INVENTORY

MANAGEMENT
(Engineering Production Management)
INVENTORY MANAGEMENT
Introduction
Types of Inventory
Managing Inventory
The ABC Inventory Classification System
Inventory Models
Implementing Inventory Systems
Introduction
Inventory is present in all manufacturing process.

In Manufacturing inventory consists of the components

that go make up the product being manufactured.
In Service Inventory may be used as part of the service
delivery system ( for example disposable implements for a
hospital operation ) or it maybe part of the tangible
component of the service itself (for example the brochure for
a car insurance policy)

Inventory is important because although it is necessary for

customer service it can also be a major cost to the organization.
 Inventory Management can be considered part of
materials management in a service or manufacturing
organization.

Materials Management includes the acquiring of

inventory, the organization movement of the inventory
and the assessment of when inventory should be ordered
and the amount of inventory that should be ordered.

Inventory Management Systems calculate the volume and

timing of independent demand items. Independent
Demand is when demand is not directly related to the
demand for any other inventory item.
Types of Inventory
1. Inventory Classified by Location
2. Inventory Classified by Type

1. Inventory Classified By Location

Raw Finish
suppliers mate operation ed customers
rials goods

Work in
progress
Inventory classified by location as raw materials (goods
received from suppliers), work in progress (at some
point within the operation process ) or finished goods
(goods ready for dispatch to the customer).
The proportions between these inventory types will
vary but it is estimated that generally 30% are raw
materials, 40% work in progress and 30% finished goods.

1.A. Raw Materials Inventory

May be supplied in batches to secure quantity
discounts and reduce material handling.
1.B. Work-In-Progress Inventory
May help uncouple production stages and provide
greater flexibility in production scheduling.

1.C. Finished Goods Inventory

May be used to ensure that important inventory items
are always available to the customer or avoid disruption
caused by changing production output levels.

2. Inventory Classified by Type

The type of inventory can also be used to provide a
method of identifying why inventory is being held and so
suggest policies for reducing its level.
2.A. Buffer/Safety – this is used to compensate for the
uncertainties inherent in the timing or rate of supply
and demand between two operational stages.
Safety Stock is often used to compensate for
uncertainties in the timing of supplies form supplier.

2.B. Cycle – if it is required to produce multiple

products from one operation in batches, there is need to
produce enough to keep a supply while the other batches
are being produced.
Cycle inventory can be reduced by reducing the batch
size which in turn will depend on reducing setup/
changeover times between batches.
2.C. Decoupling – this permit stages in the
manufacturing process too be managed and their
performance measured independently, to run at their
own speed and not match the rate of processing of
departments at different points in the process.

2.D. Anticipation – this includes producing to stock to

anticipate an increase in demand due to seasonal factors.

2.E. Pipeline / Movement - this is the inventor needed

to compensate for the lack of stock while material is
being transported between stages. For Example, the
distribution time from the warehouse to a retail outlet.
Managing Inventory
One of the major issues in inventory management is
the level of decentralization required in inventory
distribution.
Decentralized facilities offer a service closer to the
customer and thus should provide a better service level
in terms of knowledge of customer needs and speed of
service.
Centralization however, offers the potential for less
handling of goods between service points, less control
costs and less overall inventory levels due to lower
overall buffer levels required.
The ABC Inventory Classification System
One way of deciding the importance of inventory items
and thus an appropriate inventory management
method for them is to use the ABC Classification
System.

The ABC Classification System sorts inventory items

into groups depending on the amount of annual
expenditure they incur which will depend on the
estimated number of items used annually multiplied
by unit cost
Example of an ABC Classification Table
Item Annual Expenditure Percentage Expenditure Cumulative
(Cost X usage) (%) Expenditure
(%)
D-76 800 24.1 24.1
A-25 650 19.6 43.7
C-40 475 14.3 58.1
C-22 450 13.6 71.6
B-18 300 9.0 80.7
G-44 200 8.0 71.6
A-42 150 5.4 80.7
D-21 100 3.0 86.7
H-67 75 2.3 91.3
E-88 65 2.0 94.3
F-23 50 1.5 96.5
Total 3315 98.5
100.0
As shown in the table, Following Pareto’s Law, it is
found out that 10 to 20 % of the items account for 60 –
80 % of annual expenditure. These items are called A
items and needs to be controlled closely to reduce
overall expenditure. (Forecasting techniques may be
used to improve the accuracy of demand of forecast for
these items.
The B items account for the next 20-30% of items and
usually account for a similar percentage of total
expenditure.
The C item represents the remaining 50-70% of items
but only account for less than 25% of the total
expenditure.
Inventory Models
Inventory Models are used to assess when inventory
requires ordering and what quantity should be ordered at
that point in time.

A. First Order Quantity Inventory Systems

The order quantity is the same each time the order is
placed, but the time between the orders varies
according to the rate of use of the inventory item.
When the inventory level has reduced to a certain
amount, termed Reorder Point, an order for further
inventory is made.
B. The Reorder Point (ROP) Model
It identifies the time to order when the stock level
drops to a predetermined amount.
Safety Stock is used in order to prevent stock-out
occurring.
To calculate safety stock level of number of factors
should be taken into account including:
 Cost due to stock-out

 Cost of holding safety stock

 Variability In the rate of demand

 Variability in delivery lead time

The reorder problem is one of determining level of safety
stock that balances the expected holding costs with cost
of stock-out:

1. Constant Demand and Constant Lead Time

Assuming that the delivery lead time and demand rate
are constant there is no risk of stock-out, so no safety
stock is required.

2. Variable Demand and Constant Lead Time

This model assumes that demand during the delivery
lead time consists of a series of independent daily
demand and thus can be described by a normal
distribution.
3. Constant Demand and Variable Lead Time
here the lead time variation is described by a normal
distribution and thus the expected lead time is normally
distributed.

4. Variable Demand Rate and Variable Lead Time

When Both Demand rate and lead time are available, the
expected demand during lead time is the average daily
demand multiplied by average lead time.
C. The Economic Order Quantity (EOQ) Model
it calculates the fixed inventory order volume required
while seeking to minimize the sum of the annual cost of
holding inventory and annual costs of ordering inventory.
The Model makes a number od assumption including:
Stable or constant demand
Fixed and identifiable ordering cost
The relationship between the cost of holding inventory
and number of items held is linear
The item cost does not vary with the order size
Delivery lead time does not vary
No quantity discounts are available
Annual demand exist
Inventing Inventory Systems
Inventory management can also be outsourced in this
way and thus is sometimes referred to as Vendor
Managed Inventory.

Example of this is when wholesalers hold stock for a

number of retailers this allows the retailers to focus on
selling activities and order stock from the wholesaler as
needed.
THE END
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