Four Process Strategies

Process Focus: A production facility organized

around processes to facilitate lowvolume, high-
variety production.

Repetitive Focus: A product-oriented production

process that uses modules.
Product Focus: A facility organized around products;
a product-oriented, high-volume, low-variety
process.

Mass Customization Focus: Rapid, low-cost

production that caters to constantly changing
unique customer desires.
Question

Discuss the process strategies as

mentioned in the class
Inventory Management

1
What is Inventory?
Inventory is a stock of items held to meet future demand.

The stock of any item or resource used in an organization and can include: raw
materials, finished products, component parts, supplies, and work-in-process

Single largest asset on the balance sheet

Accounts for 40-60% of current assets

Helps to improve ROI & working capital

Introduction

Definition: Inventory Management

Scientific method of finding out how much stock should be maintained

in order to meet the production demands and be able to provide right
type of material at right time, in right quantities and at competitive
prices.
Introduction
(Cont’d)
• Inventory control is concerned with
achieving an optimum balance between
two competing objectives.
Minimizing the
investment in
inventory/inventory
cost.

Maximizing the service

levels to customer’s and
it’s operating
departments.
4
Types Of
Inventory
 Based on Flow of Materials Through and
Out of Production
Maintenance, repair
Work-in-process Distribution
Raw Materials Finished Goods and operational
(WIP) inventories
supplies (MROs)
• These are • Raw materials that • The finished • finished goods • Items used in
purchased items have entered the products of the located in the production that do
received which manufacturing production process distribution system not become part of
have not entered processes and are tat are ready to be the product. These
the production being worked on or sold as completed include hand tools,
process. They waiting to be items. They may be equipment, etc.
include purchased worked on held at a factory or
materials, central warehouse
component parts or at various points
6
and sub assemblies. in the distribution
system
 Regular or Cyclical in Nature. Obsolete, Dead or Shrinkage Stock.
• Necessary to meet the average demand during the time • Some inventories deteriorate, become out of date or is lost
between successive replenishments. or stolen.
• The amount of cycle stock is highly dependent on • Where the products are of high value, perishable or easily
• production lot sizes, economical shipment quantities, stolen special precautions must be taken to minimize the
storage space limitations, replenishment lead times, amount of such stock.
price-quantity discount schedules and inventory carrying
costs.
• If demand or lead time is greater than forecast, a stock out
will occur. Safety stocks are carried out to protect against
this possibility.
• Its purpose is to prevent disruptions in manufacturing or
deliveries to customers.
• Accurate forecasting is essential to minimize safety stock
levels. In fact if lead time and demand could be predicted
with 100 percent accuracy, no safety stocks would be
required.
 Question
Discuss the various types of Inventory
Inventory Costs
Dollars

Space

Labor to receive, check quality, put away, retrieve, select, pack, ship, and
account for

Deterioration, damage, and obsolescence

Theft
Inventory Carrying Costs
While the calculation of inventory carrying expense is basic, determining the
appropriate carrying cost percent is less obvious.

Determining carrying cost percent requires assignment of inventory-related

costs.

Financial accounts relevant to inventory carrying cost percent are capital,

insurance, obsolescence, storage, and taxes.
Inventory Carrying Costs
Capital Cost
The appropriate charge to place on capital invested in inventory varies widely.
Any funds invested in inventory lose their earning power, restrict capital availability,
and limit other investment.
For example, if a firm expects a 20 percent before-tax return on invested capital,
similar logic suggests that capital tied up in inventory should be assessed or
charged the same 20 percent.
Inventory Carrying Costs
Taxes
Taxing authorities typically assess inventory held in warehouses. The tax rate and
means of assessment vary by location. The tax expense is usually a direct levy
based on inventory level on a specific day of the year or average inventory level
over a period of time.
Inventory Carrying Costs
Insurance
Insurance cost is an expense based upon estimated risk or loss over time.
Loss risk depends on the product and the facility storing the product.
For example, high-value products that are easily stolen and hazardous products
result in high insurance cost.
Insurance cost is also impacted by facility characteristics such as security cameras
and sprinkler systems that might help reduce risk.
Inventory Carrying Costs
Obsolescence
Obsolescence cost results from deterioration of product during storage.
A prime example of obsolescence is product that ages beyond recommended sale
date, such as food and pharmaceuticals.
Obsolescence also includes financial loss when a product becomes obsolete in
terms of fashion or model design.
Inventory Carrying Costs
Storage
Storage cost is facility expense related to product holding rather than product
handling.
Storage cost must be allocated on the requirements of specific products since it is
not related directly to inventory value.
Ordering Cost/Setup Cost

Ordering Costs : incurred when ordering more inventory and when setting up to go
into production to fill the order

Used in calculating order quantities, the costs that increase as the number of orders
placed increases.

It includes the costs related to the clerical work of preparing, releasing, monitoring
and receiving orders, the physical handling of goods, inspections and setup costs.”
Economic Order Quantity

It shows how we can balance the various costs of stock to answer the question,
‘How much should we order?’

The approach is to build a model of an idealized inventory system and calculate the
fixed order quantity that minimizes total costs.

This optimal order size is called the economic order quantity (EOQ).
EOQ Example 1

If D = 1,000 per year, S = $62.50 per order, and H =

$0.50 per unit per year, what is the economic order
quantity?

2DS
Q* 
H
2 * 1000 * 62.5

0.5
 500

21
 Question
What do you mean by the concept of Economic Order Quantity ?
 Independent Demand vs Dependent Demand

Independent Demand : demand for a stand alone product such as motorcycle, car
etc.

Dependent Demand : Exists only because of demand for something else such as
demand for motorcycle tire is dependent upon the demand for the motorcycles
ABC Analysis
Another useful set of accounting information comes from an ABC analysis.

Inventory control can take a lot of effort and so for some items, especially
cheap ones, this effort is not worthwhile.

Very few organizations, for example, include routine stationery or coffee in

their formal stock systems.

At the other end of the scale are very expensive items that need special care
above the routine calculations.

It would be useful to find the amount of effort worth putting into the control of
any item.

An ABC analysis gives some guidelines for this.

ABC Analysis of Stocks
The origin of the ABC analysis – sometimes called Pareto analysis, or the ‘rule of
80–20’

In inventory control terms it means that 20 per cent of the inventory items
need 80 per cent of the attention, while the remaining 80 per cent of items
need 20 per cent of the attention.

In particular, ABC analyses define the following:

A items are the few most expensive ones that need special care.
B items are ordinary ones that need standard care.
C items are the large number of cheap items that need little care
ABC Analysis of Stocks
Typically an organization might use an automated system to deal with all B
items.

A items are more important, and although the automated system might make
some suggestions, managers make the final decisions after a thorough review
of circumstances.

C items are very cheap and are usually left out of the automatic system, to be
dealt with by ad-hoc procedures.
ABC Analysis of Stocks
An ABC analysis starts by taking each item and multiplying the number of units
used in a year by the unit cost.

This gives the total annual use of items in terms of value.

Usually, a few expensive items account for a lot of use, while many cheap ones
account for little use.

If we list the items in order of decreasing annual use by value, A items are at
the top of the list and C items are at the bottom.
 Question
Explain the ABC analysis system of Inventory Management
 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
SDE ANALYIS
Based on availability
Scarce
Managed by top level management
Maintain big safety stocks
Difficult
Maintain sufficient safety stocks
Easily available
Minimum safety stocks
FSN ANALYSIS
Based on
utilization.
Fast moving.
Slow moving.
Non-moving.
Non-moving
items must
be
periodically
reviewed to
prevent
expiry
&
obsolescence
HML ANALYSIS
Based on cost per unit
Highest
Medium
Low
This is used to keep
control over consumption
at departmental level for
deciding the frequency of
physical verification
 Question
Describe the role of Inventory control in Operations Managment