Inventory Management

Inventory
Management
Objective:
To have the right material / products at the right time to meet production / customer
demand while optimizing the overall inventory investment.

It aims at:

• Minimizing average inventory level

• Maximizing utilization of stores / warehouse capacity
• Reduce lead time
• Increase production efficiency
• Improve customer satisfaction

Main functions of Inventory Management:

• Inventory analysis.
o ABC - based on consumption and value
o XYZ - based on stock value of item
o VED - (Vital Essential Desirable) based on criticality

<!--[if !supportLists]-->• <!--[endif]-->Determine ordering policy

o Determine stock parameters like safely stock, Re-order point,

Economic order quantity, minimum stock, Review Period.

<!--[if !supportLists]-->• <!--[endif]-->Stock accounting

o Inventory maintenance and stock valuation

<!--[if !supportLists]-->• <!--[endif]-->Physical stock verification

Inventory classification according to material

group:
<!--[if !supportLists]-->• <!--[endif]-->Raw material
 <!--[if !supportLists]-->• <!--[endif]-->Semi-finished good

<!--[if !supportLists]-->• <!--[endif]-->Sub-contracted items

<!--[if !supportLists]-->• <!--[endif]-->Bought-out parts

<!--[if !supportLists]-->• <!--[endif]-->Consumables

<!--[if !supportLists]-->• <!--[endif]-->Tools & gauges

<!--[if !supportLists]-->• <!--[endif]-->Jigs & fixtures

<!--[if !supportLists]-->• <!--[endif]-->Machine spares

Stock parameters used for controlling inventory:

<!--[if !supportLists]-->• <!--[endif]-->Lead time of procurement

<!--[if !supportLists]-->• <!--[endif]-->Safety stock or minimum stock to handle

unexpected demand, changed rejection rate, to avoid stock out condition

<!--[if !supportLists]-->• <!--[endif]-->Re-order point

<!--[if !supportLists]-->• <!--[endif]-->Maximum stock

<!--[if !supportLists]-->• <!--[endif]-->Economic order quantity (EOQ)

<!--[if !supportLists]-->• <!--[endif]-->Average consumption for the period

<!--[if !supportLists]-->• <!--[endif]-->Review period

<!--[if !supportLists]-->• <!--[endif]-->ABC, XYZ, VED classification

Different stores where material is stored:

• Inward store
• Raw material store
• Semi-finished stock store
• Finished parts store
• Finished goods store
• Rejection store
• Scrap store
• Maintenance store
• Tools store
 • Jigs, fixtures, patterns etc store

Inventory Transactions:
Material receipts:

• Goods Receipt Report (GRR)

• Goods Receipt & Inspection Report (GRIR)
• Supplementary GRR
• Customer’s Material return note
• Material return note from Production (MRN) against excess or wrong
material issue
• Delivery note from Production (DN)
• Transfer Note from other store location (TN)
• Material Rejection Note
• Positive Stock Adjustment update store record after physical counting

Material Issues:

• Material issues note to part production (MIN)

• Material transfer note to other stores
• Assembly issue note to assembly production
• Dispatch challan to sub-contractor for returnable material
• Dispatch challan to customer for Finished Goods /Spares
• Material rejection challan for sending rejected material to supplier
• Negative Stock Adjustment

Reference documents for Inventory transactions:

• Purchase Order (PO)

• Sales Order (SO)
• Material Requisition Note
• Production Work Order
• Goods Receipt Report

Need of Lot Traceability / Serial Tracking:

• Inventory stored by Lot/ Serial Number on receipt and also issued
• Inventory can also be stored by Grade, Potency, etc.
• Keep track on inventory w.r.t. Shelf life, Sell-by Date, Display until
Date, Best before Date
• Used for forward / backward traceability w.r.t. Quantity, Rejection,
etc.

Stock control systems:

Different methods for stock control

• Re-order level system

• Two bin system
• Review system of replenishment

Re-order Level System (ROL):

• Item is replenished as soon as stock of item falls to or below ROL

• ROL = min. stock + (LT * Average Consumption)
• Quantity ordered is EOQ which might be modified due to constraints like
lot size, discount on Qty.
• Max Level = Stock-on-hand + EOQ

Two bin System (Kanban):

• Physically entire stock is segregated into two bins.

• First the stock is been consumed from Bin-I
• The empty Bin-I indicates that stock has reached ROL
• Bin-II contains stock equivalent to ROL
• The quantity ordered is divided into both the bins

Review system of Replenishment:

• Stock is reviewed at a pre-fixed period

• Ordered quantity varies as per the stock at the time of review.
• Computation of Economic Review Period so as to minimize Total
Procurement & Inventory carrying cost.

Economic Order Quantity (EOQ):

It is the quantity where inventory carrying cost equals cost of procurement

Inventory carrying cost = Cost of procurement

• Inventory carrying cost includes

o Investment cost (Interest on capital)
o Storage cost (Storage, Insurance Handling, Obsolescence, Loss due
to deterioration)

<!--[if !supportLists]-->• <!--[endif]-->Inventory procurement cost includes

o Cost of processing Purchase Order (PO) or Work Order (WO)

o Cost of handling
Calculation of EOQ:
EOQ = SQRT (2 * R * S / K * C)

Where:

R = Annual requirement or Consumption

S = Set-up cost in production or Procurement cost

K = Carrying cost as a % of average inventory cost

C = Unit cost of Item

EOQ is modified due to following constraints:

• Suppliers minimum order quantity conditions
• Lead time
• Seasonal availability
• Packing restrictions
• Risk of obsolescence or deterioration
• Price discount
• Market condition
• Government restrictions

A-B-C Analysis:
Classification is based on consumption value

• A-class items
o Usually 5-10% items accounts for 70-75% of money spent on
material
o These items require detailed & rigid control
o Need to be stocked in smaller quantities
• B-class items
o Usually 10-15% items accounts for 10-15% of money spent on
material
o These items do not need detailed & rigid control
o Normally stock are reviewed once in 1 or 2 months
• C-class items
o Usually 70-80% items accounts for 5-10% of money spent on
material
o Do not require close control
 o These items need to be procured infrequently in bulk to get
quantity discount
• Application of A-B-C Analysis:
o Degree of control
o Stock records
o Safety stock level
o Price discounts
o Value engineering