TECHNIQUES OF INVENTORY CONTROL In managing inventories, the firm’s objective should be in consonance with the wealth maximization principle. To achieve this, the firm should determine the optimum level of investment in inventory. To deal with the problems of inventory management effectively, it becomes necessary to be conversant with the different techniques of inventory control. Although the concepts involved in inventory management are production-oriented and are not strictly financial it is important that the financial manager understand them since they have certain built-in financial costs. The different techniques of inventory control may be summarized as follows: (1)
Inventory level Technique The main objective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor unnecessary investment in inventory. For this purpose, determination of maximum and minimum limits of inventory and ordering level is necessary.
(2)
Maximum stock Limit: This represents the quantity of inventory above which it should not be allowed to be kept. The main object of fixing this limit is to ensure that unnecessary working capital is not blocked in stores. The quantity is fixed keeping in view the disadvantages of overstocking.