Inventory Management


Accman Institute of Mangement Acknowledgement Letter

Dear Sir/Madam, Subject: Project on Inventory Management, I deeply acknowledge the support of Prof. Subir Guha who initially helped and motivated us to embark on this strenuous .I would like to give thanks to providing me an opportunity to make this project.

Name & Title of Authorised Representative: Signature: College Name and Address: Telephone number: 

Inventory :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:  Raw Materials  Partly finished goods  Finished goods  Spare parts etc. OR 1. A stock of items held to meet future demand 2. Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.  Variables in an Inventory Problem: The variables associated with the inventory problems are classified into two categories. a. The Controlled variables b. The uncontrolled variables

a) The variables that may be controlled, separately or in combination are following: 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. b) The uncontrolled variables ± The variable that may not be controlled in an inventory problem are divisible into cost variables and others. 

Inventory management: 1. Inventory management is the branch of business management concerned with planning and controlling inventories. 2. Inventory is stock of items held to meet future demand . 3. It deals with two basic questions: y How much to order y When to order? 

Types of Inventory: 1. Raw Material 2. Work in progress 3. Finished Goods  Nature of Inventories 1. Raw Materials ± Basic inputs that are converted into finished product through the manufacturing process . 2. Work-in-progress ± Semi-manufactured products need some more work before they become finished goods for sale .

3. Finished Goods ± Completely manufactured products ready for sale. 4. Supplies ± Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment. 

Reasons To Hold Inventory 1. Meet variations in customer demand: o Meet unexpected demand o Smooth seasonal or cyclical demand 2. Pricing related: o Temporary price discounts o Hedge against price increases o Take advantage of quantity discounts 3. Process & supply surprises o Internal ± upsets in parts of or our own processes o External ± delays in incoming goods.  Objective of Inventory Management 1. To maintain a optimum size of inventory for efficient and smooth production and sales operations. 2. To maintain a minimum investment in inventories to maximize the profitability.

3. Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality. 

An effective inventory management should: Ensure a continuous supply of raw materials to facilitate uninterrupted production.  Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes .  Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service.  Minimize the carrying cost and time.  Control investment in inventories and keep it at an optimum level . 

An optimum inventory level involves three types of costs :              
Ordering costs:Quotation or tendering Requisitioning Order placing Transportation Receiving, inspecting and storing Quality control Clerical and staff Stock-out cost Loss of sale Failure to meet delivery commitments Carrying costs:Warehousing or storage Handling Clerical and staff Insurance Interest Deterioration,shrinkage, 

Taxes  Cost of capital 

Dangers of Over investment: Unnecessary tie-up of firm¶s fund and loss of profit ± involves opportunity cost  Excessive carrying cost  Risk of liquidity- difficult to convert into cash  Physical deterioration of inventories while in storage due to mishandling and improper storage facilities      Dangers of under-investment:Production hold-ups ± loss of labor hours Failure to meet delivery commitments Customers may shift to competitors which will amount to a permanent loss to the firm May affect the goodwill and image of the firm 

Functions of Inventory Management:- Track inventory ± How much to order ± When to order
Basic EOQ Model

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Assumption Seasonal fluctuation in demand are ruled out . Zero lead time ± Time lapsed between purchase order and inventory usage. Cost of placing an order and receiving are same and independent of the units ordered. Annual cost of carrying the inventory is constant . Total inventory cost = Ordering cost + carrying cost 

 y y

Inventory management:Two system followed Periodic review Fix order quantity 

In periodic stock position is reviewed periodically rather than continuously. A new order is always placed at the end of the each review.  In Fixed order quantity system the stock of an item is continuously reviewed. A reorder level is decided on. Whenever the stock of the item equals the reorder level, a new order is placed. The time between orders can vary. In this system, the order quantity ordered is always fixe and is equal to the EOQ. EOQ (Economic Order Quantity) is calculated by a formula which ensures that the total cost is minimum.  Lead time is the lapsed time between the placement of an order and its actual delivery.  Safety stock level is also known as buffer stock. It is the extra quantity of merchandise that i s stocked to take care of delay in delivery and higher demand during the lead time.  Lead time is the lapsed time between the placement of an order and its actual delivery.  Safety stock level is also known as buffer stock. It is the extra quantity of merchandise that is stocked to take care of delay in delivery and higher demand during the lead time. 

Types of Inventory  Movement inventory:-This inventory is known as transit or pipeline inventory arises due to shipment of inventory items to distribution centres and from various production centers.  Buffer inventory:- This inventory is maintained to meet uncertainties of demand and supply. Such buffer inventory which are in excess of those necessary to just meet the average demand during the lead time .  Anticipation inventory:-This is known as seasonal inventories held because of future demand which is anticipated. 

Decoupling inventory:-This is used to reduce interdependence of various stage of production systems are known as decoupling inventories.  Lot size inventory:-These are held for the reason that purchases are usually made in lots rather than for the exact amounts which may be needed at appoint of time.  EOQ ± Three Approaches  Trial and Error method  Order-formula approach  Graphical approach  Model I: Basic EOQ  Typical assumptions made:o Annual demand (D), carrying cost (C) and ordering cost (S) can be estimated o Average inventory level is the fixed order quantity (Q) divided by 2 which implies  No safety stock  Orders are received all at once  Demand occurs at a uniform rate  No inventory when an order arrives  Assumptions (continued)  Stock out, customer responsiveness, and other costs are inconsequential  Acquisition cost is fixed, i.e., no quantity discounts  Annual carrying cost = (average invent ory level) x (carrying cost) = (Q/2)C  Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)S  Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C + (D/Q)S  The order quantity where the TSC is at a minimum (EOQ) can be found using calculus (take the first derivative, set it equal to zero and solve for Q)

EOQ:  2DS / C 
Example: Basic EOQ Zartex Co. produces fertilizer to sell to wholesalers. One raw material ± calcium nitrate ± is purchased from a nearby supplier at $22.50 per ton. Zartex estimates it will need 5,750,000 tons of calcium nitrate next year. The annual carrying cost for this material is 40% of the acquisition cost, and the orde ring cost is $595. a) What is the most economical order quantity? b) How many orders will be placed per year? c) How much time will elapse between orders? } Economical Order Quantity (EOQ) D = 5,750,000 tons/year C = .40(22.50) = $9.00/ton/year S = $595/order





= 27,573.135 tons per order } Total Annual Stocking Cost (TSC) TSC = (Q/2)C + (D/Q)S = (27,573.135/2)(9.00) + (5,750,000/27,573.135)(595) = 124,079.11 + 124,079.11 = $248,158.22 } Number of Orders Per Year = D/Q = 5,750,000/27,573.135 = 208.5 orders/year

} Time Between Orders = Q/D = 1/208.5 = .004796 years/order = .004796(365 days/year) = 1.75 days/order

Refrences:  Operation Management by Prof. Subir Guha  Production and Operations Management by EVERETT E. ADAM , Jr. RONALD J. EBERT


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