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Inventory Control

Meaning of inventories

According to the Institute of Chartered Accountants, the term ‘inventory’ refers to (i) tangible property held for sale in the ordinary course of business, or (ii) in the process of production for sale, or (iii) for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares. Thus, the term inventory includes stocks or raw-materials, components, work-in-progress and finished goods.

Meaning of inventory control

Gordon B. Carson defines inventory control as “the process whereby the investment in materials and parts carried in stock is regulated within predetermined limits set in accordance with inventory policy established by the management”. Scientific control of inventories, therefore, involves the following:

(i) Fixation of the limits within which the inventories are to be held.

(ii) Laying down of inventory policies.

(iii) Setting out the investment pattern keeping in view the individual and collective requirements.

(iv) Examining the working of the inventory policy and effecting changes as and when needed.

Briefly speaking, inventory control involves planning of (I) what to indent, (ii) when to indent, (iii) how much to indent, and (iv) how much to stock so that purchasing and storing costs are minimum without affecting adversely production or sales process.

A fine distinction can be made between materials control and inventory control. The former is the operational process while latter is the management process. In other words, inventory control precedes materials control or the formal gives birth to the latter. In brief, inventory control forms the basis of materials control.

Techniques for control over inventories are also the same as explained regarding materials control. They are:

1. Use of perpetual inventory system both regards stores ledger and bin cards followed by continuous stock taking.

2. Effective and efficient purchasing, storing and issuing procedures.

3. Setting of various levels regarding each item of inventory and their compliance.

4. Economic order quantity.

5. ABC analysis.

6. Min-max plan.

7. Two bin system.

8. Kardex system

9. Turnover ratios.

10. Establishment of budgets.

The levels regarding finished goods inventory can be fixed by taking into account the demand for the products and the capacity of the plant. Over-stocking of finished goods results in blockage of capital and increase in losses on account of deterioration and obsolescence of products besides increasing the changes of pilferage or leakage. Under-stocking may result in plants remaining idle, deterioration in labour management relations because of idle labour and loss to the goodwill of the firm.

Controlling of work-in-progress is somewhat difficult. Its stock will depend upon the duration of the production process and sequence of processes and sub-assembling. Proper production planning and strict following of production programme will be helpful in having an effective control over this item.