Types of Inventories, Inventory control Techniques EOQ

Types of Inventories:

Raw Materials Inventory: This inventory includes the basic materials that are required to manufacture a product or provide a service.

Work-in-Progress (WIP) Inventory: This inventory includes items that are in the process of being manufactured or serviced.

Finished Goods Inventory: This inventory includes completed products that are ready for sale.

Maintenance, Repair, and Operating (MRO) Inventory: This inventory includes items that are required to maintain the production process, such as tools, supplies, and equipment.

Inventory Control Techniques – EOQ:

EOQ stands for Economic Order Quantity, and it is a widely used inventory control technique that helps to determine the optimal order quantity for a product to minimize total inventory costs. The basic idea behind the EOQ model is to balance the costs associated with ordering and holding inventory.

The EOQ model takes into account the following factors:

Demand: The expected demand for the product over a given time period.

Ordering Costs: The costs associated with placing an order, such as paperwork, processing, and transportation costs.

Holding Costs: The costs associated with holding inventory, such as storage, insurance, and handling costs.

Lead Time: The time it takes to receive an order after it has been placed.

Using these factors, the EOQ model calculates the optimal order quantity that minimizes total inventory costs. The EOQ formula is as follows:

EOQ = √(2DS/H)

Where:

D = Annual demand for the product

S = Ordering cost per order

H = Holding cost per unit per year

The EOQ model is a useful tool for inventory control because it helps to minimize the total costs associated with inventory while ensuring that the required quantity of products is available to meet customer demand. By using this model, organizations can improve their inventory management and reduce costs, thereby improving their profitability.

ABC

ABC stands for Activity-Based Costing. It is a cost accounting technique that is used to identify the cost of each activity involved in producing a product or providing a service. ABC is based on the idea that activities consume resources, and that the cost of a product or service is related to the cost of the activities that are required to produce it.

The basic steps involved in ABC are as follows:

Identify the activities involved in the production process or service delivery process.

Assign costs to each activity based on the resources consumed by the activity.

Determine the cost drivers for each activity. Cost drivers are the factors that cause or influence the cost of an activity.

Calculate the cost of each product or service by allocating the costs of each activity to the product or service based on its usage of the activity.

ABC provides a more accurate and detailed view of the cost of producing a product or providing a service compared to traditional cost accounting methods. It helps organizations to identify the activities that are driving costs and to allocate costs more accurately to products or services. By doing so, organizations can better understand the profitability of their products or services and make more informed decisions about pricing, production, and resource allocation.

VED

VED analysis is a technique used in inventory management to classify inventory items based on their importance to the organization. VED stands for Vital, Essential, and Desirable.

The VED classification of inventory items is as follows:

Vital: These are inventory items that are critical to the organization’s operations and have a high impact on the organization’s ability to function. These items are typically expensive and/or difficult to replace. Examples of vital items might include specialized machinery, key components for a product, or critical raw materials.

Essential: These are inventory items that are necessary for the organization’s operations but are not as critical as vital items. These items are usually less expensive and/or easier to replace than vital items. Examples of essential items might include basic raw materials, standard components, or office supplies.

Desirable: These are inventory items that are nice to have but are not essential to the organization’s operations. These items are usually inexpensive and/or easy to replace. Examples of desirable items might include promotional items, luxury office furniture, or high-end electronics.

By classifying inventory items using the VED analysis, organizations can prioritize their inventory management efforts and focus on ensuring that vital and essential items are always in stock while minimizing the inventory levels of desirable items. This approach helps to ensure that the organization has the resources it needs to operate effectively while minimizing the cost of carrying inventory.

FSN

FSN analysis is a technique used in inventory management to classify inventory items based on their consumption patterns. FSN stands for Fast-moving, Slow-moving, and Non-moving.

The FSN classification of inventory items is as follows:

Fast-moving: These are inventory items that are frequently used and have a high turnover rate. These items are typically sold or consumed quickly and have a short shelf life. Examples of fast-moving items might include food products, toiletries, or popular electronics.

Slow-moving: These are inventory items that are used infrequently and have a low turnover rate. These items may have a longer shelf life and may be more expensive than fast-moving items. Examples of slow-moving items might include specialized machinery, high-end electronics, or custom-made products.

Non-moving: These are inventory items that have not been used or sold for an extended period of time. These items may be obsolete or no longer needed by the organization. Examples of non-moving items might include discontinued products, excess inventory, or unused raw materials.

By classifying inventory items using the FSN analysis, organizations can prioritize their inventory management efforts and focus on ensuring that fast-moving items are always in stock while minimizing the inventory levels of slow-moving and non-moving items. This approach helps to ensure that the organization has the resources it needs to operate effectively while minimizing the cost of carrying inventory.