Inventory Control Procedures in Manufacturing Organizations

Inventory Control Procedures in Manufacturing Organizations

Inventory Control – Inventory may be defined as a raw material and finished goods and work in progress of manufacturing concerns or merchandise on hand, in transit, in storage or consigned to others at and of an accounting period” (Albert and Slaring: 1968, page 359).

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According to Bucham and Koenishberg (1970, page 2),

“inventory probes are as old as history itself, it has only been since the turn of the century that many attempt have been made to employ analytical techniques in studying these problems.  

          The initial impetus for the use of mathematical methods in inventory analysis seems to have been supplied by the simultaneous growth of the manufacturing industries and the various branches of engineering”.

The real need for analysis was first recognized in industries that had a combination of production scheduling problems and inventory problems, that is in situation in which items were produced in lots, the cost of set up being fairly high and then stored at factory warehouse.

Also, Buchan and Koeinshberg (1979, pg 2) said “inventories are viewed by senior management as a large potential risk and seldom as a measure of wealth”. A constant nagging fear seems to persist in the minds of most policy makers that merchandise stocks in excess of actual demand may require drastic price cuts, so as to be salable before it becomes worthless because of obsolence through styles changes. Rein Peterson (1979, page 5) said

“At the level of the firm, inventory is among the largest investments made and therefore logically deserves to be treated as a major policy variable, highly responsive to the plans and styles of top management. Yet in most firms, both analysts and managers have been relatively unsuccessful in convincing top management to give this area the due consideration it logically deserves. The same is not the case at the level of the economy as a whole. Aggregate inventory fluctuation relieved very close scrutiny from senior governmental analysts and policy makers, industrial lobbyists, labour unions and politicians”.

The strange paradox is an important part of the basic challenge that this project tries to examine and resolve. It is the hope of the researcher that through the development of a comprehensive yet practically usable set of decision rules and decisions the writer can demonstrate to the senior management that it is now feasible to control inventories more effectively than has been the case ever before.

INVENTORY CONTROL PROCEDURES

The primary goal in management of inventory must be to provide the right goods in the right condition at the right price in the right place at the right time.

Management must control the procedures for purchasing and controlling inventory in such a way that an optimum balance is obtained between efficient control and economy. Such a system must be designed in the light of the individual needs of the business.

MATERIAL CONTROL METHOD

          The term is generally used to mean raw produce, semi – finished or finished products required by a firm as an input to produce or manufacturer a product for which is known (Osisidoma: 1990 page 89) Nigeria for instance, automobile manufacturing companies use the imported spare parts and accessories manufactured by foreign firms to produce various brands of cars used in this country. The fold processing industries like the breweries use the agricultural products like wheat, maize as their raw materials while the building material companies like Emenite uses cements, lime stones etc for their raw materials.

The importance of raw materials is seen in Nigeria especially during the era of economic recession when lack of them caused retrenchment of workers, closure of factories, dwindling of the nations Gross Domestic Products (GDP) and scarcity of essential commodities in the market. In view of the importance of raw material in the manufacturing sector, it becomes importance for materials control to be rather practicalised than being ignored.

In planning of material control, two major considerations required in the actual buying and receipt of materials, and controlling them once they come in.

The buying function typically is handled by a purchasing department, which may consist of the part – time services of one person or in full larger corporations, the full time of hundreds of people. In buying materials, three factors must be considered. One of this of course is quality – The buyer must know what quality standards are necessary and must be sure that the supplier understands these. Second – reliability of delivery. This is very, very important. Failure to get materials of even minor nature to the production line may cause work stoppage which is most expensive. Other considerations are quantity and the price of materials to be bought. According to Ralf F. Lewis (1989, page 59) “In well – planned production, the production schedule that details all the goods to be produced for a given time ahead is analyzed”. Then for each products too be produced, a bill of materials is prepared, which is merely a detailed, breakdown of all of the times to be used. With the quantities of each in producing the product, the bill of materials is prepared, it is checked against stocks on hand, and the decision is made as to which items should be ordered. It is at this point in the planning that major amounts of money be saved or wasted.

WORK IN PROGRESS CONTROL                                         

          The stock cost control responsibility is not ended after requisition for production. Until goods are finished, packed, sold and shipped, inventory control, problems and cost savings potentials exists. Generally, the aim is to keep inventory levels based either on maximum production or the lowest unit cost. To a large extent, work in progress stock investment is determined by the time necessary for the goods to pass through the production process. These include set – up time, running time, queue time, move time, wait time etc. Although cutting queue time can result in significant reductions in inventory investment, some minimum level of queue is required in order to keep operations from running out of stock.

FINISHED GOODS INVENTORY

Inventory control is a generalized concept, common to both finished goods and materials inventory. Specialized aspects of inventory control are therefore discussed separately. Within the sale system, some finished goods inventory system makes the point at which manufactures or bought goods enter the sale system. Within a production environment, the objective of a finished goods inventory control system must be to minimize inventory holding and shortage cost as well as production start-up costs.

BENEFITS OF INVENTORY CONTROL     

          The following advantages are enjoyed in maintaining a good inventory control:-

i)         The fundamental reason for keeping is that it is either physically impossible or economically unsound to have goods arrive in a given system precisely when demands for them occur. Therefore a good inventory control enable inventories to be kept at an optimal level to provide customers with desired materials – without inventory, customers would have to wait until their orders are filled from a source or were manufacture. In general, however, customers will not or cannot be allowed to wait for a long time. For this reason alone, the inventory is necessary to almost all organizations that supply physical goods to customers.

ii)       The price of raw material used by a manufacturer may exhibit considerable seasonal fluctuation. When the price is low it is profitable for him to procure a sufficient quantity of it to last through the high priced season and to keep it in inventory to be used as needed in production.

iii)    Another advantage of maintaining inventories, a reason particularly important to retail establishments, is that sales and profit can be increase if one has an inventory of goods to display to customers.

PROBLEMS ASSOCIATED WITH INVENTORY CONTROL

          The control and maintenance of inventories is a problem common to all enterprises in any sector of a given economy. For example, inventories must be maintained  in agriculture, industries, retail establishments. The problems are:-

i)         There may be lack of control policy and where it exists, may not be practiced. Hence there is often deviation from inventory control. There may be a movement in the storeroom without authorization. As a result, there is often theft of inventories especially consumables and portable goods.

ii)       Price fluctuations are predominant. Consequently, it is difficult to replenish stock or inventories at the same price with the same quantity of stock as in previous order.

iii)    There is inadequate information to enable the management to control effectively the stores item in the warehouse.

iv)    There is problem in valuation of stock of inventories. That is, inventory manager are sometimes uncertain as to whether to use first in, first out (FIFO) or last in first out (LIFO) method.

INVENTORY CONTROL DECISION 

          Management process or performance of management functions of planning, organizing, directing and controlling, is carried out through decision making activity. For example, the manager in carrying out those four functions take decisions, establishing objectives, polices procedures. A Morrison that inventory control decision is very essential in firms and further gave reasons for inventory control as follows:-

–         To give customers assurance of availability

–         To protect against unexpected surge in sales or price deduction because of promotion

–         To award shipment to fill a definite order

–         To handle production variation

–         To make material in economic run size

–         To allow for batch production

–         To present flexibility in scheduling

–         To held off increasing capacity

–         To provide raw material storage

–         To take advantage of favourable raw material price.

Also, controlling inventory minimizes costs and keep services good enough so as not to loose business. The basic method of controlling inventory by quantity is by means of fixing for each commodity, stock levels which are noted on the stock records and subsequently used as  a means of indicating which some action is necessary. The fundamental kinds of stock level which may be used are as follows:-

Maximum Stock Level (MSL)

Minimum Stock Level (Min.SL)

Hastening Stock Level (HSL)

Ordering Stock Level (OSL).

MINIMUM STOCK LEVEL

          This the level at which the items of any given commodity should not be allowed to fall. An urgent action for delivery of next items is usually involved whenever this level is reached. The main factor to be considered in fixing the minimum stock level is the effect of the run of such item. However, for some items a nil level may be required but for some other items like raw materials, spare parts for vital machines and so on, efficient stock must be held as a maximum to avoid shortages because a nil level will cause the time.

Mathematically, minimum stock level is calculated thus.       

Minimum level = Re-order level – Average Usage for average re-order.

Period (lead time)

ORDERING STOCK LEVEL

          This is the amount expressed in units of issue at which ordering action is indicated in time for the material delivered before stock falls below the minimum” Tow factors are responsible for ordering stock level. The anticipated rate of consumption, and the estimated period of time between the raising of he provision demand and actual arrival and inspection of the goods, that is led time. This can be determined using the following formular:

Re-order level       =       Maximum usage x maximum re-order period.

HASTENING STOCK LEVEL

          “This is the upper level at which it is expected that hastening action will be taken so that suppliers will make early delivery”. It is in between maximum and minimum level.

MAXIMUM STOCK LEVEL

          This is the upper level of stock and the quantity that must not be exceeded without specific authority from management. The maximum stock level is set after considering the storage capacity available and it’s cost, the supply of capital, risk of deterioration and obsolesce and economic order quantity.

It calculated by:

RL – (Min C x Min. RP) RQ

Where

Min. C.       =       Minimum consumption

Min. P         =       Minimum re-order period

RQ              =       Re-order Qty.

 

 STOCK CONTROL MODELS

          BASIC ECONOMIC ORDERING QUANTITY MODEL

          This is the amount of stock to be ordered at on time for purpose of minimizing stock costs. Two factors are involved in determining the quantity of stock that should be ordered at a given time. These are the ordering cost and the carrying cost.

Ordering costs consist of the clerical costs of preparing a purchase order, and the special processing and receiving costs related to the number of orders processed.

Carrying costs arise when stocks related to the number of order processes carrying costs arise when stocks of goods for sale are held. They consist of the opportunity cost of the investment tied up in the inventory and the costs associated with storage, such as space rental, insurance etc. The economic order quantity (EOQ) decision model focuses on the trade off between ordering cost and carrying costs. Assumptions made by Horngren to when using the model include the following:-

a)                 The same fixed quantity (E) is ordered at each re-order point

b)                Demand for the goods for sale is known with certainty

c)                 There is also certainty about the purchase order, lead time and the time between the placement of an order and it’s delivery.

d)                Purchasing cost per unit is unaffiliated by the quantity ordered. This assumption makes purchasing costs irrelevant to determining the optimal EOQ size. The cost of a stock out is so prohibitively high that inventory is always replenished before a stock out occurs.

Cost of quality are recognized in purchase order size decisions only to the extent that they can be included as a component of ordering costs or crying costs. Given these assumptions, the total relevant costs for the total ordering costs and the total carrying costs:

 

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

INVENTORY CONTROL PROCEDURES IN MANUFACTURING ORGANIZATIONS

(A CASE STUDY OF EMENITE LIMITED, EMENE)”

 

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Inventory Control Procedures in Manufacturing Organizations

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