The research was characterized by a bibliographic review with the aim of creating a reference material for the Inventory Control Methods, summarizing the fundamental theoretical elements of the inventory and emphasizing three common techniques for the administration and control of inventories. such as: the ABC System, the Basic Model of Economic Order Quantity (CEP) and the Reorder Point, exposing the advantages and disadvantages of its application. The material is based on the fact that there is no ideal method to control inventories in companies, but that a combination of existing ones adapted to the particularities of the entity would allow an adequate administration of resources and provide a quality service to customers.For this, the training of personnel working in the Economic Departments of Cuban Companies was recommended in how to use these methods.
Keywords: Methods, control, inventories.
ABSTRACT
The investigation characterize for a bibliographic revision for the objective of creating a supportive material for Control's Methods of Inventory, making a fundamental summary of the inventory's theoretic elements and accomplishing emphasis in three common techniques for the administration and control of the inventories as: the ABC systems, the Basic Model Of Quantity Economic Order (CEP) and Reorder Point, exposing the advantages and disadvantages this application's. It breaks in the material that an ideal method to control the inventories in the companies, but the existent combination adapted to a entity's particularities doesn't exist he would allow the resources made suitable administration and providing the clients a good quality service. Was recommended the personnel's training in the Cuban Enterprise Financial Department,in how using said methods.
Key words: Methods, control, inventory.
INTRODUCTION
At the present time, the economy of many countries is characterized by social inequity and poverty, that is to say, a shortage of material and financial resources, hence the importance of each entity using the resources it possesses effectively, since in Businesses will coexist with the various means, both material, human and financial, to develop their operations.
Inventories were traditionally seen, within business management as a necessary evil to guarantee the continuity of production, however current business management is in need of adequate management and control of inventories, where the criterion of maintaining quantities must prevail. minimum requirements that guarantee the continuity of the entire flow in the logistics chain that allow absorbing the impact of the variability and uncertainty associated with the operation, guaranteeing maximum customer satisfaction and the entity's efficiency.
Inventory, after accounts receivable, represents a large investment in current assets of most companies.
Starting from this point, it can be said that to counteract the effects of the existing internal and external conditions, Cuba's political leadership has had to draw up a set of actions and measures that can sustain the economy efficiently, in order to guarantee continuity. and the prospective development of the Revolution and the preservation of its socialist essence. That is why it focuses its future hopes on excellent business management, where, without a doubt, companies that operate with freely convertible currencies are prone not to exercise effective inventory control, as they constitute a main source of income to the central bank. of the State and thereby support the priority programs of the Revolution.
Therefore, the rationalization in the use of resources and the acceleration of their rotation, are revealed as some of the most viable alternatives, knowing that the duration of inventories and their negative impact on financial ratios are not an exception in the Cuban business environment.
Hence, it is necessary to search for materials that allow you to easily and clearly identify how to control these essential resources in the business world that guarantee efficiency.
Methods and materials:
A bibliographic review was carried out to study the different sources of information that allowed to substantiate the reference material from the theoretical and methodological points of view.
FUNDAMENTAL THEORETICAL ELEMENTS
The basis of any commercial company is the purchase and sale of goods or services; hence the importance of inventory management by it. This accounting management will allow the company to maintain control in a timely manner, as well as to know at the end of the accounting period a reliable status of the economic situation of the company.
Concept and objective of the inventories.
In relation to the foregoing, Sabina Pérez, 2007: 15 “Inventory in the business world is the set of own goods available for sale to customers. It becomes cash within the operational cycle of the company, so it is considered as a current asset ”.
The Cuban Financial Reporting Standards in harmony with the International Financial Reporting Standards refer to the regulation, harmonization, implementation and evaluation of the accounting practice and it is stated that “an asset is recognized in the Balance Sheet or Income Statement when it is probable that are obtained from the same future economic benefit for the company, and also the asset has a value that can be measured with certainty ”. (Committee of Cuban Standards, 2005: 23)
In this regard, as part of the use and content of the inventory account, it is regulated that: “these accounts represent the value of the stock of material resources destined for the entity's consumption or its commercialization. These accounts record, among others, the value of stocks of raw materials and materials, fuels, spare parts and spare parts, returnable containers and packaging, tools and tools, finished productions and merchandise for sale ”(MFP, 2005: 8)with destiny:
- To consumption in the production process To consumption or distribution in the provision of services To sale or distribution in the course of operations Or are in the production process
These reflections allow us to infer that inventories are those items for which a standard is established, by which the levels of stocks or inventories for the main material goods of the company are determined, or it is the investment in which the company commits its money.
The objective of inventory management is based on minimizing investments and meeting product demand, facilitating production, service and sales functions.
Its efficient administration allows it to meet the company's objective of maximizing its profit. Inventory must be rotated promptly, since the faster its rotation, the less the company must invest to satisfy a given demand for a certain service or merchandise.
This financial goal often conflicts with the company's goal of maintaining sufficient inventories to minimize shortages at any given time to meet production demands. Therefore, the command must have knowledge of the optimal level of inventory that both objectives contain.
In addition "inventory management is the efficiency in the proper management of the registry, rotation and evaluation of the same according to how it is classified since through this we will determine the results (profits or losses) in a reasonable way, being able to establish the financial situation of the company and the necessary measures to improve or maintain said situation ”. (Morera, 2002: 3)
Inventory decisions.
In inventory management, there are two basic decisions that managers must make when attempting to carry out the inventory functions just stated, which are made for each item:
- How much of an item to order when inventory is to be replenished When to replenish inventory for that item.
Likewise, in general, it focuses on four basic aspects: (LTDA, 2008: 2).
- Number of units that correspond to be ordered (or produced) at a given time Time when inventory should be ordered (or produced) Inventory items that deserve special attention Protection against changes in the costs of inventory items
Classification of inventories according to Bacallao, 2005:
According to their nature, they can be:
- Of raw materials and materials: These are products that will be used to form part of the finished product. Of products in process: It refers to parts and pieces that will be part of the final product still unfinished. Of finished products: Once the product is finished it is packed (and sometimes also packed) and becomes part of the finished product inventory, ready for later distribution and sale.
According to the rotation speed, they can be classified into:
- Current inventory: Refers to inventory that moves within typical ranges of turnover Slow-moving inventory: Made up of products whose few outbound movements lead to relative immobilization Idle inventory: Made up of products without outflows during a given period of time Obsolete inventory: Made up of products that, fundamentally due to a change in technology, become unusable, becoming idle. According to the level of access, they are classified into: Strategic inventory: Products that are reserved according to a national, branch or business strategy because they can serve as a replacement for vital equipment for a certain activity. State reserve inventory: These are the inventories that are kept for contingencies or natural disasters. Untouchable inventories:They are reserves of the Armed Forces for use only in military cases and must be properly rotated.
According to their position in the logistics process:
- Inventory in stock: These are the products that are in a warehouse. Equivalent to available inventory. Inventory in transit: These are products that are moving on transport equipment between two warehouses in the logistics network.
According to its functionality:
- Normal inventory: Ensures the demand for a product, therefore when it exceeds what is expected, it is necessary to resort to the safety inventory. Safety inventory: It allows to cover fluctuations in demand and those of the supply period and product quality. Available inventory: Total of the stocks that are physically in the warehouse. It is the sum of the normal inventory and the safety inventory.
Methods for controlling inventories.
The inventory control is carried out with the purpose of developing sales or budget forecasts, in order to determine the costs of inventories, purchases or obtaining, reception, storage, production, shipping and accounting.
Inventory, which normally means a considerable investment, on the part of the company must be carefully examined. The general trend when it comes to inventory levels is to keep them low, thus curbing the amount of money that must be committed to inventories. A close relationship must be guaranteed between all areas that contribute in one way or another to inventory management.
The organizational methods to achieve these objectives vary depending on the activities carried out in the different entities and according to the complexity and volume of the entity's operations.
Among the most common techniques for inventory management and control are:
- The ABC System Basic Economic Order Quantity (CEP) Model Reorder Point Stocks of reserves or inventory security Just-in-time inventory control Simple financial reasons
The first three techniques are explained below:
ABC inventory control method.
The ABC (acronym in English for "Activity Based Costing" or "Activity Based Costing") has been treated by different authors, such is the case of Fácil, A. (2006) who pointed out that it consists of carrying out an analysis of inventories by establishing investment layers or categories in order to achieve greater control and attention over inventories, which due to their number and amount deserve permanent vigilance and attention.
The inventory analysis is necessary to establish three groups: A, B and C. The groups must be established based on the number of items and their value. Generally, 80% of the inventory value is represented by 20% of the items and 80% of the items represent 20% of the investment. This conversion is associated with the name “Pareto Analysis”.
Items A include inventories that represent 80% of the investment and 20% of the items, in the case of an 80/20 composition. Items B, with an average value, cover a smaller number of inventories than items C in this group, and finally items C, which have a low value and will be a large number of inventories.This system allows managing the investment in three categories or groups to pay attention to the management of items A, which represent 80% of the investment in inventories, so that through their strict control and surveillance, the investment in inventories is maintained or in some cases reduced, through efficient administration.
The maximum investment has been concentrated in products "A". Group "B" is made up of the articles that follow "A" in terms of the magnitude of the investment. Group "C" is made up mostly of a large number of products that only require a small investment. Dividing its inventory into products A, B, and C allows a company to determine the level and types of inventory control procedures required. The control of products "A" should be the most careful given the magnitude of the investment involved, while products "B" and "C" would be subject to less strict control procedures.
The following ABC Analysis table shows the relative importance of products in inventory:
| Product class | % of the product | % Of value | Control |
| A class | twenty% | 80% | Thorough |
| Class B | 30% | fifteen% | Moderate |
| Class c | fifty% | 5% | Minimum |
It is worth remembering that although the above values are a guide applied in many organizations, each organization and inventory system has its peculiarities, and that whoever applies each weighting principle must be highly aware of the reality of their company.
With this system it follows that the most convenient thing for the materials that keep the highest volume in inventory, are those that represent the lowest cost of the same. Exceptions to the ABC system should be made for certain types of materials:
- Production-critical materials Materials with short shelf life Large and bulky materials Bulky materials subject to theft
The method is based on classifying inventories by use-value. Use-value refers to the number of units in a specific assortment in a period of time (for example: monthly or yearly), multiplied by their unit cost or sales price, as the case may be. That is, it refers to the value of the inputs or outputs of the inventory, depending on the point of view used. As a general method, it consists of the following steps: (Bacallao, 2005: Chapter 4)
- Calculate the use-value for each item Sort descendingly according to the calculated use-value Calculate the cumulative sum of the use-value and quantity of items Calculate the frequency (%) of these accumulated sums The last frequency will be 100% for each case (use-value and quantity of articles). Plot the Pareto Curve as% accumulated frequency use-value vs. % cumulative frequency of number of items Select the cutoff points at the inflection points of the curve, and establish groups A, B and C.
Economic Order Quantity Method (CEP).
One of the most elaborate tools for determining the optimal order quantity for an inventory item is the basic economic order quantity (CEP) model. This model can be used to control the “A” items of the companies, as it takes into account various operational and financial costs, determines the order quantity that minimizes the total inventory costs. It is also known as the Basic Model of Economic Quantity of Order or Model of the Economic Lot and has the following assumptions:
- The demand is known, it is constant and continuous (uniform) The delivery time is known and it is constant The product is purchased in batches of the same size and it is received and placed in inventory all at once, that is, the supply All are received together, not in parts. No quantity discount or non-existent (Missing) allowed. The only variable costs are the cost of placing an order and maintenance. Orders are placed to avoid shortages.
The study of this model includes: (Acevedo, 2007: 1)
- Basic costs A graphical method An analytical method
Each of them is explained below in the CEP model.
Basic costs:
Excluding the actual cost of the merchandise, the costs incurred by inventory can be divided into three broad groups: order costs, inventory maintenance costs, and total cost.
- Order Costs: Includes the fixed administrative expenses to formulate and receive an order, that is, the cost of preparing a purchase order, making the resulting limits, and receiving and courting an order against your invoice. Inventory Maintenance Costs: These are the variable costs per unit resulting from maintaining an inventory item during a specific period. These costs are formulated in terms of monetary units per unit and per period. Costs of this type present elements such as storage costs, insurance costs, deterioration costs, obsolescence costs and, most importantly, the opportunity cost, which arises when company funds are immobilized in inventory. Total Costs: It is defined as the sum of the order cost and the inventory cost. In the model (CEP),the total cost is very important since your objective is to determine the amount requested that minimizes it.
Graphic method:
The stated objective of the CEP system is to determine the order amount that minimizes the total cost of the company's inventory. This economic order quantity can be objected graphically, representing the order amounts on the x-axis, and the costs on the y-axis, the minimum total cost is represented at the point indicated as CEP. This is at the point where the order cost line and the inventory holding cost line intersect.
The order cost function varies inversely with the order quantity. This means that as the order amount increases your order cost decreases per order. Inventory holding costs are directly related to order quantities. The larger the order amount, the higher the average inventory, and therefore the higher the inventory holding cost. The total cost function is U-shaped, which means that there is a minimum value for the function. The total cost line represents the sum of the order costs and the inventory holding costs for each order amount.
Analytical method:
It is possible to formulate the equation of the total cost of the company. The first step in obtaining the total cost equation is to develop an expression for the order cost function and the inventory holding cost function.
The elements necessary for the application of this model are: (Gallagher and Watsonh, 2005: 409)
Parameters
CO = cost of placing an order
CH = conservation cost / unit / time
CT = total inventory cost
D = demand in a given period of time
L = delivery time in days
Variable
Q = quantity ordered or batch size
Note: The demand and the conservation cost must both be on the same time scale (year, semester, etc.)
Applying the differential calculation or by the behavior of both costs where the minimum will be where both are equal, the model is solved and the total cost reaches its minimum value when the quantity ordered is:
Q * = optimal quantity to order each time an order is placed
- Order Costs:
Order cost = number of orders times the cost of a single order
If demand I is D units per year and each time an order is placed, Q units are received, then:
Number of orders = D
Q
Therefore, if C O represents the cost of an order, the:
Annual order cost = D * C O
Q
- Inventory Maintenance Costs:
Conservation cost = average inventory per conservation cost / unit / year
If the average inventory IP = Q
two
Then the Annual Conservation Cost = Q * C H
two
As the order quantity, Q, increases, the order cost will decrease while the inventory holding cost increases proportionally.
- Total Costs:
Therefore, the expression of the mathematical model of the total cost of the inventory is expressed as follows:
Total inventory cost = total ordering cost + total holding cost
Annual inventory cost (C T) = D * C O + Q * C H
Q 2
Disadvantages of the Economic Order Quantity model:
- Most companies hold stocks to protect against an unexpected increase in demand or slow delivery. The assumption that the annual demand for items is known in advance is also debatable. If the forecast differs greatly from the actual result, a Wrong CEP Another defect can be caused by a result in fractional units. In the case of units, it is solved with rounding, but in the order number some analysis of fluctuation factors might be necessary to find the number of orders to be placed.
Reorder Point Method
Once the company has calculated its economic order quantity, it must determine the amount to place the order. In the previous CEP model, it was assumed that orders are received instantly when the inventory level reaches zero. It is actually necessary to establish an order renewal point that takes into account the placement and receipt of the order.
The Reorder Point refers to determining the amount of inventory to keep, the date orders should be placed, and the number of units to order each time. To manage this, the times it rotates must be analyzed to determine if it is necessary to increase or decrease the average investment in these. It can be determined with the following equation: (Gallagher and Watsonh, 2005: 450)
Reorder Point = Interval for reception in days x Daily use.
(Order delivery time) (Daily demand)
R = The Reorder point R is expressed in units.
Days between orders = Days worked
Number of orders
In the control of inventories and the coordination of purchases for production, there must be a balance to guarantee the proper distribution of material receptions and the distribution of purchases. Hence, the important thing is the planning of the materials to be received in the course of each period.
Of the methods presented, it cannot be said that one is more beneficial than the other, depending on the characteristics of the company, it could be used in an integrated way, seeking efficiency in the control of inventory management, achieving:
- Have the minimum investment in stock, in raw materials and component parts, in process materials and finished products Maintain the level of stock of raw materials and component parts in such a way that production operations do not suffer delays due to shortages. Possible investment in stocks of finished products Maintain the level of stocks of finished products according to customer demand in order to provide a timely delivery service Discover in time the materials or products that have no movement and those that have been deteriorated or are and obsolete in the market Establish good custody in warehouses to avoid leaks, waste or abuse due to carelessness Be alert to changes in market demands.
CONCLUSIONS
- The effective management and control of inventories deserves the attention of a company's top management in order to provide a quality service to customers.There is no ideal method to control inventories in companies, a combination of existing ones adapted to the particularities of the entity would allow an adequate administration of resources.
BIBLIOGRAPHY
- Acevedo, J. and Gómez, M: Inventory Management, Editorial ISPJAE, Habana, 2001. Gallagher, Ch. A. and Watson, H. J: Quantitative methods for decision-making in administration, Volume 2 Chapter 13, 2005. Corzo Bacallao, J: Application of an inventory management system, Chapter 4, City of Havana, 2005. Easy A.com. "The ABC method in stock management". Available at http://aulafacil.com/gestion-stocks/curso/Lecc-29.htm. Accessed on March 31, 2015 Lucas Morera M., “Inventory control”, 2002. Available at http://www.monografias.com. Accessed on March 31, 2015. Merritt, C., "The advantages of the ABC inventory control system." Available at: http://www.ehowenespanol.com/ventajas-del-sistema-abc-control-inventario-lista_98022/. Visited March 31, 2015 Ministry of Finance and Prices. Resolution 235.Cuban Accounting and Financial Information Standards, 2005. Ministry of Finance and Prices. Resolution 294 of 2005, Cuban Financial Information Standards, Section IV, Chapter 4.2 “Use and content of accounts.” Rodríguez Sangil, M., “Design of a tool to improve inventory management in Copextel SA, Territorial Division Ciego de Ávila ”, Thesis presented as an option to the title of Master in Management Accounting. UNICA, Ciego de Ávila, 2012.MI LTDA, “Inventory management”, 2008. Available at http://avaluos1.blogspot.com/2008/09/administracion-de-inventarios.html. Accessed March 31, 2015.”Rodríguez Sangil, M.,“ Design of a tool to improve inventory management in Copextel SA, Territorial Division Ciego de Ávila ”, Thesis presented as an option to the title of Master in Management Accounting. UNICA, Ciego de Ávila, 2012.MI LTDA, “Inventory management”, 2008. Available at http://avaluos1.blogspot.com/2008/09/administracion-de-inventarios.html. Accessed March 31, 2015.”Rodríguez Sangil, M.,“ Design of a tool to improve inventory management in Copextel SA, Territorial Division Ciego de Ávila ”, Thesis presented as an option to the title of Master in Management Accounting. UNICA, Ciego de Ávila, 2012.MI LTDA, “Inventory management”, 2008. Available at http://avaluos1.blogspot.com/2008/09/administracion-de-inventarios.html. Accessed March 31, 2015.
