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INVENTORY CONTROL
INVENTORY CONTROL

Introduction

Inventory

Management

is

one

of

the

major

crucial

aspects

of

any

business.

Inventory is

one

of

the

most important

assets especially to manufacturing, food

and

retail

businesses

worldwide.

Since

inventory represents

cost,

it

is

critical to

have

a

good

inventory control and

management.

Introduction

Cost Minimization is the key to inventory control and management. Minimizing loss of goodwill due to frequent stock outs (no inventory at hand) and minimizing carrying costs is another. Production and logistic managers should strike a balance between minimizing inventory costs and losing customers goodwill.

Kinds of Inventory

Raw Materials Work in Process Finished Product

Kinds of Inventory

Inventory

of finished goods

is

a

function of

demand. in turn, the inventory of raw materials and work-in process inventory is a function of the demand for finished goods. Small and big business do follow a system of inventory control and management. it is important to know that the goal of the system is to minimize cost.

Basic Components of Inventory Planning and Control System

Planning – what and how of inventory system. What to order and ho to acquire the what

Forecasting – predicting demand for inventory

Controlling - what level and when to order

Feedback Mechanism – provides

Several Functions of Inventories

Decoupling Storing Resources Adapting to Irregular Supply and Demand

Enabling the company to take advantage of Quantity Discounts

Avoiding Stockouts and Shortages

Inventory Decisions

The

fundamental

questions

in

inventory

control and management are:

How much to order? When to order?

As inventory level goes up, so does the cost.

Minimizing the total inventory cost main objective in controlling inventory.

is

the

Important Costs in Inventory Control

Cost of Items (purchase cost or material cost)

Cost of Ordering (Incurred every time an order is placed

Cost of Carrying or Holding Inventory Cost of Safety Stock Cost of Stock outs

Economic Order Quantity Model

The Economic Order Quantity (EOQ) Model is one of the oldest and easiest to use model. Though many of today’s firms use this model, EOQ makes a lot of assumptions.

EOQ Assumptions

Demand is known and constant Lead time is known and constant Receipt of inventory is instantaneous Quantity discounts are not possible

The only variable costs are the cost of setting up or placing an order and the cost of holding is storing inventory over time

Stockouts

can

be

completely avoided if orders

are

placed at the appropriate time

EOQ Assumptions

The basic assumptions of the EOQ model yield a sawtooth-shaped inventory usage over time.

To

use

EOQ, follow

the steps

in finding the

optimum inventory given below:

Develop an expression for the ordering cost Develop and expression for the carrying cost Set the ordering cost equal to the carrying cost Solve this equation for the optimum desired

Developing the EOQ

Minimizing Inventory Cost is the goal of most inventory models. Two relevant cost in the picture are:

Ordering cost Holding cost

Other cost

like

the material or purchase

cost is constant

Thus,

minimizing total inventory cost

is

minimizing the sum of the 2 relevant costs

Developing the EOQ
Developing the EOQ

Developing the EOQ

Inventory changes daily as it is being used in production. Because of this, it is proper to use the average inventory in finding the annual carrying cost. Average Inventory Level is denoted by the expression;

Developing the EOQ
Developing the EOQ
EOQ  To solve for the optimum order quantity, ordering cost must equal holding cost
EOQ
 To
solve for the optimum order quantity,
ordering cost must equal holding cost

Inputs and Outputs of the EOQ Model and the Reorder Point

Now we know how to obtain the number of units. The second inventory question that needs to be answered I when to order, which is known as the Reorder Point.

The

reorder point (ROP) determines when to order

inventory. In symbols:

ROP =

demand per day

x lead time for a new

order in

days ROP = d X L, where L = time between the placing and receipt of an order

Inventory Control and the Production Process

The

Production

Run

Model

is EOQ

without the

instantaneous receipt

assumption. It is applicable in production

environment where inventory continuously builds up over a period of time after an

order has been

placed or

when units are

produced and sold simultaneously.

Inventory Control and the Production Process

There are

differences in using this model

than the basic EOQ.

Setup Cost – instead of the ordering cost, we are going to use the setup cost. This is the cost of setting up the production facility to produce the desired product.

To

find the optimal order quantity, setup

cost equal carrying cost

Inventory Control and the Production Process

To

set up the equation

for the production

run model, we need to derive the equation

for

the

average

inventory.

Since

the

replenishment

of

the

inventory

happens

over

a

period

of time and demand

continues during this time, the maximum

inventory will quantity Q.

be

less

than

the

order

Inventory Control and the Production Process  Maximum Inventory is as follows:
Inventory Control and the
Production Process
 Maximum Inventory is as follows:
Inventory Control and the Production Process  Production Run Model then is:
Inventory Control and the
Production Process
 Production Run Model then is:
Quantity Discount Models  The only difference in the assumption here is that material cost or
Quantity Discount Models
 The only difference in the assumption here
is that material cost or the purchase cost
becomes
a
relevant
cost.
All
other
assumptions in the traditional EOQ remain
the same.
 The total inventory cost then is:

Quantity Discount Models

To find the EOQ that yields the lowest total cost considering quantity discounts, follow these steps:

  • 1. Calculate Q for each discount

  • 2. Adjust

Q upward

if

quantity is too

low for

discount

  • 3. Compute total cost for each discount

  • 4. Select Q with the lowest total cost

The use of Safety Stocks

The Use of Safety Stock is basically to address the concern of stockouts or shortages. When demand is high especially during the peak season, having safety stock will prevent stockouts

Safety Stocks

is

an

extra stock

kept on

hand for emergency purposes

The use of Safety Stocks  One of the best ways to implement a safety stock
The use of Safety Stocks
 One of the best ways to implement a safety
stock
policy is
to
adjust
the ROP. When
demand during the lead time is uncertain,
ROP becomes:

The use of Safety Stocks

A. ROP with known Stockout Costs Assumptions:

EOQ is fixed ROP is used to place an order Stockout can only occur during lead time

. The

objective

is

to

find

the

safety

stock

quantity that will minimize the expected stockout cost plus the expected holding cost.

The use of Safety Stocks  Example
The use of Safety Stocks
 Example

The use of Safety Stocks

When ROP is less than demand over lead time;

total cost = stockout cost

= number units short X stockout cost/unit X number of orders/year

When ROP is greater than the expected demand over the lead time;

total cost = additional carrying cost

The use of Safety Stocks

When ROP = 30 units but the demand is 40 units, there will be a shortage of 10 units total cost = stockout cost = 10(40)(6) =

P2,400

When ROP = 70 units but the demand is 60units, there will be a surplus of 10 units. total cost = additional carrying cost = 10(5) = P50

The use of Safety Stocks

B. ROP with unknown Stockouts

The previous method

discuss earlier is

no longer

applicable here. An alternative to determining the safety stock is to use service level and the normal distribution

A Service Level

is the percent of the time that you

will not have a stockout, the P of having a stockout is:

Service level = 1 P of a stockout or

P of a stockout =

1 service level

The use of Safety Stocks  Example
The use of Safety Stocks
 Example

ABC Inventory Analysis

ABC Analysis is a qualitative technique of inventory implementation that aims to divide all of a company’s inventories into 3

groups (A,

B,

C)

based

on

the overall

inventory value of the items.

ABC Inventory Analysis

In ABC Analysis, as a rule:

Group A items accounts for a major portion of the inventory costs. These items should be monitored regularly.

A items makes up 70% of the inventory value but may consist 10% of all the physical inventory items

Group B items represents the moderately priced items making up 20% of the company investment peso and consist 20% of all the items

Group C are the very low-cost items, needs only very simple inventory policy and this may include a relatively large safety stock. Since holding cost is low, carrying large amount of these items is not too costly.

ABC Inventory Analysis

Recommended inventory policies for the ABC analysis:

Greater expenditure on supplier development for A items than for B items or C items Tighter physical control on A items than on B items or on C items Greater expenditure on forecasting A items than on B items or on C items