About Authors:
Madan Gore*, Chetan Galage
B.Pharmacy, Appasaheb Birnale College of pharmacy,
Sangli District-Sangli, Maharashtra 416416, India.
*madan.gore@rediffmail.com
Abstract
The management and control of inventory is a problem common to pharmaceutical organization. The problem of inventory does not confine them to profit making business firms. The same types of problems are encountered by social and non-profit organization too.
Inventory problem have been encountered by every society, it was until the 20th century that analytical technique were developed to study the initial impetus for analysis expectedly came from manufacturing sector; inventory is an area of Organization operation that is well developed
REFERENCE ID: PHARMATUTOR-ART-1881
Introduction of inventory
What is Inventory?
Inventories are materials and supplies that a business or institution carry either for sale or to provide inputs or supplies to the production process. All businesses and institutions require inventories. Often they are a substantial part of total assets.
Financially, inventories are very important to manufacturing companies. On the balance sheet, they usually represent from 20% to 60% of total assets. As inventories are used, their value is converted into cash, which improves cash flow and return on investment. There is a cost of carrying inventories, which increases operating costs and decreases profits. Inventory ties up capital, requires handling, uses storage space, deteriorates, sometimes becomes obsolete, requires insurance, incurs taxes, can be stolen or gets lost. Inventory must be considered at each of the planning levels with production planning concerned with overall inventory, master planning with end items and materials requirements planning with components parts and raw material. The primary function of inventory is buffering and decoupling. It serves as a shock absorber between customer demand and the manufacturer’s production capability, between input materials required for an operation and the output of the preceding operation, between the manufacturing process and the supplier of raw materials. It essentially – decouples – demand from the immediate dependence on the source of supply.
Meaning and Definition
The term ‘Inventory’ originates from the French word ‘inventaires’ and Latin word ‘inventariom’ ,which implies a list of things found.
Scientific method of finding out how much stock should be maintained in order to meet the production demands and be able to provide right type of material at right time, in right quantities and at competitive prices.
• Inventory is actually money, which is available in the shape of materials (raw materials, in-process and finished products), equipment, storage space, work-time etc.
Inventory and the flow of material
There are many to classify inventories. One often-used classification is related to the flow of materials into, and out of manufacturing organization
A) Raw materials
These are purchased items received that have not entered the production process. They includes purchased materials, component parts, and subassemblies
B) Work in process
Raw materials are withdrawn from an inventory stock in order to have work performed on them by various classes of labor and equipment in the production transformation process. While materials are in the manufacturing process in various stages of completion, they are referred to as work-in-process inventory. The amount of work in process differs greatly from company to company, depending on the particular production process being employed, but, generally, all manufacturing firms have some inventory that fits this classification.
C) Semi-Finished Assemblies
Often, in manufacturing processes, raw materials are withdrawn and then processed, fabricated, or assembled into intermediate parts or subassemblies, which may be restocked temporarily until withdrawn for use later in the production process. These semi-finished assemblies differ from raw materials as they are not acquired directly from outside suppliers, and they differ from finished goods, as they are not in a completed form.
D) Finished Goods
Finished goods inventories are products ready to be delivered to distribution centers or ultimate users. At times, manufacturing companies themselves may keep a stock of finished goods at or near factory locations ready to be delivered when requested. Some finished goods may be held at various distribution centers where they are stored as inventory before being delivered to additional holding points in the distribution chain, such as wholesale or retail stores. Furthermore, some finished goods are always in transit from one inventory stocking point to another, until delivered to a final user. The chain of distribution indicates that many different kinds of companies have concerns about inventory. Distribution points, such as warehouse or stores, may be owned and operated by the company of manufacture or may be independently owned and operated.
E) Maintenance, Repair and Operating Supplies (MRO)
The familiar acronym MRO stands for maintenance, repair, and operating supplies. All companies hold inventories of these types of items, not just manufacturers and distribution centers. These types of goods are often low cost, but numerous, and include office and janitorial supplies, items used in production that do not become part of the Product like hand tools, lubricants, spare parts, or even food for company-run cafeterias. It is obvious, therefore, that all organizations-whether public or private, profit or nonprofit-have some inventory concerns.
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Objective of inventory management
A) Customer Service:
Customer Service is the ability of a company to satisfy the needs of the customer. Inventory helps achieve this in several ways, including delivering in a timely manner, buffering against uncertainty, and providing variety to meet individual customer needs
B) Delivering in a Timely Manner:
The need to provide quick delivery of goods to users is a primary objective for holding inventories. This is especially true in terms of consumer goods. When a retailer runs short of a particular product, immediate replenishment from a distribution center is needed. The retailer is unwilling to wait for raw materials to be procured and the goods to be manufactured and then delivered over long distances. In the same way, when a distribution center needs replenishment of some products, quick delivery from an upstream distribution center or the factory is demanded. Other goods, notably industrial products, often do not call for immediate shipment. Still, the ability to deliver when promised is a service objective for every company. Competition also plays a major role in the need for customer service, because the ability to deliver in a timely fashion often determines which producer or distributor will survive.
C) Buffering against Uncertainty:
Inventories are often held because either the demand for goods or the replenishment of goods is subject to uncertainty. Anticipated demand for products is often forecasted in various ways. Forecasting is an inexact science, however, and it always includes some normal deviations that represent uncertainty. Inventories allow delivery even when demand exceeds those that were expected. Sometimes there is also uncertainty regarding supply; that is, how quickly can goods be replenished? Transportation, quality problems, excessive scrap, and supplier lead times are often factors contributing to uncertainty for which inventory can compensate.
D) Providing Variety:
Not only is there uncertainty regarding the timing of demand for goods, but there is also uncertainty regarding exactly what will be demanded. This is often the case where goods are available with various options, colors, or packaging. Inventories in a variety of configurations are therefore needed to adequately fulfill customer demands.
E) Efficiency:
There are many instances when inventories are held due to cost efficiencies in procurement and production and for balancing demand to production rate strategies.
F) In Purchasing:
In many cases, goods are purchased in larger quantities than are immediately needed in order to achieve efficiency in purchasing or transport. For example, it is less costly per unit of material to ship goods in full truck, FCL (full container load) or full railcar loads than to ship smaller quantities and break bulk lots. Quantity discounts may also be available when goods are purchased in large quantities and larger purchasing lots results in lower ordering costs per unit. When large quantities of goods are delivered in this way, the result is higher inventory levels
G) In Production:
From the production standpoint, long production runs of a single product are usually much more efficient than short runs. Things are only produced when the equipment is running. When the equipment is being set up for production of a certain part or product, it is nonproductive. The performance of factory managers is often measured by the amount of product they produce, which acts as an incentive for longer production runs. Long production runs lower the setup costs per item as setup costs, which are fixed, get absorbed over a larger number and lower the average cost per unit. It is most important in cases of bottleneck resources where time lost on setups leads directly to lost throughput and lost capacity. Inventory allows operations with different production rates to operate independently and more economically. Inventory is used to level production runs for catering seasonal demand products where demand is non-uniform throughout the year. Level production runs allow manufacturing to continually produce an amount equal to the average demand. This leads to several cost efficiencies, as costs of changing production levels are avoided, peak installed capacity is not required, overtime, hiring and firing costs and subcontracting costs are reduced. However, this leads to building up of anticipation inventory for peak periods.
H) Investment:
Inventories are expensive to hold. They tie up funds in a company that could be more profitable if used elsewhere. Often it is necessary to borrow money from outside sources to pay for inventories. Carrying inventory is justified when benefits exceed the costs of carrying that inventory. Therefore, it is an objective of financial and other-senior level managers to keep inventory level as low as possible.
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Cost associated with Inventory
Agenda for this section is the various cost elements involved for inventory management. These cost elements are:
1) Ordering cost
A. Cost of placing an order with a vendor of materials
* Processing payment
* Preparing a purchase order
* Receiving and inspecting the material.
B. Ordering and from the plants
* Machine set-up
* Start-up scrap generated from getting a production run Started
2) Carrying Costs
A) Costs connected directly with materials
* Obsolescence
* Deterioration
* Pilferage
B) Financial costs
* Taxes
* Insurance
* Storage
* Interest
3) Out-stock Costs
* Back ordering
* Lost sales
4) Capacity Costs
* Overtime payment when capacity is too small
* Lay-off and idle time when capacity is too large
Inventory Management and Control
Inventory management involves the ‘development and administration of policies, system and procedures which will minimize total costs relative to inventory decisions and related functions such as customer service requirement, production scheduling, purchasing and traffic’
Benefits of Inventory Management and control
1. Inventory control ensures an adequate supply of materials, stores, etc, minimizes stock-out and shortages, and avoids costly interruptions in operations.
2. It keep down investment in inventories
3. It eliminates duplication in ordering or in replenishing stocks by centralizing the source from which purchase requisition emanate
4. It permits a better utilization of available stocks by facilitating inter-department transfers within a company
5. It provides a check against the loss of materials through careless or pilferage
6. It serves as a means for the location and disposition of inactive and obsolete items of stores
7. Perpetual inventory values provides a consistent and reliable basic for preparing financial
Why Inventory Control?
Control of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too much of their limited resource, capital, tied up in their major asset, inventory. Worse, they may have their capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal of the total operation. Inventory control systems range from eyeball systems to reserve stock systems to perpetual computer-run systems. Valuation of inventory is normally stated at original cost, market value, or current replacement costs, whichever is lowest. This practice is used because it minimizes the possibility of overstating assets. Inventory valuation and appropriate accounting practices are worth a book alone and so are not dealt with here in depth. The ideal inventory and proper merchandise turnover will vary from one market to another. Average industry figures serve as a guide for comparison. Too large an inventory may not be justified because the turnover does not warrant investment. On the other hand, because products are not available to meet demand, too small an inventory may minimize sales and profits as customers go somewhere else to buy what they want where it is immediately available. Minimum inventories based on reordering time need to become important aspects of buying activity. Carrying costs, material purchases, and storage costs are all expensive. However, stock-outs are expensive also. All of those costs can be minimized by efficient inventory policies.
Three major approaches can be used for inventory control in any type and size of operation. The actual system selected will depend upon the type of operation, the amount of goods.
A) The Eyeball System
This is the standard inventory control system for the vast majority of small retail and many small manufacturing operations and is very simple in application. The key manager stands in the middle of the store or manufacturing area and looks around. If he or she happens to notice that some items are out of stock, they are reordered. In retailing, the difficulty with the eyeball system is that a particularly good item may be out of stock for sometime before anyone notices. Throughout the time it is out of stock, sales are being lost on it. Similarly, in a small manufacturing operation, low stocks of some particularly critical item may not be noticed until there are none left. Then production suffers until the supply of that part can be replenished. Such unsystematic but simple retailers and manufacturers to their inherent disadvantage.
B) Reserve Stock (or Brown Bag) System
This approach is much more systematic than the eyeball system. It involves keeping a reserve stock of items aside, often literally in a brown bag placed at the rear of the stock bin or storage area. When the last unit of open inventory is used, the brown bag of reserve stock is opened and the new supplies it contains are placed in the bin as open stock. At this time, a reorder is immediately placed. If the reserve stock quantity has been calculated properly, the new shipment should arrive just as the last of the reserve stock is being used.
In order to calculate the proper reserve stock quantity, it is necessary to know the rate of product usage and the order cycle delivery time. Thus, if the rate of product units sold is 100 units per week and the order cycle delivery time is two weeks, the appropriate reserve stock would consist of 200 units (I00u x 2w). This is fine as long as the two-week cycle holds. If the order cycle is extended, the reserve stock quantities must be increased. When the new order arrives, the reserve stock amount is packaged again and placed at the rear of the storage area.
This is a very simple system to operate and one that is highly effective for virtually any type of organization. The variations on the reserve stock system merely involve the management of the reserve stock itself. Larger items may remain in inventory but be cordoned off in some way to indicate that it is the reserve stock and should trigger a reorder.
C) Perpetual Inventory Systems
Various types of perpetual inventory systems include manual, card-oriented, and computer- operated systems. In computer-operated systems, a programmed instruction referred to commonly as a trigger, automatically transmits an order to the appropriate vendor once supplies fall below a prescribed level. The purpose of each of the three types of perpetual inventory approaches is totally either the unit use or the dollar use (or both) of different items and product lines. This information will serve to help avoid stock-outs and to maintain a constant evaluation of the sales of different product lines to see where the emphasis should be placed for both selling and buying.
Inventory Control Records/Documents
Inventory control records are essential to making buy-and-sell decisions. Some companies control their stock by taking physical inventories at regular intervals, monthly or quarterly. Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars. If your stock is made up of thousands of items, as it is for a convenience type store, dollar control may be more practical than physical control. However, even with this method, an inventory count must be taken periodically to verify the levels of inventory by item.
Perpetual inventory control records are most practical for big-ticket items. With such items it is quite suitable to hand count the starting inventory, maintain a card for each item or group of items, and reduce the item count each time a unit is sold or transferred out of inventory.
Periodic physical counts are taken to verify the accuracy of the inventory card.
Out-of-stock sheets, sometimes called want sheets, notify the buyer that it is time to reorder an item. Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted.
Open-to-buy records help to prevent ordering more than is needed to meet demand or to stay within a budget. These records adjust your order rate to the sales rate. They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels. An open-to-buy record is related to the inventory budget. It is the difference between what has been budgeted and what has been spent. Each time a sale is made, open-to-buy is increased (inventory is reduced). Each time merchandise is purchased; open-to-buy is reduced (inventory is increased). The net effect is to help maintain a balance among product lies within the business, and to keep the business from getting overloaded in one particular area.
Purchase order files keep track of what has been ordered and the status or expected receipt date of materials. It is convenient to maintain these files by using a copy of each purchase order that is written. Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates.
Supplier files are valuable references on suppliers and can be very helpful in negotiating price, delivery and terms. Extra copies of purchase orders can be used to create these files, organized alphabetically by supplier, and can provide a fast way to determine how much business is done with each vendor. Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal and/or resolve future potential problems.
Returned goods files provide a continuous record of merchandise that has been returned to suppliers. They should indicate amounts, dates and reasons for the returns. This information is useful in controlling debits, credits and quality Issues.
Price books, maintained in alphabetical order according to supplier, provide a record of purchase prices, selling prices, markdowns, and markups. It is important to keep this record completely up to date in order to be able to access the latest price and profit information on materials purchased for resale.
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Controlling Inventory
Controlling inventory does not have to be an onerous or complex proposition. It is a process and thoughtful inventory management. There are no hard and fast rules to abide by, but some extremely useful guidelines to help your thinking about the subject. A five step process has been designed that will help any business bring this potential problem under control to think systematically thorough the process and allow the business to make the most efficient use possible of the resources represented. The final decisions, of course, must be the result of good judgment, and not the product of a mechanical set of formulas.
STEP 1: Inventory Planning
Inventory control requires inventory planning. Inventory refers to more than the goods on hand in the retail operation, service business, or manufacturing facility. It also represents goods that must be in transit for arrival after the goods in the store or plant are sold or used. An ideal inventory control system would arrange for the arrival of new goods at the same moment the last item has been sold or used. The economic order quantity, or base orders, depends upon the amount of cash (or credit) available to invest in inventories, the number of units that qualify for a quantity discount from the manufacturer, and the amount of time goods spend in shipment.
STEP 2: Establish order cycles
If demand can be predicted for the product or if demand can be measured on a regular basis, regular ordering quantities can be setup that take into consideration the most economic relationships among the costs of preparing an order, the aggregate shipping costs, and the economic order cost. When demand is regular, it is possible to program regular ordering levels so that stock-outs will be avoided and costs will be minimized. If it is known that every so many weeks or months a certain quantity of goods will be sold at a steady pace, then replacements should be scheduled to arrive with equal regularity. Time should be spent developing a system tailored to the needs of each business. It is useful to focus on items whose costs justify such control, recognizing that in some cases control efforts may cost more the items worth. At the same time, it is also necessary to include low return items that are critical to the overall sales effort.
If the business experiences seasonal cycles, it is important to recognize the demands that will be placed on suppliers as well as other sellers.
A given firm must recognize that if it begins to run out of product in the middle of a busy season, other sellers are also beginning to run out and are looking for more goods. The problem is compounded in that the producer may have already switched over to next season’s production and so is not interested in (or probably even capable of) filling any further orders for the current selling season. Production resources are likely to already be allocated to filling orders for the next selling season. Changes in this momentum would be extremely costly for both the supplier and the customer.
On the other hand, because suppliers have problems with inventory control, just as sellers do, they may be interested in making deals to induce customers to purchase inventories off-season, usually at substantial savings. They want to shift the carrying costs of purchase and storage from the seller to the buyer. Thus, there are seasonal implications to inventory control as well, both positive and negative. The point is that these seasonable implications must be built into the planning process in order to support an effective inventory management system.
STEP 3: Balance Inventory Levels
Efficient or inefficient management of merchandise inventory by a firm is a major factor between healthy profits and operating at a loss. There are both market-related and budget-related issues that must be dealt with in terms of coming up with an ideal inventory balance:
• Is the inventory correct for the market being served?
• Does the inventory have the proper turnover?
• What is the ideal inventory for a typical retailer or wholesaler in this business?
To answer the last question first, the ideal inventory is the inventory that does not lose profitable sales and can still justify the investment in each part of its whole.
An inventory that is not compatible with the firm’s market will lose profitable sales. Customers who cannot find the items they desire in one store or from one supplier are forced to go to a competitor. Customer will be especially irritated if the item out of stock is one they would normally expect to find from such a supplier. Repeated experiences of this type will motivate customers to become regular customers of competitors.
STEP 4: Review Stocks
Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping inventory up to date and devoid of obsolete merchandise is another critical aspect of good inventory control. This is particularly important with style merchandise, but it is important with any merchandise that is turning at a lower rate than the average stock turns for that particular business. One of the important principles newer sellers frequently find difficult is the need to mark down merchandise that is not moving well.
Markups are usually highest when a new style first comes out. As the style fades, efficient sellers gradually begin to mark it down to avoid being stuck with large inventories, thus keeping inventory capital working. They will begin to mark down their inventory, take less gross margin, and return the funds to working capital rather than have their investment stand on the shelves as obsolete merchandise. Markdowns are an important part of the working capital cycle. Even though the margins on markdown sales are lower, turning these items into cash allows you to purchase other, more current goods, where you can make the margin you desire.
Keeping an inventory fresh and up to date requires constant attention by any organization, large or small. Style merchandise should be disposed of before the style fades. Fad merchandise must have its inventory levels kept in line with the passing fancy. Obsolete merchandise usually must be sold at less than normal markup or even as loss leaders where it is priced more competitively. Loss leader pricing strategies can also serve to attract more' consumer traffic for the business thus creating opportunities to sell other merchandise as well as well as the obsolete items. Technologically obsolete merchandise should normally be removed from inventory at any cost.Stock turnover is really the way businesses make money. It is not so much the profit per unit of sale that makes money for the business, but sales on a regular basis over time that eventually results in profitability. The stock turnover rate is the rate at which the average inventory is replaced or turned over, throughout a pre-defined standard operating period, typically one year. It is generally seen as the multiple that sales represent of the average inventory for a given period of time.
Turnover averages are available for virtually any industry or business maintaining inventories and having sales. These figures act as an efficient and effective benchmark with which to compare the business in question, in order to determine its effectiveness relative to its capital investment. Too frequent inventory turns can be as great a potential problem as too few. Too frequent inventory turns may indicate the business is trying to overwork a limited capital base, and may carry with it the attendant costs of stock-outs and unhappy and lost customers.
Stock turns or turnover, is the number of times the "average" inventory of a given product is sold annually. It is an important concept because it helps to determine what the inventory level should be to achieve or support the sales levels predicted or desired. Inventory turnover is computed by dividing the volume of goods sold by the average inventory. Stock turns or inventory turnover can be calculated by the following equations:
Stock Turn = Cost of Goods Sold
Average Inventory at Cost
Stock Turn = Sales
Average Inventory at Sales Value
If the inventory is recorded at cost, stock turn equals cost of goods sold divided by the average inventory. If the inventory is recorded at sales value, stock turn is equal to sales divided by average inventory. Stock turns four times a year on the average for many businesses. Jewelry stores are slow, with two turns a year and grocery stores may go up to 45 turns a year.
If the dollar value of a particular inventory compares favorably with the industry average, but the turnover of the inventory is less than the industry average, a further analysis of that inventory is needed. Is it too heavy in some areas? Are there reasons that suggest more inventories are needed in certain categories? Are there conditions peculiar to that particular firm? The point is that all markets are not uniform and circumstances may be found that will justify a variation from average figures.
In the accumulation of comparative data for any particular type of firm, a wide variation will be found for most significant statistical comparisons. Averages are just that, and often most firms in the group are somewhat different from that result. Nevertheless, they serve as very useful guides for the adequacy of industry turnover, and for other ratios as well. The important thing for each firm is to know how the firm compares with the averages and to deter- mine whether deviations from the averages are to its benefit or disadvantage.
STEP 5: Follow-up and Control
Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fast sellers are essential for proper inventory management. Taking regular and periodic inventories must be more than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is the responsibility of key management to study the figures and review the items themselves in order to make correct decisions about the disposal, replacement, or discontinuance of different segments of the inventory base.
Just as an airline cannot make money with its airplanes on the ground, a firm cannot earn a profit in the absence of sales of goods. Keeping the inventory attractive to customers is a prime prerequisite for healthy sales. Again, the seller's inventory is usually his largest investment. It will earn profits in direct proportion to the effort and skill applied in its management.
Inventory quantities must be organized and measured carefully. Minimum stocks must be assured to prevent stock-outs or the lack of product. At the same time, they must be balanced against excessive inventory because of carrying costs. In larger retail organizations and in many manufacturing operations, purchasing has evolved as a distinct new and separate phase of management to achieve the dual objective of higher turnover and lower investment. If this type of strategy is to be utilized, however, extremely careful attention and constant review must be built into the management system in order to avoid getting caught short by unexpected changes in the larger business environment.
Caution and periodic review of reorder points and quantities are a must. Individual market size of some products can change suddenly and corrections should be made.
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Inventory Control Technique
A. Always better control (ABC) classification
B. High, medium and low (HML) classification
C. Vital, essential and Desirable (VED) Classification
D. Economic order quantity (EOQ)
A) Always better control (ABC) classification
One of the widely used techniques for control of inventories is the ABC (always better control) analysis. The objective of ABC control to vary the expenses associated with maintaining appropriate control according to the potential saving associated with a proper
• A-items: 15% of the items are of the highest value and their inventory accounts for 70% of the total.
• B-items:20% of the items are of the intermediate value and their inventory accounts for 20% of the total.
• C-items: 65%(remaining) of the items are lowest value and their inventory accounts for the relatively small balance, i.e., 10%.
Procedure for classification
• All items used in an industry are identified.
• All items are listed as per their value.
• The number of items are counted and categorized as high-, medium- and low-value.
• The percentage of high-, medium- and low- valued items are determined.
|
A items |
B items |
C items |
|
Very strict control |
Moderate control |
Lose control |
|
Rigorous Value analysis |
Moderate Value analysis |
Minimum Value analysis |
|
Weekly control statement |
Monthly control statement |
Quarterly reports |
|
No safety stocks (very low) |
Low safety stocks |
High safety stock |
|
Individual posting |
Small group posting |
Group posting |
|
Maximum follow-up and expenditure |
Periodic follow-up |
Follow-up in exceptional |
|
Maximum efforts to reduce lead time |
Moderate |
Minimum efforts |
|
To be handled by senior officers |
To be handled by middle management |
Can be fully delegated |
B) HML Classification
Based on the unit value (in rupees) of it
Similar to A-B-C analysis
H-High
M-Medium
L –Low
C) VED Classification
Based on the critical nature of items. Applicable to spare parts of equipment, as they do not follow a predictable demand pattern. Very important in hospital pharmacy.
V-Vital: Items without which the activities will come to a halt.
E-Essential: Items which are likely to cause disruption of the normal activity.
D-Desirable: In the absence of which the hospital work does not get hampered.
D) Economic order quantity (EOQ)
All order quantity, or lot-size, choices are based on the principle of economy of scale. It is usually less expensive to purchase (and transport) or produce a bunch of material at once than to order it in small quantities. On other hand, larger lot sizes result in more inventories and inventory is expensive to hold.
Carrying, Ordering and Total Cost
Costs associated with carrying inventory:
* Storage facility costs
* counting, transporting and handling
* Risk of obsolescence, risk of pilferage
* Insurance and taxes
* Opportunity cost (alternate investments)
Inventory carrying cost denotes the costs related to holding items in inventory and is Usually expressed as percentage of cost of inventory item.
Cost associated with placing order:
Following are contributors to the cost of placing and processing purchase orders.
* Supplier selection, follow-up, and other contacts
* Accounts payable and collection
* Receiving, inspecting and handling
* Preparations and document handling
Following are contributors to the cost of placing production orders.
* Setup of equipment or assembly line changeover
* Preparation of production order paperwork
* Tracking and reporting work orders in the plant.
* Scrap due to new setup
Order quantity cost Comparison:
If you order in small quantities, cost of carrying inventory will be minimized. On other hand large lot sizes will have fewer orders/setups, hence cost on attending orders/setups will minimize.
Limitations of EOQ
* Annual usage is assumed to be level and continuous
* Underlying costs are assumed to be accurate
* Replenishments assumed to be instantaneous
* Costs expressed as total/average, rather than marginal
* Single-item replenishment is assumed
Conclusion:-
Inventory management involves more than immediate and reactionary decisions that affect your business. Inventory management requires that you establish and enforce procedures that will serve as tools in utilizing your system on a daily basis in the most efficient manner to produce the most profits for your company
Inventory control is a constant requirement of doing business successfully. Procedures for pulling, receiving, and replenishing stock should be established, with considerations made for your particular environment
REFERENCES
1) C.V.S. SUBRAMANYAM;”PRODUCTION MANAGEMENT” IN ‘PHARMACEUTICAL PRODUCTION AND MANAGEMENT’, VALLABH PRAKASHAN, Pg No.292-312.
2) LEON LACHMAN, HERBERT LIEBERMAN, JOSEPH KANIG;”INVENTORY MANAGEMENT” IN ‘THE THEORY AND PRACTISE OF INDUSTRIAL PHARMACY’, 3rd EDITION, VARGHESE PUBLICATION, Pg No. 747-759.
3) en.wikipedia.org/wiki/Inventory_management.
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