Project on Inventory Management
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Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. It is also used for a list of the contents of a household and for a list for testamentary purposes of the possessions of someone who has died. In accounting inventory is considered an assets. Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Other definitions of inventory management An inventory can be defined as a stock of goods which is held for the purpose of future production or sales. The stock of goods may be kept in the following forms: 1. Raw Materials 2. Partly finished goods 3. Finished goods 4. Spare parts etc.


The objective of an inventory problem is to minimize the total (actual or expected) cost or to maximize (actual or expected) profit. Involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining. Controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs. See inventory proportionality.

o o o o o o o Raw materials Purchased parts and supplies Labor In-process (partially completed) products (WIP ± work in progress) Component parts Tools, machinery, and equipment Finished goods etc.

The reasons for keeping stock There are three basic reasons for keeping an inventory: o Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time" o Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. o Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.


All these stock reasons can apply to any owner or product stage. Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change-over time. This stock is then used while that change-over is happening. This stock can be eliminated by tools like SMED These classifications apply along the whole Supply chain not just within a facility or plant. Advantages: o o o o o o The economics of production with the large run sizes. The smooth and efficient running of the business. The economics in transportation. The advantage of price discounts by bulk purchasing. Faster and adequate service to the customers and, Profit from speculation in the market where price are expected to rise.

Disadvantages: o Ware house rent. o Interest on invested capital. o Physical handling. o Accounting. o Depreciation and determination.

Strategic inventory analysis


The variables associated with the inventory problems are classified into two categories. a. The Controlled variables b. The uncontrolled variables The Controlled variable 1. The quantity acquired ± By purchase, production, or some other means. The decision maker may have a control over the production or purchase level. 2. The frequency of timing of acquisition ± The decision maker may have control over how often or when the inventory should be replenished. 3. The stage of completion of stocked items ± The decision maker may have a control over the stage at which the unfinished items be held so that there is no delay in supplying customers. The uncontrolled variables ± The variables that may not be controlled in an inventory problem are divisible into cost variables and others.

Cost Variables (or the costs) involved in Inventory Problems:

The main cost variables involved in inventory problems are as follows: 
Holding or storage cost ± The costs associated with the storage of the inventory until it is or used are known as the holding or storage costs. This cost is directly proportional to the various components of the holding costs are as follows: 1. 2. 3. 4. 5. 6. Handling costs± Which include the cost of labour, transportation charges etc. Rent of the space or interest and the cost of depreciation on owned space. Cost of the staff to keep records. Insurance and taxes. Interest on the money locked for inventory. Deterioration cost etc. Which arises in the case of fashion items or items that changes chemically during storage such as medicines, foods etc. 

Set up (or replacement or ordering) costs ± This is the cost associated with the placing of an order for purchasing goods, or it is the cost of setting a machine before it starts production. This cost may depend on the quantity of goods purchased because of price breaks or quantity discounts. 4

Besides these cost variables there are other variables that may not be controlled in an inventory problem
1. Demand ± Demand is the number of items required per period which is not necessarily equal to the amount sold as some demand may go unfulfilled because of storage or delays. The demand may be of two types: (i) Deterministic Demands± If the number of items required (i.e. demand) in a subsequent period of time is known exactly then such demand are called deterministic demands. Non deterministic Demands ± If the demands over a subsequent period of time are not known with certainty then such demands are called non ± deterministic or probabilistic demands. 2 Lead Time ± The time gap between the time of placing an order or the starting of the production and the time of arrival or delivery of goods to the inventory is called Lead Time. Also the time gap between the time of demand and the time of filling the demand from the inventory is called lead time. If this time is known (constant) and not zero then one may order in advance by an amount of time equal to the lead time. If it is a variable i.e., known only probabilistically than the question of when to order is difficult. Amount Delivered ± The supply of goods may be instantaneous or spread over a period of time.





Classification and Categories of Inventory Models:

The inventory problems (models) may be defined in to two categories.
1. Deterministic Models± These are inventory models in which demand is assumed to be fixed for a subsequent period of time. Probabilistic Models ± These are the inventory models in which the demand is a random variable having a known probabilistic distribution. Here the future demand is determined by collecting data from the past experience.


Some general notations used in inventory models:
We shall use the following general notations in inventory models: I = The cost of carrying one rupee in inventory for a unit time. C1 = Holding cost per unit time. C2 = Storage cost per unit time. C3 = Set up cost per production run. q = Lot size per production run. (i.e. The quantity produced per production run) r = Demand rate. K = Production rate. C = Average total cost per unit time. t = Time interval between two consecutive replenishments of inventory. z = Order level or stock level. L = lead time. q*, t*, z* = Optimal values of q, t, z respectively for which the cost C is minimum. Deterministic models: Economic Lot size Model: The most common inventory problem faced by industry concerns the situation where stock levels are replenished with time and then are replenished by the arrival of new item. The situation is given in the following economic lot size models. The inventory problems in which the demand is assumed to be fixed and completely predetermined are known as the Economic Lot Size Problem or Economic Order Quantity (EOQ) Problem.


Model I: Economic Lot Size Model with Uniform Rate of Demand Infinite Production Rate and having no Shortages To determine an economic lot size formula and the minimum average costs under the following assumptions. (i) (ii) (iii) (iv) (v) (vi) Demand is uniform at the rate of r units per unit time. Production is instantaneous. (Production rate is infinite). Lead time is zero. C1 = Holding cost per unit time. C3 = Set up cost per production run. Shortage costs are not allowed.

Solution: Let q be the units of quantity produced (or ordered) per production run at interval of time t. The situation in inventory can be illustrated as under


Model II: Economic Lot Size Model with Different Rate of Demand in Different Production Cycles, Infinite Production Rate and having no Shortages To derive Economic Lot Size formula and the minimum average cost under the same assumptions as in mode I except that the demand rates are different in different production cycles.

Solution: Let q be the units of quantity produced per production run

q q

Model III: Economic Lot Size Model with Uniform Rate of Demand, Finite Rate of Replenishment and having no Shortages. To derive Economic Lot Size formula and the minimum average cost under the same assumptions as in mode I except that the replenishment rate (i.e., the production rate is finite). Solution: Let K > r be the number of items produced per unit time. If q is the number of items produced per production run then the production will continue for a time t1 = q/K. And the time of one complete production run (i.e. The interval between runs) t = q/r (Since r is demand rate and no shortage is allowed).


The situation can be illustrated as follows:


‡ ‡ Medical resources of any community are its system of blood banking facilities. Blood collected from human donors at one time, place processed, stored and ultimately provided for transfusion to hospital patients. Blood bank organized loose regional system.



Hospital in such system generally acquire portion of a portion of their blood supply from one or more common central blood bank and one or more donor services the hospitals typically interact with each other only in frequently time of emergency .

MOST COMMAN PROBLEM ± ‡ ‡ Short supply at the same time Sudden stock out (High demand)


Blood bank inventory systems make a this very complex task² ± Both supply and demand are probabilistic. ± No availability of right group of right time. ± Blood is perishable, the legal lifetime being 21 days in most areas. ± Costly.









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