An Optimal Inventory Control Planning for an Indian Industry: An Analysis

Reducing excess inventory and investing in the right inventories lead to improved customer service, increased inventory turnover, reduced costs and increased profitability. Consider the fact that the typical manufacturing firm spends, on average, 56 percent of revenue to cover the direct cost of purchased goods, with this percentage figure being even higher for the typical wholesaler or retailer. Inventories are indispensable to run the plant efficiently. It helps to maintain both material inputs and the manufactured output at an optimum level of requirement. While inventories are designed to have cushioning to absorb overlapping input and output requirements, there is need to avoid uncalled for investment of capital which will otherwise become available for production purposes. The materials management department is expected to provide operational convenience with a minimum possible investment in inventories. The solution lies in exercising a selective inventory control and application of inventory control techniques. In this paper we would discuss the Purchasing Performance and Inventory Control System in a production enterprise owned by Government of India. This study addresses the overall inventory management system followed at one of the units of this organization. The study focuses on understanding and analyzing current inventory system being practiced in the organization. Methodology used in this case study was based on field visits wherein the organization under study was visited on different occasions to know their purchase and inventory management system practically. Personal interviews with professionals as well as those who were involved in the stores and purchase work were carried out. On few occasions, where a personal visit was not possible, telephonic interactions were held with the stores and purchase personnel to enquire about their particular method or system of inventory and purchase. Contents of the research were analyzed. Based on the contents analyzed, summary of observations were drawn and a set of recommendations to improve the system were also made. This study suggests, firstly, that a good data base should be developed to provide the information on existing status of the stock / order information and analysis, the exact location of the item, usage of items, vendor’s history, vendor rating report, determination of economic order quantity etc. Secondly, a repeat order policy be introduced with the conditions that if the rates and specifications of the item are same, an order can be repeated within a stipulated period, say, within 6 months or so. As the lead-time is very high at this organization, repeat order may prove fruitful. Purchases through repeat order facilitate immediate purchases for user’s satisfaction. A repeat order would ensure timely purchases, which would help avoid production losses. Thirdly, Organization will be benefited by use of an appropriate model to determine Optimal Order Quantity and safety stock. However, as sufficient data was not available, no specific model is being suggested. Once a good data base is created, this exercise can be considered by the organization. Fourthly, a policy of professional management to be evolved in order to place right persons on right jobs to monitor and control purchasing, supply, storage and distribution and transport chain in a better way. Fifthly, all indenters should be advised to certify on the indent itself that indented items will be used within three months from the date of their receipt. This will avoid blocking of capital in unwanted inventories.