Introduction:
In the process of management the yield of the firm can be increased by some methods like, by maximizing the margin of profit; or by maximizing the production with a given amount of capital, i.e. to increase the productivity of capital. Among this Materials Management has become one of the most effective. In Materials Management, Inventory Control play vital role in increasing the productivity of capital.
Classification of Inventories:
Inventories may be classified as those which play direct role during manufacture or which can be identified on the product and the second one are those which are required for manufacturing but not as a part of production or cannot be identified on the product. The first type is labeled as direct inventories and the second are labeled as indirect inventories. Further classification of direct and indirect inventories is as follows:
Direct inventories
1) Raw material inventories: The inventory of raw materials is the materials used in the manufacture of product and can be identified on the product. In inventory control manager can concentrate on the
a) Bulk purchase of materials to save the investment,
b) To meet the changes in production rate,
c) To plan for buffer stock or safety stock to serve against the delay in delivery of inventory against orders placed and also against seasonal fluctuations.
2) Work-in -process inventories or in process inventories: These inventories are of semi-finished type, which are accumulated between operations or facilities. As far as possible, holding of materials between operations to be minimized if not avoided. This is because; as we process the materials the economic value (added labour cost) and use values are added to the raw material, which is drawn from stores. Hence if we hold these semi-finished material for a long time the inventory carrying cost goes on increasing, which is not advisable in inventory control. This inventory serves the following purpose:
a) Provide economical lot production,
b) Cater to the variety of products,
c) Replacement of wastages,
d) To maintain uniform production even if sales varies.
3) Finished goods inventories: After finishing the production process and packing, the finished products are stocked in stock room. These are known as finished goods inventory. These are maintained to:
a) To ensure the adequate supply to the customers,
b) To allow stabilization of the production level and
c) To help sales promotion programme.
4) Spare parts inventories: Any product sold to the customer, will be subjected to wear and tear due to usage and the customer has to replace the worn-out part. Hence the manufacturers always calculate the life of the various components of his product and try to supply the spare components to the market to help after sales service. The use of such spare parts inventory is:
a) To provide after sales service to the customer,
b) To utilize the product fully and economically by the customer.
5) Scrap or waste inventory: While processing the materials, we may come across certain wastages and certain bad components (scrap), which are of no use. These may be used by some other industries as raw material. These are to be collected and kept in a place away from main stores and are disposed periodically by auctioning.
Indirect Inventories
Inventories or materials like oils, grease, lubricants, cotton waste and such other materials are required during the production process. But we cannot identify them on the product. Inventories may also be classified depending their nature of use. They are:
1) Fluctuation Inventories: These inventories are carried out to safeguard the fluctuation in demand, non-delivery of material in time due to extended lead-time. These are sometimes called as Safety stock or reserves. In real world inventory situations, the material may not be received in time as expected due to trouble in transport system or sometimes, the demand for a certain material may increase unexpectedly. To safeguard such situations, safety stocks are maintained. The level of this stock will fluctuate depending on the demand and lead-time etc.
2) Anticipation inventory: When there is an indication that the demand for company’s product is going to be increased in the coming season, a large stock of material is stored in anticipation. Sometimes in anticipation of raising prices, the material is stocked. Such inventories, which are stocked in anticipation of raising demand or raising rises, are known as anticipation inventories.
3) Lot size inventory or Cycle inventories :This situation happens in batch production system. In this system products are produced in economic batch quantities. It sometime happens that the materials are procured in quantities larger than the economic quantities to meet the fluctuation in demand. In such cases the excess materials are stocked, which are known as lot size or cycle inventories.
