METHODS OF CONTROLLING AND MANAGING INVENTORY

METHODS OF CONTROLLING AND MANAGING INVENTORY

Ø Economic Order Quantity (EOQ)

Please see my earlier posts for this method.

Ø Just in Time (JIT)

According to this method of inventory control, holding inventory is useless because it adds to total cost only and carries no benefit. So there should be no inventory at all. JIT method has two aspects:

·        Just in Time Production

This system tells that production should only be started when a new order of inventory is received. This means that production should be fast so that order may be delivered in time.

·        Just in Time Purchasing

This system tells that purchase order should only be placed with supplier when a new order of inventory is received. This means that supply system should be very efficient.

Ø Two Bin System

Under this method of inventory control two large containers are used for the purpose of holding inventory. As soon as the first container falls short of inventory, order is placed with the supplier. During the period of ordering inventory and receiving delivery of inventory from supplier (i.e. Lead Time), second container is used. Quantity of inventory in second container is enough to be used while new inventory is received from supplier. When second container becomes empty, again a new order is placed with the supplier and in this way, the process continues.

Ø Periodic Review System

Under this system of inventory, there is reorder level and reorder quantity for each item of inventory.

Inventory levels are checked periodically after, say, one, two, three or four weeks. When inventory levels fall below the limit, new order is placed with the supplier.

Ø ABC method of Inventory Control

There are three categories of inventory in this method of control. A, B and C. Category “A” inventory has high holding costs. Category “B” has moderate holding costs (Holding costs higher than Category C and lower than category “A” inventory). Category “C” inventory has low holding costs.

According to this method, each category of inventory should be controlled differently and the closest control should be applied to each category of inventory.

Category “A” may be controlled using EOQ model.

Category “B” may be controlled using Periodic Review System.

Category “C” may be controlled using Two bin System.

Identifying Inventories:

1.     Calculate total amount spent for each item of inventory.

2.     Rank the individual inventory items by the amount total spent and sum the column.

3.     Express each individual total spent item figure as a percentage of the total spent and sum the percentage column..

4.     Identify categories using stated policy.