5. inventory control

INVENTORY CONTROL
PRESENTED BY- MR. AKSHAY M. KASAMBE
[N.S.P.MCOLLEGE OF PHARMACY DARWHA]
Email id- akshaykasambe@gmail.com
Contact No- 8237956745, 9172432197

CONTENTS
INTRODUCTION
OBJECTIVE OF INVENTORY CONTROL
FUNCTION OF INVENTORY CONTROL
TECHNIQUES OF INVENTORY CONTROL

Inventory - It is a detailed list of those movable items which are necessary to manufacture a product & to maintain
the equipment & machinery in good working order. (OR) It is a sum of a value of raw material, fuels & lubricants,
spare parts, maintenance consumables, semi processed materials,& finished goods of the business firm at any given
point of time.
Inventory control- Inventory control is a process of maintaining optimum level of inventory by using any
technique of inventory control. OR It is a systematic control , constant checking & evaluation of stored inventories.
All the materials , parts, suppliers, expenses and in process or finished products recorded on the books by an
organization and kept in its stocks, warehouses or plant for some period of time.
INTRODUCTION

OBJECTIVE OF INVENTORY CONTROL
1. Maximum customer service- High level of inventory ensures good customer service & production schedule
are kept flexible to meet the changing demands.
2. Minimum inventory investment:-The inventory blocks the capital ,they generate storage cost, or become
obsolete on storage.
3. low cost plant operation:-The overall plant costs are kept low by stable production which is possible by
having sufficient inventories.
OR
1) Regular Supply- Proper inventory control helps in regular supply of goods in the market. Goods will be
available as per need of consumer.
2) Reduced investment- Proper inventory control avoids excess purchase of goods & thus reduced investment
on the goods & avoids over –stocking of materials.
3) Reasonable price- inventory control reduces production cost of product in different ways. Thus help to keep
price reasonable.
4) Minimum wastage- Proper inventory control avoids damage, loss & wastage of goods &% raw material.
Proper inventory control help to control theft of small but costly items

FUNCTION OF INVENTORY CONTROL
To maintain
proper
records so as
to supply
accurate and
regular
material
reports to the
management.
To minimize
‘out of stock’
danger which
result in
crash
purchase at
uneconomica
l rates
To forecast
market and
economic
conditions
of supply
as regards
availability
of materials
To maintain
a sufficient
stock of
finished
product to
meet the
reasonable
expectations
of customers
for prompt
delivery of
goods
To keep the
inventories
as low as
possible
consistent
with the
market
conditions

06
Economic order quantity
ABC analysis
Perpetual inventory system
Review of slow &
non‐moving items
Establishing an effective
purchase procedure
Setting of various levels
Use of material budgeting
Scrap & surplus disposal
TECHNIQUES OF INVENTORY CONTROL
01
09
08
03
07
02
04
10
05
Input‐output ratio analysis VED analysis

1-ABC ANALYSIS
SR.NO A- ITEMS B-ITEMS C- ITEMS
1 it covers 10% of the total
inventories.
it covers 20% of the total
inventories
it covers 70% of the total
inventories
2 it consumes about 70% of
total budget.
it consumes about 20% of
total budget.
it consumes about 10% of
total budget.
3 it requires very strict control. it requires moderate control. it requires loose control.
4 it requires either no safety
stocks or low safety stocks.
it requires low safety stocks it requires high safety stocks
5 it needs maximum follow up it needs periodic follow up it needs close follow up
6 it must be handled by senior
officers
it can be handled by middle
management
it can be handled by any
official of the management
ADVANTAGES OF ABC ANALYSIS-
The investment in inventory can be regulated and funds can be utilized in the best possible manner.
There is a closer and and strict control on those items which represent a major portion of total stock
value
It helps in maintaining enough safety stock of C categories of items
The scientific and selective control helps in the maintenance of high stock turnover rate

2-Economic Order Quantity
E.O.Q- The correct quantity of the material to buy is the quantity at which the ordering cost and the inventory carrying
cost will be minimum. OR This technique is used to find out how much of the inventory is to be ordered. The correct
quantity to buy is the quantity at which the ordering cost and the inventory carrying cost will be minimum.
Methods for Determination of EOQ
1] Tabular determination of E.O.Q 2] Graphic presentation of E.O.Q 3] Determination of E.O.Q by algebraic formula
1. Tabular determination of EOQ- A tabular arrangement of data relating to items of materials helps in the
determination of an approximate EOQ. This arrangement may help the company to find out the orders that need
to be placed weekly, monthly or yearly
SR.NO Numbers of orders per year Annual ordering cost Annual Inventory
Carrying cost
Total Annual cost
1 12 48 8.33 56.33
2 6 24 16.66 40.66
3 4 16 25.00 41.00
4 3 12 33.33 45.33
5 2 08 50.00 58.00
6 1 04 100 104.00
For ex. The order cost is Rs.4 per order. Inventory carrying cost is 10% of the rupee value of annual usage. Rupee
value of the annual usage is Rs. 1000. Hence EOQ is which has less total annual cost.e.g. sr. no. 2 in above table

2] Graphic presentation of E.O.Q- This graph is plotted between order quantity and cost to order and carry, The
ideal point where the sum of both the costs is minimum, the point A is EOQ.

3] Determination of E.O.Q by algebraic formula- EOQ can also be computed by using the following formula
a=Annual consumption
b=Buying cost per order
c=Cost per unit of material
s=Storage & other inventory carrying cost
For example, annual usage of a Material is 1200 units and it cost Rs 10 to handle an order for this material. The price is
Rs. 1.00 per unit regardless of the quantity purchased and carrying cost of inventory is 24% per year. Then

3- PERPETUAL INVENTORY SYSTEM
This is a method of recording the store balance after every receipt and issue to facilitate regular checking and to
prevent closing down for stock-taking.
The prepetual inventory systems comprises-
A. Bin Card
B. Stores ledger
C. Continuous stock-taking
A]Bin Card- This is a document maintained by the store-keeper in his store to keep record of all items of
materials and goods in his store. So bin card serves the purpose of providing ready references. It shows quantities
of each material received, issued and in stock.
AK PHARMACEUTICAL PVT.LTD.
BIN CARD
Description of Material: Bin No:
Code No: Normal quantity to order :
Stores ledger folio No: Maximum stock level:
Re-order stock level:
DATE RECEIPT ISSUE
BALANCE QUANTITY
G.R. NO. QUANTITY S.R. NO. QUANTITY

B]Store ledger- It is kept in the cost accounting department. The stores ledger is generally maintained in the form
of loose leaf cards because they can be easily removed and inserted.
AK PHARMACEUTICAL PVT.LTD.
STORES LEDGER ACCOUNT
Description of Material: Maximum stock:
Code No: Minimum stock:
Bin No: Re-order level:
Location: Order quantity:
Unit:
DATE RECEIPT ISSUE BALANCE STOCK VERIFIED
G.R.
NO.
Qty. Rate Amt S.R.
NO.
Qty. Rate Amt Qty. Rate Amt Date Intial Rema
rks
G.R. NO- MEANS GOODS RECEIPT NUMBER S.R. NO- MEANS STOCK RECEPIT NUMBER

C]Continuous stock taking- Under this system only a limited number of items are verified on a day .The
selected number of items are counted daily or at frequent intervals and compared with the bin card and stores
ledger by the store keeper. The bin card and store ledger record the balances and their correctness can be verified
by means of physical verification .In case any difference between recorded and actual balances, it has to be
pointed out to the management
Helps in completion of profit &
loss account & balance sheet
Overstocking & under
stocking is avoided.
It serves as moral
check on staff.
It helps in detection &
immediate rectification
of errors.
It ensures a reliable
checking of the store
items.
Timely action can be
taken on short ages.
ADVANTAGES OF
PERPETUAL
INVENTORY SYSTEM.
1
3
2
6
5
4

4- REVIEW OF SLOW AND NON-MOVING ITEMS
Inventory is an important constituent of total cost and as such a proper system of inventory control leads to a
significant economy in the total cost of production.
So proper system must be enforced to detect and control slow moving items, obsolete items and dormant stock.
Slow moving materials are those items which are moving at a slow rate.
Dormant materials are those items which are moving temporarily be cause of seasonal production.
Obsolete items are those which have become useless due to change in design, method of manufacture, product
or process etc.
The slow moving items are to be valued at cost replacement price or net realisable value, whichever is less.
In order to detect slow and non-moving items, the following steps may be taken
1. Periodic report 2. Obsolete items 3. Moving ratios
1. Periodic report- A monthly or quarterly report on the stocks of non- moving items is prepared which
indicates its purchase, consumption and balance in hand. These reports are given to the management.
2. Obsolete items- Many of the slow and non-moving items may become useless with the passage of time. A
well designed information system has to be devised to locate such obsolete items, so that these can be utilised
and their further purchase can be stopped.
3. Moving ratios- In order to isolate slow moving items, dormant and dead stocks, moving ratios may be
calculated periodically. These ratios show the turnover of these items for presentation to the management

Input-output ratio is the relation between quantity of material charged 1o the production process and the quantity
of material in the final output. For example, 2 kg of material A is put in production process and the content of this
material in the final product is 1.6 kg. Input-Output Ratio = 2/1.6 x 100 = 125%
ADVANTAGES-
1. It determines the efficiency of the manufacturing department.
2. It helps in the comparison of actual consumption of material with the standard consumption. It indicates
whether the use of material is favourable or unfavourable.
3. The cost of raw material in the finished product can be find out by multiplying the cost of raw material per
unit by the input- output ratio.
For example- A drug and pharmaceutical company uses chemical "A' as a raw material @ Rs 10/- per kg. The I-0
ratio is 125%, Due to non availability of this raw material two other substitutes are available as per the following
information. Recommend which of the material to be used.
Material Rate per Kg. I-0 Ratio
A1 Rs 15/- 110%
A2 Rs 12/- 140%
Solution- Since the rate per Kg and I-0 ratio vary in case of both the substitutes, the final decision depends on the
cost of each of the substitutes in the finished product per unit.
The cost of the raw material = Input/ Output × Rates per unit in the finished product
The cost of the raw material A1 = 110/100 x 15 = Rs 16.50 per kg
A2 = 140/100 x 12 - Rs 16.80 per kg . Taking into consideration the cost of raw
material chemical A1 recommended because it is more economical.
5-Input-output ratio analysis (i-o ratio)

6-SETTING OF VARIOUS LEVELS
In order to maintain inventory control, it is important to decide various levels of materials. These are maximum
level, minimum le and re-order level. These levels are not permanent, but need revision due to changes in the factors
which determine these levels.
Maximum stock level- Maximum stock level represents the limit beyond which the quantity of any item is not
normally allowed to rise. The maximum stock level for a particular item is fixed after considering the following
points:-
1. Rate of consumption of material
2. Storage space available
3. Amount of capital needed and available
4. Nature of material
5. Market trend
6. Fashion habits
7. Government restrictions
8. Risk involved due to fire, obsolescence and deterioration
9. Lead time from the date of placing the order.
The formula for computing maximum level is as follows:-
Maximum level = Re-order level + Re-order quantity - Minimum consumption
Minimum consumption = Minimum consumption per week × Minimum re-order period
A

Mimimum stock level or safety stock- This is the lower limit below which the stock of any item should not normally be
allowed to fall. This is also known as buffer stock. The main purpose of determining this limit is to protect against the
possibility of a particular item going out of stock and there is further danger of stoppage of its production and supplies.
This level is fixed taking into consideration following factors:-
1. Average rate of consumption
2. Lead time
Lead time is the total time consumed between the recognition of the need of an item, till the time it is received for use.
The minimum stock level is expressed as follows:
Minimum Re-order = Re-order level – [Normal consumption per week × Average delivery time or Normal re-order
Re-order level- Re-order level is fixed between the minimum and maximum stock levels. When stock of an inventory,
reaches at this point, the process for the purchase of material should be started. The re- order level is slightly more than
minimum stock level to guard against. 1] Abnormal use of item 2] Abnormal delay in supply
The formula for calculating the re-order level is-
Re-order level = Minimum consumption during the period × Maximum re-order period
Danger level This is generally below the minimum stock level. Normal stock level should never be allowed to fall below the
minimum level. If it reaches the danger level at any point of time, urgent action must be taken to prevent stock out

7- Use of material budgeting
In this method purchase budget of both the whole and the individual item is prepared, During the preparation of
material budget the following factors are to be considered:-
1. Increase or decrease in the sales of the previous month in order comparison with the corresponding monthly
sales in the previous year
2. Adjustment of over buying or under buying during the previous month.
When any purchase is made it is subtracted from the balance of the purchase budget maintained in a separate
purchase journal. In this way, the person concerned in purchase of inventory will come to know whether he is
buying too much or too little by referring to purchase budget.

8-Establishing an effective purchase procedure
The purchase procedure means the sequence of steps in which a purchase transaction is carried out.
The purchase procedure starts with the recognition or realization of the need of an item.
The need is written in the requisition form.
The sources are identified and the appropriate pur placed with the selected supplier.
The goods are received and then thoroughly checked.
Invoice is checked and payment is made.
The purchase transaction is recorded.
Keeping a proper record is very advantages because.
1. It acts as a guide for future action.
2. It provides authentic records about the inventory which is needed for the inventory control.
3. The purchase order is a legal document which helps in case of any legal problems.
In general, every business organization prepares its own purchasing manual which prescribes the purchase
policies and procedures.
The purchase Policies differ from company to company because these are framed keeping in view the
objectives of the company.
Good purchase policies and inventory control are interlinked with each other.
Therefore, such purchasing policies are to be pursued which are effective in controlling the inventories.

9- Scrap and surplus disposal
Scrap- is the residue obtained from manufacturing processes. It is recovered without further processing. OR
Scrap is residue incidentally obtained from manufacturing process. It is usually a small value and is
recoverable without further processing.eg. powder and fine granules obtained in processing of tablets, non-
returnable containers and packing cases.
Surplus- The surplus items are those which are not required. or excess stock of the organisation. E.g. spoiled
raw material, defective parts, obsolete items, equipment, expired goods.
DIFFERENT TYPES OF SCRAP ARE
1. Legitimate scrap- The scrap which can be predetermined or anticipated in advance due to manufacturing
operations .E.g. Material obtained in the form of granules and powder in granulation process during tablet
manufacturing.
2. Administrative scrap- This scrap results when material etc. becomes obsolete due to change in design.
3. Defective scrap- The scrap results from substandard raw material and poor workmanship in handling
such materials.
CONTROL OF SCRAP
 By providing proper attention during the designing stage.
 By selecting the right material & equipment during production.
 By selecting right type of personnel with proper training &experience
SCRAP DISPOSAL
The scrap and surplus material is sold.
The scrap and surplus material is reprocessed

10 - Ved analysis
VED analysis- In a drug store VED analysis is useful in controlling & maintaining the stock of various types of
formulation of a particular group of drugs.
This system is based on the utility of the material. In a drug store, VED analysis is very useful in controlling and
maintaining the stock of various types of formulations of a particular group of drugs. The older the brand, the
greater will be its requirement. The past trends are not useful in calculating the requirements of a particular brand.
The best way to solve this problem is to classify the different brands of drug formulation into any one of the
following categories
The brands are classified into following categories-
V-vital.
E -essential
D-desirable.
There should be maxi. Stock of vital items, followed by essential items & then desirable items
For ex. Acetyl salicylic acid is available as disprin tablets, Anacin tablets, micropyrine tablet. There is a great
demand of disprin tablets, so these are classified as vital items, followed by micropyrine tablets which are covered
under essential items due to its less demand than disprin tablets. Anacin tablets may be considered as desirable
items because there are hardly a few prescriptions of it. In a drug store, there should be maximum stock of disprin
tablets, followed by micropyrine tablets and then of anacin tablets.

THANK
YOU!
“The Pessimist Sees Difficulty In
Every Opportunity. The Optimist
Sees Opportunity In Every
Difficulty.”
A.M.KASAMBE

5. inventory control

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