1. Inventory and Inventory management 2. Lead time 3. Reserve stock and safety stock 4. Reorder level 5.

Economic order quantity 6. Trade off between total costs of inventory and order quantity 7. Customer Service levels 8. Average inventory 9. Selective Inventory Control 10. Pareto’s rule
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1. 2. 3. 4. 5. 6.

Quadrant technique Non-Performing Asset ABC analysis Vendor managed Inventory Inventory Turn Over Ratio Review Period

1. Quadrant technique 2. Non-Performing Asset 13. ABC analysis 14. Vendor managed Inventory 15. Inventory Turn Over Ratio 16. Review Period

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* What is Inventory?

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• A list of items being held in stock • An asset not participating in conversion or not getting sold • Any NPA, considered to be an asset & part of working capital

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Why do we have inventory? • Due to mindset - reluctance to dispose off • Consequence of redundancy of products • Built-up as a means of customer satisfaction, as a cushion against uncertainties • To overcome disadvantages of poor infrastructure • 9 to 12 months of sales in India, a few days in Japan and a month in US/Europe
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Importance of Inventory Decades of 1980 & 1990 brought inventory in focus Why? Emergence of Japan as a economic super power in 1980s Visual evidence of success of Japanese systems Ford Motors carried 15 times more WIP inventory than what Toyota did! A benefit Toyota enjoyed over Ford in cost management Impact on product cost, 5 to 35% of product cost are logistical costs & 35% of logistical costs are inventory costs
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 Effect on product quality Facilitates production Protects the conversion process from uncertainties of market Has a major impact on product cost - a source of cost and bad quality  Measure of managerial performance Signs of poor inventory management An increase in back orders Rising inventory investments High customer turn over Increase in order cancellation
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Insufficient storage space Increase in rupee & number of obsolete products Objectives of Inventory Management To increase corporate profitability To anticipate impact of corporate policies on inventory levels and act proactively To minimize logistical costs while meeting customer service requirement Functions of Inventory [Rationale for Inventory] Overcomes geographical separation Decoupling internal process – reducing 9 dependence

• Balancing supply and demand Buffers uncertainties of lead time, demand and poor infrastructure Acts like a cushion against unusual events like strike or war Technical requirement of batch production Facilitates price discounts

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Procurement Costs - management and staff time, order preparation and dispatch, follow up, transport from vendor, receiving, handling storage Carrying Costs - capital, opportunity, space, tax, security, insurance, spoilage and preservation, obsolescence Out of stock costs - emergency transport, lost sale, lost customer
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Inventory related costs

location In transit inventory[pipeline inventory]-Being transported and or waiting to be transported Manufacturing inventory R/M, components, WIP, F/G, MRO [Maintenance, repairs and operating supplies] Risk due to commitment of resource to manufacturing is deep and long.
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Location inventory-Inventory at a fixed

Types of Inventory

Stock of large quantities and sold in small quantities to retailers Stock of seasonal products, products to satisfy assorted, small and urgent needs of retailers Generally risk is narrow & deep, when the product line expands risk is wider and deeper. Retailers inventory Variety of products to satisfy demand Retailers push the inventory backwards to wholesalers and reduce the depth of risk although the risk is wide
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Wholesale inventory

Average level of inventory in the organization R/M, parts, WIP, finished goods Following inventory concepts are used in calculating average inventory 1. Cycle inventory: result of replenishment process, also known as base stock or lot size stock, Q/2 2. Safety stock Inventory: Stock held to safe guard against variations in lead-time & or consumption 3. Transit Inventory: Either moving or awaiting movement
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 Average inventory

 Economic order quantity  Assumptions of Wilson’s Lot size formula or Classical EOQ model 3. Demand is at a known constant rate and continuous 4. Lead time is known and constant 5. Demand is fully satisfied, no shortages are allowed 6. All costs are time invariant 7. Quantity discounts are not considered 8. Replenishment is instantaneous, there is no transit inventory
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* Process is continuous * No constraints are imposed on quantities ordered, storage capacity, budget etc.  EOQ derivation  All assumptions in tact EOQ=√2AD/h Relax instantaneous replenishment EOQ=√2AD/h(1-D/P)  Limitations of classical EOQ model- major limitations are the assumptions made  If the concept of EOQ is applied without taking into account the limitations, results can be disastrous 16

transportation # Transportation costs are sensitive to weight of consignment Quantity discount-Quantity discounts can upset the benefit of EOQ if we don’t evaluate the situation from total cost perspective
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EOQ model does not consider economics of

Adjustments to EOQ

buyer’s EOQ and supplier’s EBQ. Some adjustment is needed. Multiple items purchase # Combination of products are sourced from a supplier # Impact of quantity discounts and transportation costs on total cost when a combination of products is purchased # So adjustment is required to EOQ
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Production lot size: Mismatch between

Other EOQ adjustments

# Budget has to satisfy the requirement of entire
product line # EOQ of various items requires adjustment Private trucking # Getting a full truck (FTL) becomes significant from cost perspective as against EOQ Standard package # Standard package and EOQ
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# Significant role of budgetary allocation

Limited capital

Inventory Classification * Ranking of Inventory to facilitate selective management control * Dates back to 1951- GE * Pareto’s rule: 80-20 rule, separate vital few from trivial many * ABC Analysis Vital few Trivial many
20% 80% 80% 20% Inventory Items Inventory Value
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*An example of ABC analysis Logistics Perspective of selective management control ABC analysis has one chosen parameter like cost or value in focus ‘A’ category is priority from the perspective of this particular parameter Prioritization in inventory management has to consider other factors as well VED Analysis FSN Analysis HML 21

 SDE [Scarce, Difficult to procure, Easy to procure] SOS [Seasonal Off Seasonal] GOLF [Government, Open market, Local & Foreign Source] XYZ analysis Quadrant technique

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Stock out Risk

Distinctives High risk, low value items: customized items not expensive but not available easily, single supplier and long leadtime Generics Low value easily available items, standard items

Criticals High value customized items not available easily

Commodities High value standard items, basic production items, standard packaging items

Value or Profit potential
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Fundamental approaches to managing inventory Traditional approach has been deciding when to order? But challenge of today - to find answers to the questions ‘where?’ to stock the material, how much? and when? Inventory decisions influences customer satisfaction level High level of inventory & higher customer satisfaction level Cost of high inventory is obviously high Modern challenge is high customer satisfaction at 24 minimum inventory

Fixed Order Quantity Approach (condition of certainty) The order quantity is fixed at EOQ Another stock level fixed is Re Order Level (ROL or ROP) which triggers ordering ROL is fixed by calculating lead time consumption Inventory cycles can be conceptualized by looking at the figure drawn in the class EOQ Model – discussed already
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Q

D
ROL
IS LEAD TIME CONSUMPTION

INV

SAFETY STOCK

Lead Time

Lead Time

Lead Time

INVENTORY CYCLE TIME

INVENTORY CYCLE TIME

INVENTORY CYCLE TIME

Q - MODEL

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SOME IMPORTANT CONCEPTS ROL = SAFETY STOCK [FOR EXTENSION OF LEAD TIME] + RESERVE STOCK [FOR INCREASE IN DEMAND] + BUFFER STOCK[LEAD TIME CONSUMPTION] 3. SAFETY STOCK: Dave X [Lmax-Lave] 4. RESERVE STOCK: Lave X [Dmax – Dave] ROL = Dave Lave + K√σd2 L +σl2 D2 • K=1…………15.87% • K=2…………2.28% • K=3…………0.13% • K=0…………50%

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Salient Features of the above approach 1. widely used technique 2. requires constant monitoring of stock levels 3. limited by the assumptions made – cost of in transit inventory, volume transportation rates, use of private carriage 4. Combines the concepts of push & pull Min-Max Approach – a modification to EOQ model • Order for EOQ is released when ROL is reached
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• Assumption is stock depletion is at a specific rate ‘D’ during replenishment cycle. • In reality when stock depletions can be high • Min-Max Approach suggests that the actual order quantity should be the sum of EOQ and the difference between ROL and actual stock on hand at the time ROL occurs. • Fixed Order Quantity Approach (condition of uncertainty) When demand and lead time vary • Fixed Order Interval Approach Decisions about review period & S • Optional replenishment Approach Decisions about review period, S and s 29

TIME S

Q

D
I2

I1 INV

SAFETY STOCK

Lead Time

Lead Time

Lead Time

T

T

P- MODEL
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Some Inventory related definitions 1. Inventory policy: • 5W-1H questions about buying and controlling inventory. What to stock? How much? When? Where? What method? Approach? • Centralized or decentralized control 2. Service levels: performance objectives of inventory function • Order cycle time: release of a purchase order & receipt of the shipment at customer’s place • Case fill rate: percentage of cases deliverable against the number of cases customer ordered • Line fill rate: product lines fully delivered to the product lines ordered is the line fill rate.
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• Order fill rate: percentage of orders completely fulfilled to orders received • Average inventory a. Cycle inventory b. Safety stock Inventory c. Transit Inventory also known as Pipe Line Inventory

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Inventory Strategy – a long term plan to control inventory What is controlled? Selective management control, quadrant approach When do we move inventory? Kanban system in JIT, DRP, MRP Where and at how many places? Centralized or decentralized? Warehouse location, square root law Why? Customer satisfaction at minimum cost
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How do we manage? Inventory approaches, push methods? pull methods? How do we measure performance? Inventory turns, fill rates, perfect orders

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