13 Inventory Control

A. Thahira Banu

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1.  INTRODUCTION:

 

Inventory is a very common term and the simple literal meaning of inventory is maintenance of stock. Inventory control refers to a method, which assure the supply of required quantity and quality of stock at the necessary time and at the same time avoid unnecessary investment on inventories. It is an important function of material management.

 

2.  LEARNING OBJECTIVES:

  • The learning objectives of this module
  • Understand the term inventory control in food service system
  • Know the various types, advantages and disadvantages of inventory control system Factor affecting inventory control system

   3.  WHAT IS INVENTORY CONTROL?

 

The practice of ensuring the apt quantity of stock to be kept by a food service institution, so as to meet customer requirement or demand without any delay and at the same time keeping the costs related with holding stock to a minimum. Inventory control ensures that stocks are not over stocked or under stocked, maintains appropriate amount of stock for smooth functioning of a food service institution. It can be broadly defined as the action of inspecting a shop’s stock. Inventory control aids in the regulation and maximization of an institutions stock. The goal of inventory control is to maximize profits with minimum inventory outlay, without affecting customer contentment levels. In other word, inventory control ensures the stock available at any given time.

 

In an industry or FSO the management needs strategies and technology interms of software that is needed for managing the inventory. So, very large institutions there is separate wing that is recruited for this inventory control system. The recent trend in big shopping mall’s is usage of magnetic tags and barcodes and its detectors .These are possible through installation of software’s in the computers that help in inventory control.

 

In material management the inventory controls aims to reduce overhead cost without affecting sales. When proper inventory control is established it will in reduction of overhead cost.

 

Basically 3 simple questions can be raised  in for storing of the materials When? Where? How much? When to stock? Where to stock? How much to stock? The goods to be stored in a store house or in a ware house.

 

4.   WHAT IS THE NEED FOR INVENTORY CONTROL?

  • Is to maintain the stock or to meet customer demand
  • It controls the amount of stock on the shelves or in the storeroom.
  • To keep an inventory of the products issued to different departments. A raw material has to be issued only on requistion and issue of the stock can be stored in a database or entry in a record. So, once an inventory is maintained it helps to keep the data or the information of what products issued and how much has been issued?
  • To avoid overstocking and under stocking of raw materials. Inventory control will help us to maintain appropriate stock. We will not be getting more quantity of products and stocking it and when it goes waste it has to be discarded or under stocking will affect the smooth work flow in the production area. So, inventory control helps us to exactly store the required quantities of goods .
  • To segregate and stock of high value and low value goods. This is highly needed for many of the food service institutions. Simple example, why we need to segregate stock of high value and low value of goods. It’s very important because of cost incurred for the purchase of the material. Then once the high value goods are been used and not properly maintained in the stock. The management is at a loss. Very simple example is storing of food ingredients such as cashew, walnuts, pista etc.,. itshould be stored separely and it as to be properly secured. Same way certain fats that has been used or certain essence that are used which are very costly. Another example is saffron which is very costly has to be stored separately. So, the stock has to be segregated as high value and low value goods. So, for this inventory is very essential.
  • To provide prompt services to all the units or departments concerned. When there is a requistion from department the raw materials has to be issued immediately. In a food service institution ingredients required should be issued on demand and in time. Because the food service is not a stored service. We have to finish the service on daily basis. So, the product has to be available in time for the personnel to do the service.
  • To keep record of inventory issued to various departments in a food service institution. So, amount of material that has been issued has to be recorded only then the financial status of the company can be maintained.

Modern inventory control systems:

 

Bar coding system and Radio-Frequency Identification (RFID) tags which are used to provide automatic identification of inventory objects. So, these are used for high value goods, now in most of the super markets also we have the bar coding and radio frequency identification tags which helps us to ease the work of inventory/ record or stock maintenance and sales. Inventory objects could include any kind of physical asset: merchandise, consumables, fixed assets, circulating tools, library books, or capital equipment all this can be called as an inventory objects. To record an inventory transaction, the system uses a barcode scanner or RFID (i.e.) Radio-Frequency Identification reader to automatically identify the inventory object, and then collects additional information from the operators via mobile, computers etc. so, these the modern inventory control system that are present which says goodbye to the old stocking method, writing records, maintaining ledgers etc

 

5.   TYPES OF INVENTORY CONTROL SYSTEM: There are seven methods in practice

 

1.         ABC Method

2.       Two Bin Method

3.       Three Bin Method

4.       Fixed Order Quantity

5.       Fixed Period Ordering

6.       Just In Time

7.       Vendor Managed Inventory

 

1. ABC Method is one of the common methods used widely by various industries. So, this is one method by which inventories are maintained and are classified based on the sales contribution and significance of the same in their assortment plan. So, in this ABC method actually they categorize the products into A- category products, B- category products and C- category products. The categorization is done based on the amount or the value of the product.It is otherwise called as Selective Inventory Method(SIM).

 

A- Category products: This will be the product that has maximum sales and flagship products with higher margin. Such products are called as A- category product. The product that is of maximum sales and they are the flagship products with the higher margin. The profit they receive from selling these products will be very high. Usually the top 20% products in the assortment contributing to 80% of the total sales are classified under A category where tight control on inventory is required to ensure no loss in sales. Twenty percent of products contributing to 80% of sales are known as 80-20 Rule or Pareto principle. The products in this category are called flagship products which gives the companies a higher profit margin.

 

B-Category products are important to the retailer but are less important compared to A Category products. The products that are sold in the wholesale such products will be stored as B-category products and they are more important to the retail markets than the wholesale market and such products are called as B-category products.

 

C-Category  products  are  bottom  of  the  line  contributing  less  to  sales.  They contribute very less they are in the bottom of the sale line. Such products are called as C- category products. These products are marginally important for the business and are kept only for the sole purpose of customer requirement. They don’t give them profit or high profit products or high value products are not into this category. The products are grouped or classified according to their sales contribution and their segregration is based on the profit margin of the goods stored.

 

2.   Two Bin Method

 

Is one of the simplest methods commonly used in warehousing and the items are stored in two locations or bins in a warehouse and when the stock is depleted in the first bin the stock in the second bin can be used. The required quantity to be filled in the second bin is placed for ordering. So this is called as two bin method. This is usually followed in the warehouses with large amount of products or commodities are stored. They have it in two locations may be one in a main stock area and other one in a store.So, they may have different types bins, when the stock in first bin gets exhausted or when the stock in the first bin is completed the second bin will be used. The required quantity to be filled in second bin will be ordered once it gets exhausted.

 

3. Three Bin method is also similar to Two Bin method where it is called has Kanban system is being followed in Japan. It is a Japanese technique called as Kanban system. The supplier will not produce the raw material for the manufacturer until the reserve bin is emptied. So this is called has three bin method. Figure 1 and 2 shows the two bin and three bin methodsof inventory control

 

When it comes to three bin method it is little different. We have a main bin A, reserve bin B, supplier bin C. When it comes to main bin A it is in the stock flow it is in the main area and reserve bin is kept at the back and the supplier bin is available. So, once from the main bin it is send to the distribution center, from the distribution center it will be taken to the store and other places. Once it gets replenished when the load is completed closed then the reserve bin it will be taken, once the reserve bin is empty the purchase order will be sent to the supplier. So, manufacture in this three bin method does not produce further products until the order is placed. So, when the commodity gets reduced in the reserve bin then, it will be taken from the supplier bin. Once the goods are taken from the supplier bin it will be intimated to the supplier for the production of more or manufacture of the products. so, this is called as three bin method.

 

Fixed Order Quantity is used to avoid confusion while making any new order. Only a fixed quantity can be ordered at one time for the item. This type of ordering is usually used in auto refilling of goods where in auto reordering point is set in system and when the product’s inventory level hits the reordering point or the stock levels, an order is placed to the maximum stocking capacity of the product. This is called as fixed order quantity.

 

Just In Time- JIT inventory system exposes the unwanted or the dead inventory held by the retailer/ manufacturer. So, in this the unwanted stocking of the products is avoided in this method. The products are sold in time and the cost of inventory maintenance is less. This method is ideal for manufacturing organization and it is not used in Retail industry in general. So, it is ideal for manufacturing organization, not for retail industries. Only in wholesale they will be using it. As, soon the product comes in to the store the product will be sold. Such type of inventory is called has Just in Time.

 

When it is arrived immediately the product will be sold to the retailers, it is mostly done by the wholesale industries. So, it is not used by the retail industries in general. This is called has Just in Time.

 

Vendor Managed inventory

 

The retailer provides a shop floor space and the vendor is charged a consignment rate on every product sold at the location. So, in vendor managed inventory the retailer provides the space for sale and the vendor will be charged for the consignment, Depending on the amount of the product being sold at his location vender will be charged. The ownership of the items from receiving to sales and any loss during the stacking period will be borne by the supplier. So, this is another method called has vendor managed inventory. So, the vendor take the floor shop space and maintains everything and sales is done.

  • LEAD TIME
  • A major factor that affects inventory control policies is product lead time-the time from receipt of an order to the time of delivery. Some industries and products have extraordinarily long lead times.

For example, most of a retailer potato and cereal snacks are not produced in Chennai but is made in Uttar Pradesh This short lead time reduced the number of inventories to be maintained and it benefits the retailer because he could get more products in terms of quality and quantity within a fairly short notice.When snacks were made in Chennai, the retailers could order from its supplier and have it delivered within hours or days rather

 

6.    FACTORS AFFECTING INVENTORY CONTROL SYSTEM

  1. PRODUCT TYPE:
  • The type of product greatly influences the inventory control policies assigned to manage the product.
  • For example, products with short shelflife, such as perishable foods, require a different policy than non perishables of short shelf life products must be rotated based on expiry date.
  • PRODUCT COST:
  1. Food service institutes employ additional inventory control policies for high value goods.
  2. For example, many warehouses keep expensive raw materials or machines in secured cages; only a few warehouse personnel have access to these products
  3. Along with having the products stroted in a secured manner, most companies require signature from authorized personnel before high-value products are moved from one location within a facility to another.

ADVANTAGES AND DISADVANTAGES

 

Stock control systems ensure that stocks are available in shelves or can identify the stock availability and can spot out the stock which got over.

 

It avoids shortage of materials and duplicates ordering.

 

If there is too much stock, it ties up the company’s money, which could have been spent on other administrating work or advertising or paying a personnel for better pay for his skill for the better facilities that are given for the customers.

 

One simple example: If too much of stock store up especially perishable products , it might not sell and would have to be discarded. So, inventory control helps industries to identify the amount of stock availability and can spot out the stock which has to be ordered immediately to avoid shortage of materials and overcome duplicate ordering. So, these are the few advantages of inventory control.

 

7.   CLASSIFICATION OF INVENTORY CONTROL SYSTEMS

 

ABC ( Always Better Control) Discussed in methods of inventory control VED (Vital,Essential and Desirable):

 

This is based on the importance of the product to the FSO.Its shortage same cause confusion and stop the production and sales activity of the institute.Few products may be of essential but their nonavailability may reduce the efficiency of the operation and few others if not available doesnot stop the work and they can be immediately purchased

 

FSN (Fast moving,Slow moving and Non moving ) the items are classified based on the issues from the stores.

 

  1. SELF-CHECK EXERCISES
  • A system in which purchases are made when stock is available only in one bin is ———-
  • Which category of products 20 % adds to the total 80% total sales?
  • Expand RIFD
  • The nonavailability of which category of items causes confusion in production

a)Vital b)Essential c)Desirable

  • Inventory control helps in regulation and maximization of the stock. True/False

(Ans. 1. Two bin system   2. Category A 3. Radio Frequency Identification 4. Vital  5. True)

 

  1. SUMMARY

To summarize, inventory control system is to ensure that stock that is available to meet consumer demands. It also eliminates excessive stock and minimizes the risk of loss and ensures smooth production operations by maintaining reasonable stocks. Thus a good inventory management saves time and money.

you can view video on Inventory Control

 

Bibliography:

 

  1. 1. Sethi, M and Malhan, S. M (2006). Catering Management an Integrated approach, IInd edition, New Age International (P) Limited, Publishers, New Delhi.

Web links

 

  • https://en.wikipedia.org/wiki/Inventory_control
  • https://www.linkedin.com/pulse/20140814080601-115338191-types-of-inventory-control-systems. Published by Suresh Ram
  • http://smallbusiness.chron.com/types-inventory-control-2235.html
  • http://smallbusiness.chron.com/factors-affecting-inventory-control-policies-1644.html
  • http://www.yourarticlelibrary.com/inventory-control/inventory-control-its-objectives-advantages-and-limitations/27944/