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U. Pancras

U. Pancras on inventory management techniques in practice

THE important techniques used in materials management are ABC Analysis, Economic Order Quantity (EOQ), Re-order Point (ROP), Age Analysis and overall inventory volume control. ABC analysis is a selective approach in which the inventory is classified under three categories of A, B and C. The EOQ concept is based on the premise that when the quantity in an order is higher, the total number of orders a year will be reduced, resulting in low ordering cost, but due to more quantity handled at a time, the storage or carrying cost will be more.

ROP facilitates the availability of raw materials when required. ROP requires finding of the lead time of significant items, lead time consumption, variation and the reasons for the same. The lead time is the period taken between ordering and receiving the materials ready for use. The extent of benefit that could be derived from such application would be significant, including identifying the most suitable supplier and control of the time gap. Correct computation of ROP would result in minimum investment in inventory.

Age or FSN (Fast, Slow and Non-moving) Analysis helps managements identify superfluous and non-moving items that have become dead-stock either due to change in technology or pattern of production.

Even sheer age might have affected the quality of a material, making it unusable. Identifying such items would help reduce investment and provide additional cash flows for operations.

Stock control is a comparatively new practice. This would present to the top management the value of total inventories in stock at any time, preferably at the end of each month, compared with the figures of the previous month, the annual consumption and even target inventory values as required by the banks for working capital financing.

This could be a valuable parameter for the top management to watch and evaluate the performance of the inventory management function.

But are these techniques practised properly?

Study findings

A study was conducted to find out what inventory management techniques industry uses and if those are scientific. One positive revelation was the increased use of computers for inventory management. More than 80 per cent of the companies surveyed used computers.

Another encouraging factor is that qualified personnel manage inventory. ABC analysis was widely used (by 80 per cent of the respondents), but not even half those surveyed used EOQ.

About 40 per cent of the respondents reported that non-availability of materials when required was a real problem. The study concluded that there was tremendous scope to use EOQ and, thus, minimise the material management cost.

One cannot reconcile with the non-availability of materials and the widespread use of safety stock.

With standard and tailor-made computer packages available, obviously EOQ and ROP techniques are not being used properly.

Detailed studies of the application of inventory management techniques were also made, and two cases taken up for study — a maintenance store and a store catering to different sales depot and stockists. Besides recommending the correct methods, the likely impact on the cost and investment on inventories was also forecast.

In the first case, an ABC analysis was done on the basis of the stock, and not consumption value.

This, however, is incorrect as the high value stock items need not be fast moving or significant. Such items do not require detailed attention and use of specific inventory management techniques.

The consumption value is the correct basis. It brings out the significant groups of `A' with manageable number of items requiring detail attention. EOQ was simply based on sales/production quantities for a particular period.

It is more an order quantity than EOQ. ROP was also based on a period figure of certain months.

In the second case the ABC analysis was not done. EOQ for all items was based on four months' consumption with the contingency of 10 per cent. Ordering and storage costs were not found out.

Clearly, inventory management techniques are not practised properly. The top management must be concerned with this aspect.

Following short-cuts and simple calculations by many firms studied, for both EOQ and ROP would, at best, facilitate smooth flow of production but it will not have the inherent benefits of continuous savings in investment and expenditure associated with the application of scientific management techniques.

(The author is on the faculty of Panimalar Institute of Management Studies and Computer Science, Chennai.)

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