Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK

:PILES ON THE SHOP FLOOR and
in WARE-HOUSE and MORE IN
THE DOCK
:SOME OF IT ANICIENT, SOME OF IT
NEW
:ALAS and TOMORROW ANOTHER LOT
IS DUE….
-- UNKNOWN AUTHOR
 Functions of Inventory

• Decouple components of the operations

and distribution
• Uncertainties/variations in demand
• Flexibility in production smoothing
• Economies of scale in purchase and mfg
• To help hedge against price increases
• To take advantage of order cycles
 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportati
on Transportati
on
costs costs Inventory & costs
warehousing
costs
 Departmental Orientation Towards
Inventory
• Marketing
– Sell the product
– Good customer service
– Large inventory
 Departmental Orientation Towards
Inventory
• Production
– Make the product
– Efficient lot sizes
– Large inventory
 Departmental Orientation Towards
Inventory
• Purchasing
– Buy the required materials
– Low cost per unit
– Large inventory
 Departmental Orientation Towards
Inventory
• Finance
– Provide working capital
– Efficient use of capital
– Low inventory
 Departmental Orientation Towards
Inventory
• Engineering
– Design the product
– Avoiding obsolescence
– Low inventory
 Inventory Hides Problems Areas

Machine
downtime
Tip of the Iceberg Analogy
Scrap Vendor
Work in delinquencies Change
orders
process
queues Engineering design Design
(banks) redundancies backlogs

Paperwork Inspection Decision

backlog backlogs backlogs
 Goals of Inventory Management
• Maximize customer service (this requires
carrying substantial inventory).
• Minimize inventory investment (this requires
carrying little inventory).
• Customer service takes absolute precedence.
– Customer service must be a strategic issue.
– Leading edge discussion now centers on types of
customer service
• Shortened delivery time
• Speed to market
• Design flexibility
 Types of Inventories

• Raw materials
• Components
• Work-in-process
• Finished goods
• Vendor inventories
• Non-moving/slow moving stock
• Safety stock
• In-transit inventories
• Service parts/Consumables
 Inventory Costs
• Holding cost
• Ordering cost
• Setup cost
• Shortage costs
 Holding Cost

• Cost of storage facilities

• Handling cost
• Taxes
• Insurance
• Deterioration
• Obsolescence
• Shrinkage
• Cost of capital
 Ordering Costs
• Preparation of purchase requisition/order
• Mail
• Expediting, including fax, telephone
• Transportation
• Receiving
• Put away
• Updating inventory records
• Paying invoice
 Setup Costs

• Order preparation
• Stock picking
• Setup
• Inspection
• Waiting/Queue-time
• Order close out
• Updating inventory records
 Inventory Control Systems

• How often should the assessment of stock

on hand be made?
• When should a replenishment order be
placed?
• What should be the size of the
replenishment order?
 Inventory Counting Systems
• Periodic System
Physical count of items made at periodic intervals
• Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus monitoring
current levels of each item
Inventory Control Systems
•Fixed order quantity model (continuous
review)
•Fixed time period model (periodic review)
•Visual system
Two-bin system
Single bin system
•ABC classification system
 The Inventory Order Cycle
Demand
Inventory Level
Order qty, Q rate

Reorder point, R

0 Lead Lead Time

time time
Order Order Order Order
Placed Received Placed Received
 EOQ Model Cost Curves

Slope = 0
Annual Total Cost
cost (Rs)

Minimum
total cost
Carrying Cost = (Q/2)H

Ordering Cost = (D/Q)S

Optimal order Order Quantity, Q

Qopt
 Notation

• D = annual demand
• C = per-unit cost
• h = inventory holding rate (%)
• S = order cost
• Q = order quantity
• R = reorder point
• SS = safety stock
• LT = lead time
 EOQ Model
• Balance holding cost against ordering
costs
• Calculate the optimal EOQ:

•No of orders per year = D/Q*

•Time between orders = Q*/D
 Fixed Order Quantity Model

Reorder = Expected demand + Safety

point during lead time stock
 Fixed Order Quantity Model
Inventory level

Reorder
point, R

Safety stock
0
L L
Time
 Fixed Time Period Model
• Reviewed at fixed specified time interval.
• Place an order for a quantity that, when added
to the quantity on hand, will equal a
predetermined maximum level.
• Independent demand is the usual situation.
• Difficult to record withdrawals and additions
from stock.
• Groups of items are purchased from a common
supplier.
• Items that have limited shelf life.
 Fixed Time Period Model
• Small tools, manufacturing supplies.
• Common commercial parts such as nuts,
bolts, washers.
• Office supplies.
• Perishable items such as dairy products,
fruits and vegetables.
• Chemicals, solvents used in the
manufacturing process.
Inventory level
Fixed Time Period Model

Safety stock
0
L L
Time

Review Time
 Two-Bin System

• Special case of fixed order quantity model.

• Amount of stock equivalent to the order point is
physically segregated into a second bin and is then
sealed.
• When all the open stock has been used up, the sealed
bin is opened and a new order is placed.
• Practical method for keeping control of low-value
items.
• Without adequate training this system can be abused.
• Quantity in the second bin should be reviewed from time
to time.
 Single-Bin System

• Stock is periodically checked and each item is

ordered to a pre-established stock level.
• Works well on floor stocks located near the
point of use, like large grocery stores.
 ABC Classification System

Classifying inventory according to

some measure of importance and
allocating control efforts accordingly.
A - very important High
A
Annual
B - mod. important Rs volume B
of items
C - least important Low C
Few Many
Number of Items
 ABC Analysis

• Pareto noted that many situations are dominated by a

relatively few vital elements.
• Controlling the relatively vital few will go a long way
toward controlling the situation.
• Applying the ABC principle to inventory management
involves:
– Classifying the inventory items on the basis of relative
importance.
– Establishing different controls for different classifications with
the degree of control being commensurate with the ranked
importance of each classification.
 Inventory Turnover and Service Levels

Inventory turnover is the measure of how

well the business is managing its
inventory. It shows how many times a
year the inventory is turning(or moving)
through the organisation. The higher the
turnover,the better.However there is a
larger probability
That stock may not be available when the
customer needs it.
 Inventory Turnover …..

• Inventory turnover in a Retail business

Total sales/Actual inventory
• Inventory turnover in a Manufacturing
business
Cost of Goods sold/Actual inventory
Simple physical techniques may
provide more economical
control of inventories.