously to deter collusion and to prevent fraud.
The usual form of stock record is similar to a ledger card for each item of stock, recording goods received, good issued and balance in hand. At the top of the stock card, there may be entered figures representing the minimum and maximum stock levels. Some stock records have quantities only but some have values inserted as well so that values of stock in hand can be obtained quickly, and so that valued issues can be obtained for costing purposes.
A stock level is important and constitutes an essential part of stock control. As mentioned above, minimum and maximum stock levels are entered on bin cards (for the storekeeper to report on fresh purchase-requirements) as well as on stock records (for office staff to check). Sometimes only one of these is sufficient and sometimes both are maintained as a check on each other.
Operational research has provided mathematical formulae to ascertain scientifically the precise quantity required taking into account all the factors concerned.
Inventory is made up of raw material, work-in-process, and finished goods and as earlier observed, the level of raw material maintained by a firm is influenced by anticipated production, seasonality of production, the efficiency of scheduling, purchases, production, operation and the reliability of sources of supply of raw material.
Important Terminologies of Inventory Control
- Lead or Procurement Time: This is the period of time between the ordering of inventories and replenishment.
- Reorder Level: This is the level of stock at which a further replenishment order should be placed. It is the point in between maximum and minimum stock levels so that sufficient time is left to initiate the purchase of fresh supplies before the minimum is reached. Abnormal usages and delaying delivery must be allowed for. Often standard re-ordering quantities are also entered on the stock records to facilitate re-ordering, but notice must be taken of any special production needs changes in a market capital available, etc.
- Reorder Quantity: This is the number of replenishment orders.
- Buffer Stock: This is a stock allowance to cover errors in forecasting the lead-time or the demand during the lead-time. It is also called a minimum or safety stock. Minimum stock level is fixed by taking into account the rate of consumption of material; and the time necessary to obtain delivery. While a minimum quantity will require less capital sufficient must be ordered to give the economy of bulk prices, to take advantage of a rising market price and to reduce administrative costs of constant re-ordering.
- Demand or Maximum Stock: This is the amount required by sales, productions etc per given period. Maximum stock level is fixed by taking into account rate of consumption of material, the time necessary to obtain new supplies, amount of capital necessary and available, the keeping quantities of goods concerned, storage space available; the cost of storage and insurance, the risk of obsolescence, seasonal conditions and economic ordering quantities.
- Economic Ordering Quantity (E.B.Q): This is the ordering quantity, which minimizes the balance of cost between inventory holding costs and re-order cost. It is also called Economics Batch Quantity (E.B.Q).
Different stores control methods need to be adopted best suited to different businesses but in a business with a number of shops carrying stocks it might be as follows:
- Issues to shops are recorded on special issues indents.
- Daily sales returns will be used to deduct goods sold from individual items of stock so supplied.
- Paper records of stock at head office are usually supplemented by having traveling stock-takers who carry out surprise visits and check on stock at shops and compare physical stacks with the balances recorded at head office.
- As in the chain sores weekly or fortnightly stock returns are also required of the shop manager. Some concerns have discontinued such returns where head office maintains the records.
- It is essential here (as in a manufacturing concern) for the management to decide on a stock-holding policy, i.e. how much stock and to what value should be held by the company and how much by different departments or shops.
- The policy must be related to current sales and production, as well as to the finances of the concern.
Controls Where Demand and Supply Varies
Seasonal fluctuations of either demand or supply cause difficulties which must be counteracted.
- Where Demand is Seasonal: Problems of storage, capital requirements and building up sufficient stocks for the season; administrative staff may be slack in off-season periods and overtime be needed at seasonal times stock control is apt to be haphazard in season (not worth employing a large number of staff); goods may become out of date and often sustained publicity is necessary to sell goods manufactured previously.
- Where Supply is Seasonal: It is assumed that demand is fairly constant and problems again are capital for purchases of materials “in season” storage until required season’s supply not being sufficient there may be a search for alternatives. Arrangements can be made for the supplier to store and supply goods as required provided long-term contracts are awarded.
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