'Inventory'

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets those are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

Inventory control

Inventory Control is the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply.

It can also be referred as internal control - an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc.

Inventory control may refer to:

• In economics, the inventory control problem, which aims to reduce overhead cost without hurting sales
• In the field of loss prevention, systems designed to introduce technical barriers to shoplifting

It answers the 3 basic questions of any supply chain: 1. When? 2. Where? 3. How much?

Importance of Inventory Management

1. Inventory management helps in maintaining a trade off between carrying costs and ordering costs which results into minimizing the total cost of inventory.
2.    Inventory management facilitates maintaining adequate inventory for smooth production and sales operations.
3.  Inventory management avoids the stock-out problem that a firm otherwise would face in the lack of proper inventory management.
4.  Inventory management suggests the proper inventory control system to be applied by a firm to avoid losses, damages and misuses.

Methods of Inventory Controlling

ECONOMIC ORDER QUANTITY (EOQ) MODEL

The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable.

• Assumptions:
• Relatively uniform & known demand rate
• Fixed item cost
• Fixed ordering and holding cost
• Constant lead time

(Of course, these assumptions don’t always hold, but the model is pretty robust in practice.)

What Would Holding and Ordering Costs Look Like for the Years?

A = Demand for the year

O= Cost to place a single order

C = Cost to hold one unit inventory for a year

Total Relevant* Cost (TRC)

Yearly Holding Cost + Yearly Ordering Cost

* “Relevant” because they are affected by the order quantity Q

EOQ Formula

 

Same Problem

Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is Rs. 2.50 and the cost to place an order is Rs. 50. What is the economic order quantity?