The inventory is one of the most important resources for the company, if it is in excess then there is a problem, and if it is less than the need then there is a problem. If it is in excess, the finance is stuck up which has the cost, the holding cost increases and the chances of deterioration of inventory enhances. And if it is short than it should be, it will create the position of stock out and the customer will be dissatisfied and all other resources will be of no use as there is no inventory of goods available. Therefore the inventory management may be divided into two segments; one is called inventory purchase procedure and inventory control procedure. Inventory purchase procedure starts from what the company has to sell and what should be in inventory keeping in mind the lead time and the usage during the lead time. Then the safety stock is added with the average inventory to be held. The safety stock is calculated taking into account the maximum lead time and maximum usage during lead time. Once it is decided what to be sold the EOQ is calculated, which is the economic order quantity at which the ordering cost and the cost of holding inventory is the lowest.
Inventory control procedure describes which item should be given more importance
according to its usage in terms of cost. The costlier item will be given more importance and tight control is followed. ABC plan is used for this purpose. A category is the most important item which requires the most attention. B is the moderate category and C is the lowest category in terms of its usage in cost.
The proper documentation involves in inventory management. It starts form purchase requisition from production department; it shows the request of certain amount of quantity with specified quality and specified date of delivery. Then purchase order should be prepared based on purchase requisition, it is an order given to supplier for supply of goods. When goods are received receiving report is made confirming that goods supplied are according to purchase order. Then the gods are properly kept and issued to production department when they issue material requisition. Each in and outs of inventory should be properly recorded through inventory ledger card. At the end of year, half year or quarterly, the physical count of inventory should be done to match the quantity with the inventory ledger card.
Keeping in view the above facts Harvey Industries should try to introduce documentation at each level. The purchase requisition should be issued by assembly department according to the usage need. Then the purchase department should issue the purchase order to supplier, it should be properly received by stock room and receiving report should be prepared at the time of receipt. Finally when the material is in use they must be properly issued against material requisition issued by assembly department.
The company should categorized each item as A, B and C according to their usage. According to ABC plan the highly used item should be classified as A which is around first 80% of usage in terms of cost. The B category is the next 15% of usage cost and the C category which is last 5% of usage cost. It seems that the 179 parts which is using 220684 dollars of total purchase should be falling in A category. The control over the A category should be the tight one. If company is using order review cycle method for inventory control, it reviews these items more frequently than other items. It seems that the screw, nuts and bolts are falling in C category; the company can use two bin system for this type of items. They should keep two boxes of these items and when one get empty it should be filled, so the company will always have one box filled.