1)the simplest method, the purchase man periodically reviews the stock, perhaps visually; to see what inventory items are in short supplies and places order when he thinks a minimum level has been reached or when the inventory of a particular item is exhausted. No inventory levels are kept on records. Obviously, such a method is likely to incur excessive purchasing and carrying costs on the one hand and stock out costs on the other. While excess purchase would lead to excessive investment in obsolete or slow moving goods, shortage or inventory may disrupt production or sales may be permanently lost.
To improve upon the visual method a re-order line may be drawn in the bin or storage area so that when stock reaches this line, order will be placed. The re-order line in the bin would be high enough to cover normal usage until the new order arrives. A variation of this method is to use the two bins systems: an order is placed when the working stock bin is empty.
Another inventory management approach is through the perpetual inventory system. Managers are already familiar with the principles and procedures of this system. Another method used to assist in the control of inventory is the ABC classification. Here the inventory items are classified into groups, usually three, according to the annual cost of the item used and ranked according to the rupee value of the usage. It may, however , be pointed out here that ABC analysis is not actually a control system in itself: it shows the way to decide which items are most in need of strict control system. It is ultimately the management who decides how best to control each class of items.
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