INVENTORY CONTROL POLICIES

Dokuz Eylül University

Industrial Engineering Department

Özge AVCI 2010503008

CONTENTS

What is the Inventory Control Policies?

Procurement

Valuing Inventory

Inventory Accounting System

Physical Controls

Methods

Main Functions

Inventory control policies are decision rules

that focus on the trade-off between the costs

and benefits of alternative solutions to

questions of when and how much to order for

each different type of item.

The process of managing the timing and the

quantities of goods to be ordered and stocked, so

that demands can be met satisfactorily and

economically.

The possible reasons for carrying inventories are:

Uncertainty about the size of future demands.

Uncertainty about the duration of lead time for deliveries. Provision for greater assurance of continuing

production,using work-in-process inventories as a

hedge against the failure of some of the machines

feeding other machines. Speculation on future prices of commodities.

Some of the other important benefits of carrying inventories are:

Reduction of ordering costs and production setup costs

Price discounts for ordering large quantities

Shipping economies Maintenance of stable production rates and work-

force levels which otherwise could fluctuate

excessively due to variations in seasonal demand.

Uncertainties of future demand play a major role in the cost

of inventories. That is why the ability to better-forecast future

demand can substantially reduce the inventory expenditures of a

firm.

Main Functions Inventory management is the process companies use

to order, receive, account for and manage the various

products sold to consumers. Business owners and

managers focus on this activity because inventory

typically represents the second largest expenditure in

a company behind payroll.

While standard policies and procedures exist for inventory

management, owners and managers have some latitude to

develop standards for their own companies.

Procurement Procurement is the purchasing process individuals must

use to order and receive inventory. Companies typically

require individuals to have a purchase order with a

manager's authorization prior to ordering inventory.

A procurement manager is responsible for reviewing the

purchase order to ensure it includes authorization and other

information relating to the cost of items purchased. While

larger organizations can hire individuals to work in the

procurement department, smaller companies often have the

business owner perform this function.

Valuing Inventory Methods include first-in, first-out (FIFO), last-in,

first-out (LIFO) and the weighted average method.

FIFO requires companies to sell older inventory first,

leaving more expensive inventory in the general ledger

and increasing the company's gross profit during an

accounting period.

LIFO is the opposite of FIFO; therefore it has

the opposite effects in the accounting ledger.

The weighted average method does not require

older inventory to be sold first as inventory

costs are recalculated each time the company

purchases inventory.

An inventory accounting system is the specific

procedures a company uses to update its accounting

ledger. The two types of systems are periodic and

perpetual. The perpetual system starts

with the opening inventory balance and updates

inventory after each purchase, sales or inventory

adjustment.

Inventory Accounting System

Physical controls relate to how a company

stores and counts inventory items. Storage is

important because companies must safeguard

their inventory against loss, theft and employee

abuse. This can include limiting access,locking up

valuable products and using tracking devices on

products.

Physical Controls

Cycle counts and counting a specific number of items

each day or week-and annual inventory counts are the

most common physical counting methods in the

business environment.The benefits of carrying

inventories have to be compared with the costs of

holding them.

Inventory Control Policy Statement is as follows:

It is the responsibility of Inventory department

heads to assign a Barcode to all equipment and

material in their possession. Each inventory

department head is responsible for the equipment

and materials purchased and assigned to his or

her department.

Methods

Inventory managers are also responsible for conducting quarterly inventory on the prescribed Inventory forms and will receive a quarterly inventory showing:

Assigned Inventory number

Description

Serial Number

Last known location

Value of asset

In order to insure proper inventory control, all

inventory managers are to use the proper

forms.

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