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Inventory Management
Inventory Management
INVENTORY MANAGEMANT
Inventory management is the branch of business management concerned with planning and controlling inventories Inventory is stock of items held to meet future demander Inventory is vitally important to almost every type of business of whether product or service oriented; in the business of water and electric utilities, inventory management touches almost every facet of operation. Raw materials such as coal and fuel oil must be scheduled and stockpiled for production of electricity. Operation supplies such as hydrogen, chlorine, and fireside, treatment chemical must be delivered and on hand is the proper quantities for the operation of the power plant and the water treatment plant. Large stocks of materials such as poles, wire, valves, and pipe must be kept to operate, maintain, and expand the extensive distribution system required to deliver electricity and water to the customer. If the proper materials are not available when needed, construction crews will not be able to extend service to new customer in a timely fashion. During a los e of power or water pressure, the lack of a proper repaid part could mean that a customer might be without service for an extended period of time. On a daily basis, even stocks of blank forms and envelopes must be kept on hand for the preparation of monthly bills. Since the health and welfare of a community is involved, it would be easy to take the approach that large volumes must be a shortage. But customers also like low rates, and costs of inventory on hand can easily exceed 5 percent of the annual revenues of the utility. Thus the proper balance must be struck to maintain proper inventory with the minimum financial impact on the customer. Inventory management offers comprehensive reporting capabilities to keep you on top of inventorystatus.Generate reports on item pricing, stock status, detailed sales history, back order information, reorder points and recommendation, valuation, turnover, sales analysis, and much. And adding the business alerts module can keep your staff on top of quantity changes to critical inventory items, to keep stocking levels precisely where you want them. Properly used, the, inventory management module can help bring about the formulation of new or improved purchasing policies, sale policies pricing methods, and even enhanced customer service. Inventory management could also provide your company with an additional edge over competitors who are unable to access the same strategic information.
Types of Inventory
Raw materials Purchased parts and supplies
Lab our In-process (partially completed) products (WIP work in progress) Component parts Tools, machinery, and equipment Finished goods
Contribute to the efficient and effective operation of the production system Finished Goods y y y Essential in produce-to-stock positioning strategies Necessary in level aggregate capacity plans Products can be displayed to customers
Raw Material y y Suppliers may produce/ship materials in batches Quantity discounts and freight/handling $$ savings
Variables in inventory models--Variables in inventory models in developing and discussion models, we will use the following notation. D = Total annual demand (in units) Q =Quantity ordered (in units); order quantity Q*=Optimal order quantity (in units) R =recorder point (in units) R*=Optimal recorder point in units) L = Lead time in time units) S =Setup or procurement cost (per order)
G =Cost of the individual item; cost per units I = Carrying cost per unit carried, expressed as a percentage of unit cost C K =Stock out cost per unit out of stock P =Production rate; output per time unit (in units);or delivery rate dL=Demand per time unit during lead time (in units) DL=Total demand during lead time (in units) TC=Total annual relevant costs TC*=Minimum total annual relevant costs
INVENTORY SYSTEMS
There are basically two systems followed Q/R Inventory system
At time of delivery
y y y y y y Verify count -- Make sure you are receiving as many cartons as are listed on the delivery receipt. Carefully examine each carton for visible damage -- If damage is visible, note it on the delivery receipt and have the driver sign your copy. After delivery, immediately open all cartons and inspect for merchandise damage. Retain damaged items -- All damaged materials must be held at the point received. Call carrier to report damage and request inspection. Confirm call in writing--This is not mandatory but it is one way to protect yourself. Have all damaged items in the receiving area -- Make certain the damaged items have not moved from the receiving area prior to inspection by carrier. After carrier/inspector prepares damage report, carefully read before signing. Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier. Do not return damaged items without written authorization from shipper/supplier
After inspection
DEPENDENT
Items whose demand depends on the demands for other items For example, the demand for raw materials and components can be calculated from the demand for finished goods The systems used to manage these inventories are different from those used to manage independent demand items Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item
INDEPENDENT
Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory Demand for an item carried in inventory is independent of the demand for any other item in inventory Finished goods inventory Demands are estimated from forecasts
INVENTORY COSTS
In operating an inventory system managers should consider only those cost that vary directly with the operating doctring in deciding when and how mush to to reorders; costs independent of the operating doctrine are irrelevant. Basically, there are five types of relevant costs: Cost of the item Cost of procuring the item Cost of carrying the item in inventory Cost associated with being out of stock when units are demanded but are unavailable(stock outs) 5. Cost associated with data gathering and control procedures for the inventory system. 1. 2. 3. 4.
EXAMPLE
Thompson tooling has a department of defense contract for 150,000 bushings a year .Thompson order the metal for the bushings in lots of 40,000 units from a supplier. It cost Rs 40 to place an order, and the estimated carrying charge is 20 percent of the unit cost, which is Rs0.15.thompson, wants to know what percent their order quantity varies from optimal and what this variation is costing them, if anything .Finding optimal order quantity Q* ! Q* ! 2 DS IC 2(150,000)(40)
Q* ! 20,000 comparing , optiama, order , quantityQ*, withcurrent , order , quantityQ : Q 40000 ! !2 Q * 20000 total cos ts TC 1 Q * Q 1 20000 40000 ! ! ! 1.25 TC * 2 Q Q * 2 40000 20000
This calculation shows that even though order quantity is 100% higher than the optimal cost are only 25 percent higher than the optimal. the excess (marginal)costs of current order quantity can be found as follows
m arg inal , cos t ! TC TC * ! 1.25(TC *) TC * ! 0.25(TC *) D Q * ! 0.25 S Q * IC 2 40(150 ,000 ) ( 0.20)(0.15)(40000 ) ! 0.25 2 20,000 ! 0.25(300 300 ) ! RS 150 Alternativ ely TC * ! S Q* D IC 2 D* ( 40)(150,000 ) (0.20)(0.15)( 40,000 ) ! 20,000 2 ! 300 300 RS 600 AND TC ! ( 40)(150,000 ) (0.20)(0.15)(40,000 ) 40,000 2 ! 150 600 ! RS 750
As a business grows, it may find a need for a more sophisticated and technical form of inventory control. Today, the use of computer systems to control inventory is far more feasible for small business than ever before, both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers. Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer. Point-of-sale ter inals relay information on each item used or sold. The manager receives information printouts at regular intervals for review and action. Off-line point-of-sale terminals relay information directly to the supplier's computer who uses the information to ship additional items automatically to the buyer/inventory manager. The final method for inventory control is done by an outside agency. A manufacturer's representative visits the large retailer on a scheduled basis, takes the stock count and writes the reorder. Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined, authorized procedure. A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item. Two major control values are used: 1) the order quantity, that is, the size and frequency of orders; and 2) the reorder point, that is, the minimum stock level at which additional quantities are ordered. The Economic Order Quantity (EOQ) formula is one widely used method of computing the minimum annual cost for ordering and stocking each item. The EOQ computation takes into account the cost of placing an order, the annual sales rate, the unit cost, and the cost of carrying inventory. Many books on management practices describe the EOQ model in detail.