| | | | | large quantities are involved. In this system, the items |
| The main purpose of Holding inventory is cost | | | | are segregated into three groups, namely A, B, and |
| effective and helps achieve sales at competitive | | | | C. The items falling in category A are those that |
| prices. The other objectives of holding inventories | | | | involve the maximum investment. Likewise, the items |
| are: | | | | that require minimum investment are classified into |
| - To ensure prompt delivery. | | | | group C. |
| - To avail quantity discounts. | | | | |
| - To reduce the order cost. | | | | Advantages |
| - To avoid production shortage. | | | | - This approach helps in selective control of |
| - To achieve efficient production runs. | | | | inventories. |
| | | | | - It helps in pinpointing the obsolete stocks. |
| Costs associated with holding inventories. | | | | - It reduces the clerical costs and results in better |
| | | | | inventory planning. |
| - Material cost. | | | | |
| - Ordering cost. | | | | Limitations: |
| - Carrying cost. | | | | |
| - Stock Out cost. | | | | - The gradation of the items may include many |
| | | | | subjective elements |
| Each of the above mentioned costs could be | | | | - The results should be periodically updated. |
| controlled through efficient inventory management | | | | |
| techniques. | | | | Developing an Information system: |
| | | | | |
| Economic order quantity (EOQ): | | | | Use of programmed information system using the |
| | | | | latest technologies helps in better inventory |
| This refers to the optimal ordering quantity that will | | | | management. A sound information system updates |
| incur the minimum total cost (order cost and carrying | | | | you on the status of the stocks, their requirements |
| cost) for an item of inventory. With the increase in | | | | and the costs associated with each. Further, a |
| the order size, the ordering cost decreases but the | | | | well-developed information system not only helps you |
| carrying cost increases and the optimal order quantity | | | | house control but is also in keeping with the industry |
| is determined where these two costs are equal. The | | | | standards. |
| company should also keep an eye on the level of | | | | |
| safety stock and the lead-time associated with the | | | | |
| orders made. | | | | Some other methods of inventory control are |
| ABC system: | | | | |
| This is also referred to as “always better | | | | - Perpetual inventory system |
| control”. It is a selective inventory management | | | | - Material budgeting system |
| technique. This is used when there are varied items in | | | | - Control ratio method. |