Name: Sarim Javed

Reg # 2010321
INVENTORY CONTROL
SUMMARY


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Inventory is the stock of any item or resource used in an organization. Inventory is basically the largest
asset on the balance sheet of most businesses. The average cost of inventory in the United States is
around 33 percent of its value and therefore a curb in the inventory can bring about significant
monetary benefits. The trick is to decrease the inventory order cycle time and increase the accuracy of
demand forecast. In order to maintain the minimum amount of inventory all the while meeting the
customers demand on time, probability distribution techniques are employed. But before moving on
to these techniques, let us first briefly discuss the purpose of having an inventory and the types of
associated inventory costs.


There are a number of reasons why businesses maintain an inventory. Firstly, having an inventory
relieves the dependence of a workstation on another in an assembly line in order to minimize
performance time and maintain a stable output. Secondly, demand of a particular product is random in
nature and cannot be predicted with great accuracy, therefore as a safety measure, an inventory is
maintained to meet the customers need in time. Thirdly, inventory brings flexibility in production
scheduling by relieving the pressure on the production system in getting the goods out. Hence, the
lead time can then be made longer enabling planning for smoother flow, all the while meeting
customers need in time. Fourthly, unforeseen delays in the arrival of raw material from the vendor
might bring the production to a temporary halt. Having an inventory can still enable the business to
meet the customers demand on time even when such problems arise. Finally, having an inventory
enables larger order size. The larger the order size, the more money the business will save on
transportation.


The types of costs associated with maintaining an inventory are: Holding costs which include the costs
for storage facilities, handling, insurance etc. Setup costs which include costs for arranging specific
equipment setups, material and parts changing time, removal of previous stock material etc. Ordering
costs which includes costs for counting items, calculating order quantities, maintaining order tracking
systems etc. And finally Shortage costs which include the lost profits resulting from stockout.


An inventory system provides the organizational structure and the operating policies and techniques
for maintaining and controlling goods to be stocked. The system is responsible for timing the order
placement and keeping track of what has been ordered, how much, and from whom. This inventory
system is further classified into Single-Period Inventory Model and Multiple-Period Inventory Model.


In single-period inventory model, the purchase is a one-time decision with the purchase being made
for a fixed amount of time with no reordering. In order to illustrate, consider the following example. A
T-shirt sales man decides to sell promotional shirt for a football match. His stock will comprise of T-
shirts corresponding to the teams playing in that particular match and hence the stock will be a one-
time order, a single-period inventory model. Now the problem that arises for the T-shirt salesman is
estimating how many people buy his T-shits and how much risk can he afford for running out of
inventory. The extra amount of T-shirts that the salesman should carry in order to avoid running out of
stock, he must gather statistical data and make a normal distribution graph. Using this probability


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distribution graph and the NORMSINV command in MS EXCEL, the salesman can calculate the exact
number of standard deviations of extra T-shirts.


In multi-period inventory model, the purchase is periodical where the inventory is kept in stock and
used to demand. There are two general types of multi-period inventory systems: Fixed-order quantity
model (also called economic order quantity, EOQ) and Fixed-time period model. Multi-period inventory
ensures that a product is available for purchase round the year. In fixed-order quantity, the order is
triggered when specified reorder level is reached and can take place at any time depending on the
demand. Therefore the inventory in a fixed-order quantity model must be continually monitored, and
records must be maintained. In a fixedtime period model, counting takes place only at the review
period. The fixedtime period model has a larger average inventory and safety stocks because it must
also protect against stockout during the review period.


Maintaining inventory through counting, placing orders, receiving stock, etc. demands a lot of time and
costs a lot of money. When there are limits on these resources, it is wise to try to use the available
resources to control inventory in the best possible manner. Simply put, the items in the inventory must
be prioritized. That is where the ABC inventory planning comes in. The ABC inventory planning
classifies items according to their importance. According to this system, items are divided in three
parts; high dollar volume, moderate dollar volume and low dollar volume. The ABC approach divides
this list into three groupings by value: A items constitute roughly the top 15 percent of the items, B
items the next 35 percent, and C items the last 50 percent. The main purpose of placing items in these
categories is to establish a certain degree of control over each item. The critical items mean that their
stockout can lead to sizeable loss to the company, so they are automatically placed in category A or B.


Another problem is inventory accuracy, which is how much accurate your record is of your inventory.
Inventory records usually differ from actual count. There are number of reasons that record and
inventory may not agree. Use of bar codes and RFID tags is one important way to minimize errors
caused by inputting wrong numbers in the system.