Inventory Management

Introduction

Sanjay Choudhari

Indian Institute of Management

Indore
 Product-Process Matrix OM1
One of Low Volume High Volume
a kind Many Products Few Products

Project (construction)

Job Shop (machine shop)

Very
Jumbled
Flow
Batch
Process (apparel)

Assembly
Line (auto assembly)

Continuous
Rigid Process
Flow (sugar mill)
 Product-Process Matrix OM 1

⚫ For manufacturing organization it brings together

1. Product customization & Volume
2. Process characteristics

⚫ Process choices include job, batch, line, and

continuous flow processes
⚫ Production include make-to-order (MTO),
assemble-to-order (ATO), and make-to-stock
(MTS)
Supply chain Structure for Inventory
Supply chain Structure 1 MTS
Supply chain Structure 2 ATO
Supply chain Structure 3 MTO
 Supply Chain Structure : Inventory
Customer response time

High Moderate Low

Customer Interface point

Raw materials + WIP +

Raw Materials + WIP Raw material components
Finished Products
+ WIP
HUL, Dell,
Thermax Dell, Bajaj
Subways
MTO ATO MTS

Continuous flow
Job Line
Batch Batch
Line LT ? σLT ?
Batch
D1 Dn

W1 Wn

d ? σd ? R1 Rn
 Inventory Analogy
⚫ Water in Pipes in the Apartment

⚫ Importance of inventory for the Spacewood

Right Decision Making

 Inventory Analogy
⚫ Bottleneck in inventory management
◆ Transparency in information/ non availability of
appropriate information
◆ Spare part inventory
◆ Use of SMS by Coca Cola
◆ e.g. Bajaj vs HUL
◆ Can What up / Apps bring new evolution in
supply chain ?

Right Decision Making

Inventory Analogy 1
 Importance of Inventory

⚫ Balance the advantages and

disadvantages of small and large
inventories

⚫ Pressures for small inventories

◆ Cost of capital i.e. 10.50 % (in KEY case)
◆ Storage and handling costs
◆ Taxes, insurance, and shrinkage
 Importance of Inventory

⚫ Pressures for large inventories

◆ Customer service
◆ Ordering cost
◆ Setup cost
◆ Labor and equipment utilization
◆ Transportation cost
◆ Payments to suppliers
ABC Analysis
 KEY Data

Projected 2012
Local US Asia Service Mean Std Dev of
Current Weight Volume Units/ Sales Base Unit Base Unit Base Unit Level Demand Demand
SKU KM Description Item Source (lbs) (Cubic ft) Pallet Price ($) Cost ($) Cost ($) Cost ($) Duty (Type 1) (Month) (Month)
2300105 BATERIA KY357 Batteries KEY 0.10 0.016 1,000 1.33 0.80 0.41 0.40 18% 0.98 1,800 250
1609313 T.V. 25" SANYO TV Local 8.82 2.08 8 176.94 129.17 116.78 115.01 30% 0.98 115 95
2780211 CONECTOR F-59 Cable/Connector KEY 0.01 0.043 350 1.18 0.66 0.38 0.37 10% 0.90 675 85
1709786 TEL CEL SONY Z200 Cellphone KEY 0.60 0.13 128 142.22 128.00 108.09 106.67 35% 0.98 152 69
6300612 PURIFICADOR DE AIRE Air Purifier KEY 8.08 1.36 8 166.67 116.67 93.33 91.67 15% 0.95 125 45
1309034 KARAOKE JXOK5 Karaoke Machine Local 16.50 3.50 4 138.89 108.33 75.00 73.61 50% 0.95 30 16
6509036 CALC.CIENT.SC OL153 Calculator Local 1.23 0.20 80 16.28 10.42 8.46 8.30 25% 0.95 108 65
6109015 REGULADOR KOBLENZ BP1000 Surge Protector Local 0.96 0.08 200 20.51 13.33 8.41 8.21 13% 0.95 540 270
4309113 TELEFONO ALAMBRICO GONDOL Telephone Local 1.50 0.14 115 9.49 6.83 4.46 4.37 23% 0.98 910 334
2000234 RADIO FM YB400PE Radio KEY 3.00 0.16 100 174.39 148.23 120.33 118.58 20% 0.95 38 17
ABC Analysis
 ABC Analysis

⚫ Stock-keeping units (SKU)

⚫ Identify the classes so management can
control inventory levels
⚫ A Pareto chart
 ABC Analysis

100 — Class C
Class B
90 —
Percentage of dollar value Class A
80 —

70 —

60 —

50 —

40 —

30 —

20 —

10 —

0—
10 20 30 40 50 60 70 80 90 100
Percentage of SKUs
 ABC Problem : KEY Electronics
Can KEY Electronics Company classify …SKUs into three
classes, according to their dollar usage.
Calculate the usage values of the following SKUs and
determine which is most likely to be classified as class A.

SKU Quantity Used Unit

Number Description per Year Value ($)
1 Batteries 21600 1.33
2 TV 1380 176.94
3 Cable/Connector 8100 1.18
4 Cellphone 1824 142.22
5 Air Purifier 1500 166.67
6 Karaoke Machine 360 138.89
7 Calculator 1296 16.28
8 Surge Protector 6480 20.51
9 Telephone 10920 9.49
10 Radio 456 174.39

300 SKUs
 ABC Problem : KEY Electronics

Annual Dollar
SKU Quantity Used Unit Usage ($)
Number Description per Year Value ($)
1 Batteries 21600 1.33 28728
2 TV 1380 176.94 244178
3 Cable/Connector 8100 1.18 9573
4 Cellphone 1824 142.22 259413
5 Air Purifier 1500 166.67 250000
6 Karaoke Machine 360 138.89 50000
7 Calculator 1296 16.28 21094
8 Surge Protector 6480 20.51 132923
9 Telephone 10920 9.49 103639
10 Radio 456 174.39 79521

300 SKUs
 ABC Problem : KEY Electronics
SKU Description Quantity Unit Annual % of total Cumulativ % of total Cumulative Class
Number Used per Value ($) Dollar Usage value e % SKUs % of SKU
4 Cellphone Year
1,824 142.22 ($)
259413 22.00 22.00 10.0 10.00 A
5 Air Purifier 1,500 166.67 250000 21.20 43.20 10.0 20.00 A
2 TV 1,380 176.94 244178 20.71 63.91 10.0 30.00 B
8 Surge Protector 6,480 20.51 132923 11.27 75.19 10.0 40.00 B
9 Telephone 10,920 9.49 103639 8.79 83.98 10.0 50.00 B
10 Radio 456 174.39 79521 6.74 90.72 10.0 60.00 C
6 Karaoke Machine 360 138.89 C
50000 4.24 94.96 10.0 70.00
1 Batteries 21,600 1.33 28728 2.44 97.40 10.0 80.00 C
7 Calculator 1,296 16.28 21094 1.79 99.19 10.0 90.00 C
3 Cable/Connector 8,100 1.18 9573 0.81 100.00 10.0 100.00 C
1179068
Percentage of Dollar Value

Class C 0.3
100 – Class B
Class
90 – A
80 – See Excel Sheet
70 –
60 –
50 –
40 –
30 –
20 –
10 – 10 20 30 40 50 60 70 80 90 100
Percentage of SKUs
0–
Concepts of Inventory as I/P in this Covid
situation
 Terms used in Inventory
• Item cost = Ci (Average price paid per unit purchased is a key cost in the
lot-sizing decision )

• Fixed ordering cost = Co (Fixed ordering cost includes all costs that do
not vary with the size of the order but are incurred each time an order is
placed)

• Holding cost = Ch = %*Ci (Holding cost is the cost of carrying one unit in
inventory for a specified period of time i.e. $ CH/Unit/Year)

• Quantity in a lot or batch size = Q (Quantity is either produced or

purchased at a time, EOQ* = Q* )

• Demand per unit time = D (i.e. Demand in one 1 year, d = average

demand per week, So, D = d *52 / year)