Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK :PILES ON THE SHOP FLOOR and the WARE-HOUSE and MORE IN THE DOCK. :SOME OF IT ANICIENT, SOME OF IT NEW :ALAS and TOMORROW ANOTHER LOT IS DUE. -- UNKNOWN AUTHOR

Functions of Inventory Decouple components of the operations and distribution Uncertainties/variations in demand Flexibility in production smoothing Economies of scale in purchase and mfg To help hedge against price increases To take advantage of order cycles

Sources: plants vendors ports

Field Regional Warehouses: Warehouses: stocking stocking points points

Customers, demand centers sinks

Supply

Inventory & warehousing costs Production/ Transportati Transportati purchase on on costs costs Inventory & costs warehousing costs

Departmental Orientation Towards Inventory

Marketing
Sell the product Good customer service Large inventory

Departmental Orientation Towards Inventory

Production
Make the product Efficient lot sizes Large inventory

Departmental Orientation Towards Inventory

Purchasing
Buy the required materials Low cost per unit Large inventory

Departmental Orientation Towards Inventory

Finance
Provide working capital Efficient use of capital Low inventory

Departmental Orientation Towards Inventory

Engineering
Design the product Avoiding obsolescence Low inventory

Inventory Hides Problems Areas

Machine downtime Scrap Work in process queues (banks) Paperwork backlog Vendor delinquencies Change orders Design backlogs Decision backlogs

Tip of the Iceberg Analogy

Engineering design redundancies Inspection backlogs

Goals of Inventory Management

Maximize customer service (this requires carrying substantial inventory). Minimize inventory investment (this requires carrying little inventory). Customer service takes absolute precedence.
Customer service must be a strategic issue. Leading edge discussion now centers on types of customer service
Shortened delivery time Speed to market Design flexibility

Types of Inventories
Raw materials Components Work-in-process Finished goods Vendor inventories Non-moving/slow moving stock Safety stock In-transit inventories Service parts/Consumables

Inventory Costs
Holding cost Ordering cost Setup cost Shortage costs

Holding Cost
Cost of storage facilities Handling cost Taxes Insurance Deterioration Obsolescence Shrinkage Cost of capital

Ordering Costs
Preparation of purchase requisition/order Mail Expediting, including fax, telephone Transportation Receiving Put away Updating inventory records Paying invoice

Setup Costs
Order preparation Stock picking Setup Inspection Waiting/Queue-time Order close out Updating inventory records

Inventory Control Systems How often should the assessment of stock on hand be made? When should a replenishment order be placed? What should be the size of the replenishment order?

Inventory Counting Systems

Periodic System
Physical count of items made at periodic intervals

Perpetual Inventory System

System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

Inventory Control Systems

Fixed order quantity model (continuous review) Fixed time period model (periodic review) Visual system Two-bin system Single bin system ABC classification system

The Inventory Order Cycle

Order qty, Q Inventory Level Demand rate

Reorder point, R

Lead time Order Order Placed Received

Lead Time time Order Order Placed Received

EOQ Model Cost Curves

Slope = 0 Total Cost

Annual cost (Rs) Minimum total cost

Carrying Cost = (Q/2)H Ordering Cost = (D/Q)S Optimal order Qopt Order Quantity, Q

Notation
D = annual demand C = per-unit cost h = inventory holding rate (%) S = order cost Q = order quantity R = reorder point SS = safety stock LT = lead time

EOQ Model Balance holding cost against ordering costs Calculate the optimal EOQ:

Q =
*

2 DS Ch

No of orders per year = D/Q* Time between orders = Q*/D

Fixed Order Quantity Model

Reorder = Expected demand point during lead time

+ Safety stock

Fixed Order Quantity Model

Inventory level

Reorder point, R

Safety stock

Time

Fixed Time Period Model

Reviewed at fixed specified time interval. Place an order for a quantity that, when added to the quantity on hand, will equal a predetermined maximum level. Independent demand is the usual situation. Difficult to record withdrawals and additions from stock. Groups of items are purchased from a common supplier. Items that have limited shelf life.

Fixed Time Period Model

Small tools, manufacturing supplies. Common commercial parts such as nuts, bolts, washers. Office supplies. Perishable items such as dairy products, fruits and vegetables. Chemicals, solvents used in the manufacturing process.

Fixed Time Period Model

Inventory level

Safety stock

Time
Review Time

Two-Bin System
Special case of fixed order quantity model. Amount of stock equivalent to the order point is physically segregated into a second bin and is then sealed. When all the open stock has been used up, the sealed bin is opened and a new order is placed. Practical method for keeping control of low-value items. Without adequate training this system can be abused. Quantity in the second bin should be reviewed from time to time.

Single-Bin System
Stock is periodically checked and each item is ordered to a pre-established stock level. Works well on floor stocks located near the point of use, like large grocery stores.

ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly .

A - very important B - mod. important C - least important

High Annual Rs volume of items Low

A B C
Few

Number of Items

Many

ABC Analysis
Pareto noted that many situations are dominated by a relatively few vital elements. Controlling the relatively vital few will go a long way toward controlling the situation. Applying the ABC principle to inventory management involves:
Classifying the inventory items on the basis of relative importance. Establishing different controls for different classifications with the degree of control being commensurate with the ranked importance of each classification.

Inventory Turnover and Service Levels Inventory turnover is the measure of how well the business is managing its inventory. It shows how many times a year the inventory is turning(or moving) through the organisation. The higher the turnover,the better.However there is a larger probability That stock may not be available when the customer needs it.

Inventory Turnover .. Inventory turnover in a Retail business Total sales/Actual inventory Inventory turnover in a Manufacturing business Cost of Goods sold/Actual inventory

Simple physical techniques may provide more economical control of inventories.