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INVENTORY MANAGEMENT

Made By :- ANKIT DUBEY

INVENTORY
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Inventory Management- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

INVENTORY CLASSIFICATION BY FLOWS

Raw Material Purchased Items Received But Not Issued to Production & Include Component Parts/ Sub-assemblies etc. Work-In-Process (WIP) - Raw Materials Issued to Production Being Processed/ Waiting for Next stage in Processing Finished Goods End Product of the Production Process Ready for Sale Held at Factory/ Central Warehouse Distribution Inventories Stocked in Various points in the Distribution System Maintenance, Repair & Operational Supplies (MRO) Items that Support the Production Process But Do Not Become Part of Product Hand Tools/ Machine Spares/ Lubricants/ Cleaning Supplies
Work in process Work in process Work in process Finished goods
Customer

Vendors

Raw Materials

THE MATERIAL FLOW CYCLE


Cycle time 95% 5%

Input

Wait for inspection

Wait to be moved

Move time

Wait in queue for operator

Setup time

Run time

Output

Copyright 2006 John Wiley & Sons, Inc.

INVENTORY AND SUPPLY CHAIN MANAGEMENT

Bullwhip effect Demand information is distorted as it moves away from the end-use customer Higher safety stock inventories to are stored to compensate Seasonal or cyclical demand Demand that varies cyclically over time, usually in response to some effect of season or business cycle. Demand for electricity and Christmas ornaments is seasonally cyclical; demand for housing is affected by the effects of the business cycle upon interest rates.

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Copyright 2006 John Wiley & Sons, Inc.

TWO FORMS OF DEMAND


Dependent
Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item

Independent
Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory

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Copyright 2006 John Wiley & Sons, Inc.

INVENTORY AND QUALITY MANAGEMENT


Customers usually perceive quality service as availability of goods they want when they want them Inventory must be sufficient to provide highquality customer service in given time.

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INVENTORY CLASSIFICATION BY FUNCTIONS


Anticipation Inventory
In Anticipation of Future Demand Ahead of Peak Selling Season/ Sales Promotion/ Vacation Shutdown/ Threat of Strike

Fluctuation Inventory (Safety Stock)


To Cover Random Unpredictable Fluctuations in Supply/ Demand/ Lead Time Safety Stock/ Buffer Stock/ Reserve Stock Prevents Disruption in Manufacturing/ Deliveries To Customers Due To Stock Out Resulting from Un-Anticipated Delays

Lot-Size Inventory (Cycle Stock)


Purchased/ Manufactured Quantities Greater Than Immediate Need Create Cycle Stock To Take Advantage Of Quantity Discounts/ Reduce Shipping/ Set Up Costs When Making/ Purchasing of Items at Same Rate These Will Be Used/ Sold Cycle Stock is Portion of Inventory That Depletes Gradually as Customer Order Comes in and is Replenished Cyclically When Suppliers Orders Delivered

Maintenance, Repair & Operating Supplies (MRO)


Items that Support the Production Process But Do Not Become Part of Product Hand Tools/ Machine Spares/ Lubricants/ Cleaning Compounds/ Pencils/ Erasers

INVENTORY CLASSIFICATION BY FUNCTIONS


Hedge Inventory
Inventory Procured To Take Benefit of Low Prices When Supply More Than Demand in Global Markets Such Products Normally are Minerals/ Grains/ Animal Products

Transportation Inventory (Pipeline/ Movement Inventory)


Inventory in Transit Created as Time Required to Move Inventory from Plant To Distribution Centre/ Customer Transit Inventory Not Dependent on Shipment Size But on Transit Time-T in Days & Annual Demand-A in Units Average Annual Inventory in Transit, I=TA/ 365 in Units Reduction in Annual Average Transit Inventory Possible by Reducing Transportation Time

INVENTORY MANAGEMENT OBJECTIVES Maximizing Customer Service Maximizing the Efficiency of Purchasing and Production Minimizing Inventory Investment Maximizing Profit

INVENTORY COSTS
Ordering Cost: Clerical costs of preparing purchase orders Some spent finding suppliers and expediting orders Transportation costs Receiving costs (E.g. unloading and inspection) Holding Costs : Costs of storage space (E.g. warehouse depreciation) Security Insurance Forgone interest on working capital tied up in inventory Deterioration, theft, spoilage, or obsolescence

Shortage Costs: Temporary or permanent loss of sales when demand cannot be met

Disrupted production when raw materials are unavailable : Idle workers Extra machinery setups Lost sales resulting in dissatisfied customers Loss of quantity discounts on purchases

what is Inventory Control?


It is planning, ordering and scheduling of material. Right quantity of material available at right time. Systematic control over purchasing, storing and using of material.

FUNCTIONS OF INVENTORY CONTROL:

Effective use of financial resources. Protection against all material losses Proper calculation of cost of production. Keep the ball of production bouncing. Economies in purchasing. Eliminates redundant inventory. Keeping prompt delivery to the customers

TECHNIQUES IN SELECTIVE INVENTORY CONTROL


ABC VED HML FSN XYZ SOS SDE GOLF

ABC
1. ABC Analysis (Always Better Control): Classify the items on the basis of importance and the technique of grouping is called as ABC analysis. To provide maximum overall protection against the stock outs for a given investment in safety stock. This analysis prepared and checked weekly or monthly. Category % of items %of value A (High Cost) 10 70 B (Medium Cost) 20 20 C (Low Cost) 70 10

HML(HIGH,MEDIUM,LOW)
HML analysis is similar to ABC analysis, but only price criterion is used. The items are classified into three groups which are called high , medium ,low. For example management may decide that all items of unit price above Rs 3000 will be of H, those between 300 to 3000 are M , those having unit price below Rs 300 will be L category

GOLF(GOVT,ORDINARY,LOCAL,FOREI GN)
GOLF analysis is based on nature of the supplier which determine quality , delivery , lead time , payment terms , continuity of supply and administration work involved. G group covers procurement from government supplier O group covers procurement from non-government supplier L group from Local supplier F group from foreign supplier

XYZ
XYZ is based on the value of closing stock of inventory Items whose inventory values are high are called X Y as moderate inventory Z as low inventory

SOS(SEASONAL,OFF-SEASONAL)
SOS divides items into two classes Seasonal & Off-seasonal As far as possible procurement must be made during harvesting when the price is low. Off-season purchase could be a costly affair unless the supplier is in position to offer offseason discount eg onFans,regarments,coolers

FSN(FAST,SLOW,NON-MOVING)
Classifies items on the basis of their rate of consumption in the company. High value non-moving items are a liability Low value fast moving items should kept in ample quantities

VED(VITAL,ESSENCIAL,DESIRABLE)
VED analysis represents classification of items based on criticality. Criticality means how a machine is important to production. The analysis classifies the items into three groups called vital , essential & desirable. Vital category encompasses those items which, if not made available, being the production to a halt ,causing heavy losses

Essential group includes items whose stock-out cost is very high because it reduce production. Desirable group comprises items which do not cause noticeable loss of production or their stock-out entails nominal expenditure and causes minor disruptions.

SDE(SCARCE,DIFFICULT,EASY)

SDE classifies items into three groups called scarce ,difficult & easy and focuses on ease of procurement as the criterion. Scarce group includes items of which dearth , are imported or obtained through canalizing agencies of the government. Difficult items includes those items which are available indigenously but are not easy to procure due to exotic raw material being used. Easy category are produced on mass-scale , locally available ,absence of string specifications and are easy to produce.