Methods of Inventory Control

Methods of Inventory Control

 1.  Definition of inventory control

"Inventory control involves managing inventories in such a way that customer needs are met while keeping costs low." (Stevenson, W. J. (2020).

Inventory control involves the coordination and supervision of the supply, storage, distribution, and tracking of materials to maintain adequate quantities for current needs, while avoiding overstock or loss.

It plays a critical role in ensuring the right balance of stock is maintained within warehouses. Broadly defined, inventory control—or stock controls the activity of monitoring and managing warehouse inventory levels.

Key aspects of inventory control also include supply chain management, production planning, financial flexibility, and enhancing customer satisfaction.

        2. Why do Need inventory (Reason for Inventory)

• To meet production or repair requirements.
• To ensure smooth customer service and order fulfillment.
• To hedge against future market uncertainties or fluctuations.
• To maintain availability during lead time or delays in supply.
• To accommodate seasonal or fluctuating customer demand.
• To avoid stock-outs and potential loss of sales. 

    

        3. Methods of Inventory techniques

v    First-In First-Out (FIFO)

FIFO assumes that the oldest inventory costs are assigned to cost of goods sold when items are sold, leaving the more recent costs in ending inventory.(Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018).

 

First-In, First-Out (FIFO) is a common inventory management method that ensures the oldest stock is used or sold first before newer inventory.

 

FIFO assumes that items purchased or produced first are the ones sold or used first.

This method helps prevent inventory from becoming expired, damaged, or obsolete, especially for perishable goods (like food, cosmetics, or medicines).

It maintains accurate cost tracking and is often used in accounting to reflect more realistic inventory costs

v    last-in first-out (LIFO)

LIFO assigns the most recent inventory costs to cost of goods sold, assuming that the last items placed in inventory are the first ones sold. (Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018).

 

Last-In, First-Out (LIFO) is an inventory valuation method where the most recently purchased or produced items (last in) are assumed to be sold or used first (first out).

- LIFO assumes that the latest inventory costs are the first to be accounted for in cost of goods sold (COGS).

- This method is commonly used in accounting (where permitted) during periods of inflation, as it matches higher recent costs against revenue, which can lower taxable income.

- However, older inventory remains in stock, which may not reflect actual stock usage, especially for perishable goods.

v    ABC Analysis ( prioritize with ( ABC )

ABC analysis is a method of classifying inventory items according to their relative importance. ‘A’ items are very important, ‘B’ items are of medium importance, and ‘C’ items are the least important.(Gopalakrishnan, P., & Sundaresan, M. (2010).

 

ABC Analysis is an inventory management technique that categorizes inventory items based on their importance, typically measured by value and sales frequency, to help prioritize control and management efforts.

ABC Analysis divides inventory into three categories:                                                                                  

• A Items: 
• High-value, low-volume items    
• Contribute significantly to the total inventory value 
• Require tight control, accurate records, and frequent   monitoring

 

•  Item B: 
•  Moderate value and moderate sales frequency 
•  Need moderate attention and regular reviews
•  

• Items C: 
• Low-value, high-volume items 
• Contribute the least to the total value 
• Can be managed with simpler controls and bulk handling

v  Highest in, first out (HIFO)

 

The HIFO method assigns the highest cost items to cost of goods sold first, regardless of the actual flow of physical goods. It is rarely used due to regulatory and tax restrictions but may be applied in internal reporting.

(Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2012).

 

HIFO (Highest In, First Out) is an inventory valuation method where the most expensive inventory items are sold or used first, regardless of when they were purchased.

 

- Under HIFO, the highest-cost items are removed from inventory before lower-cost ones.

- This method results in a higher cost of goods sold (COGS) and lower taxable income, especially in times of rising prices.

- It’s not commonly accepted under standard accounting principles (like GAAP or IFRS) but may be used for internal reporting or specific financial strategies.

v  Just in Time Methods

 

JIT is a philosophy of continuous and forced problem solving that supports lean production and aims to eliminate waste by producing only what is needed, when it is needed, and in the amount needed.” 

(Heizer, J., Render, B., & Munson, C. (2020).                

 Just-in-Time (JIT) Method is an inventory management strategy where materials or products are received only when they are needed in the production process, not before.

 

• JIT aims to reduce inventory holding costs by  minimizing stock levels.
• 
  
• It helps eliminate waste, overproduction, and      storage space.
• Originally developed by Toyota (hence called     the Toyota Production System), it focuses on     efficiency and quality.
• Requires accurate forecasting, strong supplier    relationships, and timely deliveries.

v  VED Analysis

 

VED analysis is a system of classifying items based on their functional importance to ensure that the vital items are never out of stock, thus minimizing production disruptions.

(Gopalakrishnan, P., & Sundaresan, M. (2001).

VED Analysis is a method of inventory classification used primarily in maintenance and spare parts management. It helps prioritize items based on their criticality to operations.

 

• - V – Vital: Items that are essential for production or operations. Their non-availability can cause a complete halt.
• - E – Essential: Items that are important but not critical. Operations may continue for a short time without them.
• - D – Desirable: Items that are good to have but do not impact operations significantly if unavailable. 

v  FSN Analysis

 

FSN analysis is primarily based on the pattern of consumption and is a vital tool in controlling inventory by categorizing items based on frequency of usage or movement.

(Sharma, S. C. (2010).                                       

 

FSN Analysis is a technique used in inventory management to classify items based on how frequently they are used or issued. It helps optimize stock levels and storage space.

 

- F – Fast Moving: Items that are used or issued frequently. They require regular replenishment and close monitoring.

- S – Slow Moving: Items with moderate usage. They are used less frequently but still needed periodically.

- N – Non-Moving: Items that have had no movement or usage over a certain period. These may need review for disposal or reduction.

 

In conclusion, effective inventory management methods like FIFO, LIFO, ABC, HIFO, JIT, VED, and FSN analyses play a crucial role in optimizing stock control, reducing costs, and meeting customer demands efficiently. Each method offers a unique approach to categorizing, prioritizing, and managing inventory, helping businesses maintain the right balance between availability and cost-effectiveness while minimizing waste and improving overall supply chain performance.

References

• Stevenson, W. J. (2020). Operations Management (14th ed.). McGraw-Hill Education.

•  Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.

•  Gopalakrishnan, P., & Sundaresan, M. (2010). Materials Management: An Integrated Approach. PHI Learning.

•     Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2012).

• Heizer, J., Render, B., & Munson, C. (2020). Operations Management.

• Sharma, S. C. (2010). Inventory Management and Control

     Group A : N.W. Chinthamani Mohotty