Inventory control Management

12-1
 ABC Classification System
Figure 12.1

Classifying inventory according to some

measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. important High
A
C - least important Annual
$ value B
of items

Low C
Low High
Percentage of Items
12-2
 ABC ANALYSIS
(ABC = Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted with large number
of items it rationalizes the number of orders, number of items & reduce
the inventory.
About 10 % of materials consume 70 % of resources
About 20 % of materials consume 20 % of resources
About 70 % of materials consume 10 % of resources
 A ITEMS
Small in number, but consume large amount
of resources
Must have:
Tight control
Rigid estimate of requirements
Strict & closer watch
Low safety stocks
Managed by top management
 B ITEM
Intermediate
Must have:
Moderate control
Purchase based on rigid requirements
Reasonably strict watch & control
Moderate safety stocks
Managed by middle level management
 C ITEMS
Larger in number, but consume lesser amount of resources
Must have:
Ordinary control measures
Purchase based on usage estimates
High safety stocks
ABC analysis does not stress on items those are less costly but
may be vital
 ANNUAL COST CUMMULATIVE
ITEM % ITEM
[Rs.] COST [Rs.]
COST %
ABC
1 90000 90000
10 % 70 %
A 2 50000 140000
3 20000 160000
N 4 7500 167500
20 % 20 %
A 5 7500 175000
6 5000 180000
L
7 4500 184500
Y 8 4000 188500
9 2750 191250
S
10 1750 193000
I 11 1500 194500

S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
SHEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
 VED ANALYSIS
Based on critical value & shortage cost of an item
It is a subjective analysis.
Items are classified into:
Vital:
Shortage cannot be tolerated.
Essential:
Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized

V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
 Cycle Counting

A physical count of items in inventory

Cycle counting management
How much accuracy is needed?
When should cycle counting be performed?
Who should do it?

12-9
Economic Order Quantity Models

Economic order quantity (EOQ) model

The order size that minimizes total annual
cost

Economic production model

Quantity discount model

12-10
 Economic Order Quantity (EOQ)
Economic order quantity (EOQ) is the order
quantity of inventory that minimizes the total
cost of inventory management.

12-11
 EOQ
Ordering costs are costs that are incurred on
obtaining additional inventories. They include
costs incurred on communicating the order,
transportation cost, etc.
Carrying costs represent the costs incurred
on holding inventory in hand. They include
the opportunity cost of money held up in
inventories, storage costs, spoilage costs,
etc.

12-12
 Ordering costs and carrying costs are quite
opposite to each other. If we need to minimize
carrying costs we have to place small order
which increases the ordering costs. If we want
minimize our ordering costs we have to place
few orders in a year and this requires placing
large orders which in turn increases the total
carrying costs for the period.
We need to minimize the total inventory costs
and EOQ model helps us just do that.
12-13
 Total inventory costs = Ordering costs +
Holding costs

EOQ = SQRT(2 Quantity Cost Per Order

/ Carrying Cost Per Order)

12-14
 Example
ABC Ltd. is engaged in sale of footballs. Its
cost per order is $400 and its carrying cost
unit is $10 per unit per annum. The company
has a demand for 20,000 units per year.
Calculate the order size, total orders required
during a year, total carrying cost and total
ordering cost for the year.

12-15
 Solution
EOQ = SQRT(2 20,000 400/10) = 1,265 units
Annual demand is 20,000 units so the company will
have to place 16 orders (= annual demand of
20,000 divided by order size of 1,265). Total
ordering cost is hence $64,000 ($400 multiplied by
16).
Average inventory held is 632.5 ((0+1,265)/2)
which means total carrying costs of $6,325 (i.e.
632.5 $10).

12-16
 Assumptions of EOQ Model

Only one product is involved

Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single
delivery
There are no quantity discounts
12-17
 The Inventory Cycle
Figure 12.2

Profile of Inventory Level Over Time

Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time

12-18
 When to Reorder with EOQ
Ordering
Reorder Point - When the quantity on
hand of an item drops to this amount,
the item is reordered
Safety Stock - Stock that is held in
excess of expected demand due to
variable demand rate and/or lead time.
Service Level - Probability that demand
will not exceed supply during lead time.

12-19
 Determinants of the Reorder
Point
The rate of demand
Demand and/or lead time variability
Stockout risk (safety stock)

12-20
 Safety Stock
Figure 12.12
Quantity

Maximum probable demand

during lead time

Expected demand
during lead time

ROP

Safety stock reduces risk of Safety stock

stockout during lead time LT Time

12-21
 Reorder Point
Figure 12.13

The ROP based on a normal

Distribution of lead time demand

Service level
Risk of
a stockout
Probability of
no stockout

ROP Quantity
Expected
demand Safety
stock
0 z z-scale

12-22
 Fixed-Order-Interval Model

Orders are placed at fixed time intervals

Order quantity for next interval?
Suppliers might encourage fixed
intervals
May require only periodic checks of
inventory levels
Risk of stockout
Fill rate the percentage of demand
filled by the stock on hand
12-23
 Fixed-Interval Benefits

Tight control of inventory items

Items from same supplier may yield
savings in:
Ordering
Packing
Shipping costs
May be practical when inventories
cannot be closely monitored

12-24
 Fixed-Interval Disadvantages

Requires a larger safety stock

Increases carrying cost
Costs of periodic reviews

12-25
 Floating/ process stock
Float inventory is inventory that is still "in
process." It is the inventory that companies
are shipping from one stocking location to
another. It is not counted as inventory on
hand because technically it is not in any of
the company's facilities, but inventory
managers still have to track it so the
company knows how much total inventory
the company owns.

12-26
 Thank you

12-27