Discuss the various techniques for inventory control with their merits and demerits.

Table of Contents
Q1. Discuss the various techniques for inventory control with their merits and demerits..........................2
1. Setting Up of various Stock Levels;......................................................................................................2
Maximum Level...................................................................................................................................2
Re-ordering Level.................................................................................................................................2
Minimum Level/ Buffer Stock..............................................................................................................3
Average Stock Level.............................................................................................................................3
Danger Level........................................................................................................................................4
Economic Order Quantity (E.O.Q)........................................................................................................4
2. Maintaining Perpetual Inventory system.............................................................................................4
3. Preparation of Inventory Budgets........................................................................................................4
4. Establishing proper Purchase Procedures............................................................................................5
5. Inventory Turnover Ratio.....................................................................................................................5
6. ABC Analysis.........................................................................................................................................5
Q2. “Inventory management is a key to profitable running of Business” Comment...................................6

, Q1. Discuss the various techniques for inventory control with their merits and demerits.
There are six very important techniques used in inventory control systems;

1. Setting Up of various Stock Levels;
The management of a company has to manage stock levels at all time so as to avoid overstocking

and under stocking. The management therefore has to decide;

Maximum Level
This is the level above which stock should never reach and or exceed. This is extremely essential

as it avoids unnecessary blocking of capital in inventories, losing of stock which may be caused

by deterioration, extra overhead and increased temptations of theft and obsolescence of

materials. This explains why it is commonly defined as the stock level that should be held at all

times.

This limit is normally determined after considering the storage space of the facilities in which the

inventory will be held, how quickly the inventory is used or sold, the cost of insurance on the

inventory and the risk of the inventory i.e. the inventory becoming obsolescence or outdated

before it is used or sold. Some of the factors taken into account in coming up with it include are

the rate of consumption, lead time, availability of capital, storage capacity, costs associated with

maintaining stores, possibility of price fluctuations and changes in habits etc.

Maximum level can be determined using the formula below

MSL=Recording Level+ Re-ordering Quantity-(Minimum consumption x minimum re-

ordering period).

Re-ordering Level
This is the point at which order for supply of materials should be replenished. The re-order point

for replenishment of stock levels occurs when the level of inventory drops down to zero. It is

majorly assumed that there is no time lag between ordering and procuring of materials, however

in real life situations one almost never encounters a zero lead time. There is always a time lag