TYPES OF INVENTORIES

TYPES OF INVENTORIESInventories may be classified under:

(1) Raw materials and production inventories:These are raw materials, parts and components which enter into the product directly during the production process and generally form part of the product

(2) In-process inventories:Semi-finished parts, work-in process and partly finished products formed at various stages of production(3) M.R.O. inventories:Maintenance, repairs, and operating supplies which are consumed during the production process and generally do not form part of the product itself (e.g. POL, petroleum products like petrol, kerosene, diesels, various oils and lubricants, machinery and plant spares, tools, jibs and fixtures, etc.)

(4) Finished goods inventories:Complete finished products ready for sale.Inventories may also be classified according to the function they serve, such as:

(a) Movement and transit inventoriesThis arises because of the time necessary to move stocks from one place to another. The average amount can be determined mathematically thus,

I=S x T

Where, S = represents the average rate of sales (say, weekly or monthly average), andT = transit time required to move from one place to another, andI = the movement inventory needed As for example, if it takes three weeks to move materials to a warehouse from the plant and if the warehouse sells 110 per week, then the average inventory needed will be 110 units x 3 weeks = 330 units. In fact, when a unit of finished product is manufactured and ready for sale, it must remain idle for three weeks for movement to warehouse. Therefore, the plant stock on average must be equal to three weeks sale in transit.Inventories may also be classified according to the function they serve, such as:

(b) Lot-size inventories:In order to keep costs of buying, receipt, inspection and transport and handling charge slow, larger quantities are bought than are necessary for immediate use. It is common practice to buy some raw materials in large quantities in order to avail of quantity discounts.

(c) Fluctuation inventories:In order to cushion against unpredictable demands these are maintained.Inventories may also be classified according to the function they serve, such as:

(d) Anticipation inventories: Such inventories are carried out to meet predictable changes in, demand. In case of seasonal variations in the availability of some raw materials, it is of inventory and also to some extent economical to build up stocks where consumption pattern may be reasonably uniform and predictable. As has already been said that even a typically medium-size industrial organization may use 10,000 to 15,000 different items which are carried in inventory. Initial planning and subsequent control of such inventories can only be accomplished on the basis at knowledge about them. Consequently, the starting point in inventory management and control is the development of a stores catalogue, which is more or less comprehensive and complete in all respects. All inventories should be fully and carefully described and a code number should be allotted. Similar items should be grouped together and standard codification should be adopted.

THE TWO-BIN SYSTEMOne of the earliest systems of stock control is two-bin system, which is a simple method of control exercised by two simple rules. One is when the order should be placed, and the other is what quantity should be covered. The following diagram shows this simple method. The bins contain, say, mild-steel bolts and nuts. The bolts and nuts are issued from the first bin as and when required, and as soon as the first bin is empty, more bolts and nuts are ordered.The replenishment arrives just when the second bin is empty. While delivery is awaited, the nuts and bolts from the second bin are issued. When the delivery arrives, then both the bins are again filled in.Bin No. 1 Bin No. 2Use until Bin No.1 is emptyUse Bin No.2 when Bin No.1 is emptyABC ANALYSIS OR SELECTIVE INVENTORY CONTROL (SIC)80 per cent of the income and wealth were concentrated in the hands of about20 per cent of the population. This 80-20 relationship also holds good in most cases of inventories where it may be found that about 20 per cent of the total number of items are responsible for about 80 per cent of the value. As this 20per cent of items, 80 per cent of value rule holds good in many inventory situations, high value items need more stringent control, which may be termed A class items, and the remaining ones can be classified as B and c class items according to descending order of value. Thus, the principle of graduated control may be affected and the degree of control may be equated with the frequency of reviews. Controlling tightly means reviewing frequently, and frequency in turn tends to determine the order quantity, A items would be reviewed frequently, and because of their high value they will be ordered in small quantities in order to keep the inventory investment minimum. B items will be renewed less frequently and C items still less.

CLASSNO. OF ITEMS IN USE (%)VALUE (%)A2080B3015C505TOTAL100100