The investment in inventories for most agricultural firms represents a sizeable sum. Since this investment is substantial, management practices that result in savings of a few percent of total inventory values translate into significant savings in naira and kobo.
Inventory control is critical in agricultural production for several reasons. First, inventories must be sufficient to maintain balance in the production line. If some machines or processes operate at different rates, temporary inventories or banks, as they are called, can be provided between operations to address these imbalances.
Second, inventories of raw materials and semi-finished products absorb fluctuations in sales or production volumes. This leads to the third reason inventory control is essential: inventories ensure a smooth flow of production, facilitating effective scheduling.
Finally, inventory control enables production and purchasing in economic lot sizes, representing the optimum quantity to produce to minimize costs.
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Key Objectives of Inventory Control in Agriculture
Several objectives guide inventory control in agriculture. Sometimes, compromises must be made to achieve these goals, as meeting all simultaneously is often impossible. The objectives of inventory control are to:
- Minimize investment in inventory.
- Minimize warehousing costs.
- Minimize losses from damage, obsolescence, and perishability.
- Maintain sufficient inventory to prevent production halts due to shortages of raw materials, parts, or supplies.
- Ensure efficient transportation of inventories, including shipping and receiving functions.
- Maintain an efficient inventory information system.
- Supply information on inventory value to accounting.
- Cooperate with procurement to enable efficient and economical purchasing.
- Forecast inventory requirements accurately.
Benefits of Effective Inventory Control in Agriculture
An effective inventory control system delivers numerous benefits, including the following:
- Ensures proper execution of policies covering procurement and use of materials, enabling rapid shifts to meet changing market conditions.
- Achieves economies by reducing unnecessary variety in stock items.
- Eliminates production delays caused by the unavailability of required materials and tools.
- Prevents over-accumulation of inventories and tools, maintaining the minimum investment consistent with production needs and procurement policies.
- Reduces inventory losses due to inadequate inspection of incoming materials, damage, deterioration, obsolescence, waste, or theft.
- Provides “balance-of-store” records as a reliable basis for effective production planning, economical procurement, cost accounting, and preparation of financial reports.
Procedures for Establishing an Efficient Inventory Control System
To establish an efficient inventory control system in agriculture, the following procedures are recommended:
- Determine the place of inventory control within the organization.
- Develop a method for classifying and identifying inventory.
- Set up and secure control through balance-of-stores records (perpetual inventory cards) for planning inventory needs, allocating materials, requisitioning purchases, conducting physical inventory, and preparing financial statements.
- Establish steps in the materials control cycle to regulate the flow of items from requisitioning and procurement to product completion.
- Set up procedures for tool procurement and control.
- Secure physical control of inventory through an effective system of keeping stores.
The primary responsibility for inventory control should typically reside in the production division under the chief of production planning and control.
This centralizes direction for all phases of the inventory control cycle (requisitioning, procurement, receiving, storage, allocation, processing, and replenishing), even though execution involves purchasing, engineering, inspection, and sales departments.
Classification and Identification of Agricultural Inventory
To save time and simplify identification, allocation, and control, inventory types should be classified using symbols. An identification system should be established for all aspects of the business, including departments, sections, machines, operations, and positions.
1. Types of Agricultural Inventories
Inventory includes tools, standard supply items, raw materials, goods in process, and finished products. Raw materials are commodities (e.g., seeds, fertilizers, pesticides) and purchased parts (e.g., irrigation components) that go into the final product.
Goods in process are materials that have been partially processed but are not yet completed. Finished goods are completed items ready for shipment.
2. Symbols for Inventory Identification
Numeric and mnemonic systems are commonly used for classifying and identifying inventories, including tools. The numeric system uses numbers and decimals to identify items and subgroups, with digits and decimal positions signifying models, locations, sizes, or physical properties.
The mnemonic system employs letters and numbers to aid memory, such as “Z” for model, “SA” for subassembly, or “P” for component parts. Stores may also be identified using tags, paint colors, or distinctive markings.
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Balance-of-Stores Record (Perpetual Inventory System)
The balance-of-stores record is central to inventory control systems, particularly in job-order plans. It tracks the movement of each item as it enters and exits, showing the current balance on hand. As it is closely tied to production planning, it is best maintained by a balance-of-stores clerk in the production planning office.
1. Perpetual Inventory Form
The store record must be designed to meet the business’s needs. A loose-leaf ledger or card is kept for each item in terms of unit quantities (e.g., kilograms, units, or liters) and often monetary value. Data typically included in the record are the item’s name and identification, storage location, consumption rate, ordering point, ordering quantity, and the following balance columns:
- Ordered: Quantity placed on order by purchase requisition.
- Received: Quantity supplied to the storeroom.
- Issued: Quantity released to the production process in response to requisitions.
- Balance on hand: Current quantity and value of stores.
- Allocated or applied to: Quantity apportioned to a production order but not yet issued for use.
- Available: Quantity still available for allocation.
2. Ordering Point and Ordering Quantity
To prevent shortages and high costs from under- or over-buying, a minimum quantity (ordering point) and a maximum quantity (ordering quantity) should be established for each item and indicated in the stores record.
The ordering point, indicating the minimum quantity to keep in stock and the time to reorder, is determined by the rate of use in production and the time required for purchasing or fabricating the item. The ordering quantity is determined by balancing factors influencing procurement costs, including:
- Inventory-carrying charges (e.g., storage, insurance, interest).
- Clerical costs of ordering for purchase or fabrication.
- Transportation costs.
- Quantity discounts on purchases.
The increase in carrying charges from larger ordering quantities must be balanced against savings in clerical costs, transportation costs, and quantity discounts.
The ordering quantity should be periodically revised to align with the company’s financial situation, seasonal production fluctuations, and market trends, such as rising or falling prices.
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