Page 190 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 12: Inventory Management

sources) classification are systems where classification is done on the basis of general availability Notes
and the source of suppliers.

SOS Classification

Raw materials specially agriculture inputs are generally classified by the SOS (Seasonal, Off-
seasonal) system since the season would generally be lower.
Other management devices are discussed as follows:
1. Control Account: The control account is maintained in the general ledger by accounting.
All material purchases are charged against and all insurance are credited to it. The balance
of the control account should always equal the sum of the balances of stores forms.
The control account is frequently maintained by a purchased card system, cards are
maintained for every transaction that affects the inventory receipts, insurances and
adjustments. The cards are then collected by part number and the information on each card
is mechanically transferred to ledger sheets.
2. Physical Counting: All companies take a periodic inventory at least one each year. Physical
counting of stock on hand necessary for tax and cost accounting functions and as a means
of verifying the balances showed on perpetual inventory records and in the control account
maintained by accounting. Physical inventories may be taken periodically (usually
annually), continuously or by sampling.
3. Visual Review: A highly subjective method of determining when to recorder is a visual
reviews of stock in the old time general store, the owner would inspect his inventory and
determine what should be ordered. This techniques still has limited application where the
cost of the inventory is low and the cost of control needed to be minimised control is based
upon the judgment of the individual ordering and periodic review of the item being
ordered.
4. Two-bin-system: As the name implies, the two-bin system divides each item of inventory
into two groups or bins. In the first, a sufficient supply is kept to meet current demand
over a designed period of time, in the second, enough additional items are available to
meet the demand during the load time necessary to fill the order.
The advantages of this form of inventory management and control are minimum control
expenses and positive physical recognition of reorder points. The principal disadvantages
are the limited information available regarding inventory status of items, lack of monthly
usage dates and reliance on storeroom personnel.

5. Minimum-maximum System: The minimum-maximum (min-max) system is frequently
used in connection with manual inventory control systems. The minimum quantity is
established in the same way as any reorder point. The maximum is the minimum quantity
plus the optimum order lot size. In practice, a requisition is initiated when a withdrawal
reduces the inventory below the minimum level. The order quantity is the maximum
minus the inventory status after the withdrawal. If the final withdrawal reduces the stock
level substantially below the minimum level, the order quantity will be larger than the
calculated optimum order lot quantity.
The effectiveness of min-max system is determined by the method and precision with
which the minimum and maximum parameters are established. If these parameters are
based upon arbitrary judgements with a limited factual basis, the system will be limited
in its effectiveness. If the minimums are based on an objective rational basis, the system
can be very effective.

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