END TERM ASSIGNMENT

OF
STRATEGIC COST MANAGEMENT

SUBMITTED TO
DR. N. SREENU

SUBMITTED BY
RAJSHREE SONI

CM

DEPARTMENT OF MANAGEMENT STUDIES

MAULANA AZAD NATIONAL INSTITUTE OF TECHNOLOGY
(M.A.N.I.T)
2020-22
 A Project on Inventory Control

What Is Inventory?
Inventory is the raw materials, components and finished goods a company
sells or uses in production. Accounting considers inventory an asset.
Accountants use the information about stock levels to record the correct
valuations on the balance sheet.

 Introduction
Inventory control is the process of keeping the right number of parts and
products in stock to avoid shortages, overstocks, and other costly
problems.

Inventory control focuses on cutting the number of slow-selling products a

company purchases while also increasing the number of high-selling
products. This saves businesses time and money because they don’t have
to spend lots of man-hours reordering and receiving goods that they don’t
really need. Plus, they avoid devoting precious warehouse space to hold
those products, which cuts down on carrying costs and affords more room
for faster-selling products.

By using inventory control, you are able to protect against making rash
decisions and you also avoid the pain and expense that come from
overstocking on inventory. As its name suggests, inventory control helps
you maintain control over your inventory levels so that you make the best
use of your resources and avoid product spoilage and obsolescence.

 Objective of Inventory Control

1. To meet unforeseen future demand due to variation in forecast figures
and actual figures.
2. To average out demand fluctuations due to seasonal or cyclic variations
3. To smoothen the production process
4. To meet the customer requirement timely, effectively, efficiently,
smoothly and satisfactorily.
5. To gain economy of production or purchase in lots
6. To facilitate intermittent production of several products on the same
facility
7. To stabilize employment and improve lab our relations by inventory of
human resources and machine efforts.
8. To balance the stock out cost/ opportunity cost due to loss of sales
against the costs of inventory
9. To minimize losses due to deteriorations, obsolescence, damage,
pilferage etc.
10. To meet the technological constraints of production/ process.
11. To meet the time lag for transportation of goods.
12. To reduce loss due to changes in prices of inventory items
13. To balance various costs of inventory such as order cost or set cost
and inventory carrying cost.

 Benefit of Inventory control

1. Ensures an adequate supply of material
2. Minimizes inventory costs
3. Facilitates purchasing economies
4. Eliminates duplication in ordering
5. Provides a check against the loss of materials
6. Better utilization of available stocks
7. Locates & disposes inactive & obsolete store items
8. Consistent & reliable basis for financial statements
9. Enables managements in cost comparison
10. Facilitates cost accounting activities.
 Literature Review

Success of any industrial undertaking depends upon the 6 m’s

1) Money
2) Manpower
3) Machine
4) Market
5) Material
6) Management

Materials are pivotal importance not less than any other M’s. Problems
have their root in material affects the efficiency of all men, machine, money
& marketing decisions of the firms and thus become the grave concern of
management at all levels. If there were too much of material problems like
ideal funds lied up in excessive inventory storage and obsolesces
difficulties market pressure would Arise. Thus, the importance of inventory
management is realized. A number of studies have been done in the field
of inventory management by various researchers. Some of them are given
below:

1. Bern at de William year 2008 This study tells that the main focus of
inventory management is on transportation and warehousing. The
decision taken by management depend s on the traditional method of
inventory control models. The traditional method of inventory
management is how much useful in these days the author tell about it.
He is also saying that the traditional method is not a cost reducing, it is
so much expensive. But the managing the inventory is most important
work for any manufacturing unit.
2. Jon Schreibfeder 1992 He said that it is easy to turn cash into
inventory, the challenge is to turn inventory back into cash. In early
1990’s many distributor recognize that they needed help controlling and
managing their largest asset inventory. In response to this need several
companies developed comprehensive inventory management modules
 and systems. These new package include many new features designed
to help distributors effectively managed warehouse stock. But after
implementing this many distributors do not feel that they have gained
control of their inventory.
3. Wolf Bagby, Managing inventory In this study Mr. W.Bagby explains
that by managing the inventory it becomes easier for the organization to
meet the profit goals, shorter the cash cycle, avoid inventory shortage,
avoid excessive carrying costs for unused inventory, and improve
profitability by decreasing cash conversion and adopt JIT system.
According to this study companies need to get smart about inventory.

Boosting financial performance is another benefit that comes from better

inventory management. Infect large number of manufacturers enjoy
savings and better performance by choosing the approach of inventory
reduction.

4. D.Hoopman April 7, 2003 (Article from inventory planning and

optimization) In this article he said that inventory optimization recognize
that different industry have different inventory profiles and requirements.
Research has indicated that solutions are priced in a large range from
tens of thousands of dollars to millions of dollars. In this niche market
sector price is definitely not an indicator of the quality of solution, ROI
and usability are paramount.
5. Silver, Edward A Dec22, 2002 (Article from production and inventory
management journal) This article considers the context of a population
of items for which the assumption underlying the EOQ derivation holds
reasonably well. However as is frequently the cash in practices there is
an aggregate constraint that applies to the population as a whole. Two
common forms of constraints are: The existence of budget to be
allocated among the stocks of the items and a purchasing production
facility having the capability to process at most a certain number of
 replenishments per year. Because of the constraint the individual
replenishment quantities cannot be selected independently.
6. Charles Atkinson (A study on inventory management) In the study by
Mr. Charles Atkinson, he explained the inventory management and
assessment of inventory levels. As per this study inventory management
need to address two issue

Part I. How to optimize average inventory levels.

Part II. How to assess (evaluate) inventory levels.
This study talks about what the manager should do and not to do, and
how much amount should be order in one placed orders. Average
inventory can be calculated by simplistic method.
Average inventory = beginning inventory +end inv./2

7. Delaunay C, Sahin E, 2007. A lots of work has been done but now if we
want to go ahead we must have good visibility upon this field of
research. That is why we are focused on frame work for an exhaustive
review on the problem of supply chain management with inventory
inaccuracies. The author said that their aim in this work is also to
present the most important criterion that allow a distinction between the
different types of managing the inventory.

 Importance of Inventory Control

The value of inventory control extends from cost reduction to customer

satisfaction. Good inventory control saves your business time, resources,
and money. Your company can have a significant gain in sales, but without
control over your inventory, your business’s profitability will suffer.

Here are some ways inventory control is important for your business.

 Quality control
Having an inventory management system allows you to implement greater
quality control. If you can track and manage all aspects of your stock, you
better control quality. The longer you hold inventory, the more likely it is to
get damaged. You can avoid that by ensuring that stock gets rotated
through your warehouse.

Inventory control also allows you to track the quality of stock you receive
from suppliers. How often do you have certain products returned? How
often are those that are returned sent back because they break or have
other defects? Seeing how products move through your inventory can point
to any problems, and help you eliminate write-offs.

 Organizational control
Inventory control means that you have organizational control in your
business. A well-organized stockroom lets you manage your merchandise
and make the most of your investment in physical inventory. This aspect of
inventory control is vital for knowing where your stock is and the
expediency with which you can access it.

Inventory control in terms of the organization of your stock is vital for the
proper running of your company. It will ensure that you have enough units
to fulfill orders and have safety stock. Effective inventory control will also
help you avoid having any dead stock or overstock. Safety stock acts as a
buffer to reduce the risk of an item being out of stock. Dead stock is
inventory that doesn’t sell.

 Accounting accuracy
Keeping an accurate record of your inventory is vital for managing your
assets. It will also help you in the event of an audit. Knowing what you have
in assets allows you to know your overall spoilage and understand the
value of your company.

Financial accounting rules and tax regulations may mandate your company
to have a physical inventory account. All stock should have correct
numbers and pricing in your inventory systems and your accounting
software. This will ensure your company can go through audits without any
question to your business’s accounting integrity.

 Purpose
The purpose of stock control is to have as much as you need on hand
without having too much inventory to manage or sell. Inventory
management gathers and evaluates data about demand, turnover rates
and inventory levels, giving you the information, you require to place
orders when necessary and sell down existing stock when you can.

Inventory control is often done digitally, using inventory management

systems that track when an item is ordered and restocked. Your inventory
control system may even have an automatic ordering feature that alerts
you or even places your order once stock gets below a certain level. But
inventory control programs are only as good as the information you enter
into them, which can change regularly. If demand for a product increases,
your established reorder point may turn out to be too low, and if demand
declines, that same reorder point may turn out to be too high.

Methods of Inventory Control

FIFO ( first in first out ) :

This method assumes that goods that are added to the inventory first must
also be removed from the inventory first i.e., goods that are bought first
must be sold first. This method is generally used by firms dealing with
perishable goods or goods that are subjected to quick obsolescence.’

LIFO ( Last in first out ) :

This method assumes that goods that are added to the inventory last must
be sold first or removed from the inventory first. This method is usually
used by firms dealing with goods that are perishable or do not become
obsolete quickly.

 Techniques of Inventory Control

1. ABC analysis :
The basic work in this always better control analysis is the classification
and identification of different types of inventories, for determining the
degree of control required for each. In many firms it is found that they have
stocks which are used at very different rates. So items are classified under
three broad categories A, B and C, on the basis of usage, bulk, value, size,
durability, utility, availability, criticality etc.; and should be controlled with
due weightage to differential characteristics.

The items included in group A involve largest investments and the

inventory control should be most severe to these items. C group consists of
inventory items which involve relatively small investments although the
number of items remains large. These items deserve minimum attention of
control. In B group that items are included which are neither of A nor C.
This method can be explained by the following exhibit.

Classification of Inventory Items:

Class No. of items (per cent Value of item (percent
of total) of total)
A 20 85
B 30 10
C 50 5
Total 100 100

2. Economic order quantity model:

The basic decision in an economic order quantity (EOQ) procedure is to
determine the amount of stock to be ordered, at a particular time so that
the total of ordering and carrying costs may be reduced to a minimum
point. A firm should place optimum orders and neither too large nor to
small. The EOQ is the level of inventory order that minimizes the total cost
associated with inventory. A useful formula for calculating the optimum
order quantity is:

EOQ = √2DO/ C

Example: A firm has an annual inventory requirement of 10,000 units. The

accounting costs associated with placing an order with the supplier come to
Rs. 200 per order and the carrying costs of holding stocks are expected to
be Rs. 4 per unit.
Hence,
D=10,000 units
0 = Rs. 200
C=Rs. 4

EOQ = √2 x 10,000 x 200/ 4

= √10,00.000
= 1,000 units
Therefore, 1000 units should be ordered every 37 days.

3. Just in Time (JIT):

Just In Time (JIT) inventory management lowers the volume of inventory
that a business keeps on hand. It is considered a risky technique because
you only purchase inventory a few days before it is needed for distribution
or sale.

JIT helps organizations save on inventory holding costs by keeping stock

levels low and eliminates situations where deadstock - essentially frozen
capital - sits on shelves for months on end. However, it also requires
businesses to be highly agile with the capability to handle a much shorter
production cycle. It is a technique to arrange raw material orders from
suppliers in sync with the production schedules to reduce inventory costs.
There will be no excess inventory stored beyond the production requirements,
and hence it leaves no scope for deadstock in the organization.

4. Safety Stock:
To avoid stock-outs firms maintain safety stocks of inventory. The safety
stock is the minimum level of inventory desired for an item given the
expected usage rate and the expected time to receive an order. If an order
is placed when the inventory reaches 12,000 units instead of 10,000 units,
the additional 2,000 units constitute a safety stock.

The manager expects to have 2,000 units in stock when the new order
arrives at the scheduled time. The safety stock protects as a safe-guard
against stock-outs ‘position due to unanticipated increase in usage
resulting from an unusually high demand and/or an uncontrollable late
delivery of inventories.
The increase in the amount of inventory held as safety stock reduces the
chances of stock-out and therefore, reduces stock-out costs over the long-
run. The level of inventory investment is, however increased by the amount
of safety stock. The optimum level of safety stock is determined by the
trade-off between the stock-out and the carrying costs.

Thus, the best level of safety stock for a given item depends on stock-out
costs, variability of usage rates and delivery times. The safety stock level is
the multiplication of the average demand during a period of the maximum
delay and the probability of its occurrence.

5. Re-order point:
The ROP may be defined as that level of inventory at which a fresh order
should be placed to the suppliers for replenishing the current stock.The
ROP is calculated as the lead time X daily usage. The lead time is the time
lag between raising an order and the goods being delivered.

For example, if the normal daily usage of materials is 100 units and it takes
30 days for the supplier to deliver the goods, then an order must be sent
out when the stock level reaches 3,000 units. If safety stocks are held then
re-order level should be: safety stock+ (lead time x daily usage).

6. VED Analysis:
VED analysis is an inventory management technique that classifies
inventory based on its functional importance. It categorizes stock under
three heads based on its importance and necessity for an organization for
production or any of its other activities. VED analysis stands for Vital,
Essential, and Desirable.

7. Perpetual Inventory Management:

This technique entails recording stock sales and usage in real-time. Read
“The Definitive Guide to Perpetual Inventory” to learn more about this
practice.
Conclusion of the study

Effective inventory Control is vital for any business, from a newly

established brand all the way up to Amazon. It allows you to optimize your
cash flow and reduce resources spent in inventory control. By using
automated inventory control software systems, you can implement a
strategy for inventory control that tracks your assets in real-time. Giving you
visibility and control over your stock.

Even if your business has a relatively small operation, you can choose
between a periodic or perpetual inventory system. However, if you have a
large volume of stock or more complex processes, a perpetual inventory
system is definitely a more suitable option. And if you look to complete your
retail tech stack, research the best inventory system that can be
seamlessly integrated with the rest of your business operations.