Inventory Management

Er.Sartaj Singh Bajwa

Types of Inventories
y y

Raw materials & purchased parts

Partially completed goods called work in progress y Finished-goods inventories

Er.Sartaj Singh Bajwa

Functions of Inventory y y y y y y To meet anticipated demand To smooth production requirements To protect against stock-outs To take advantage of order cycles To hedge against price increases To take advantage of quantity discounts Er.Sartaj Singh Bajwa .

Key Inventory Terms y Lead time: time interval between ordering and receiving the order Holding (carrying) costs: cost to carry an item in inventory for a length of time Ordering costs: costs of ordering and receiving inventory Shortage costs: costs when demand exceeds supply y y y Er.Sartaj Singh Bajwa .

Sartaj Singh Bajwa . and so on. phone bills.ORDERING COST FACTORS Developing and sending purchase orders CARRYING COST FACTORS Cost of capital Processing and inspecting incoming inventory Taxes Bill paying Inventory inquiries Utilities. for the purchasing department Salaries and wages for the purchasing department employees Supplies such as forms and paper for the purchasing department Insurance Spoilage Theft Obsolescence Salaries and wages for warehouse employees Utilities and building costs for the warehouse Supplies such as forms and paper for the warehouse Er.

Sartaj Singh Bajwa .Inventory Counting Systems y y 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 Er.

Sartaj Singh Bajwa .Inventory Counting Systems y y Two-Bin System .Bar code printed on a label that has information about the item to which it is attached 0 214800 232087768 Er.Two containers of inventory. reorder when the first is empty Universal Bar Code .

Sartaj Singh Bajwa Many .very important B . important C .least important High Annual $ value of items Low A B C Few Number of Items Er.mod. A .ABC Classification System ALWAYS BETTER CONTROL Classifying inventory according to some measure of importance and allocating control efforts accordingly.

infrequent batches. y Purchase/manufacture in small.Sartaj Singh Bajwa . y Monitor continuously (continuous review). y Purchase/manufacture in medium size batches. monitor periodically (periodic review). y Simple manual records. y Purchase/manufacture in large. keep inventories as low as possible. occasional review. Er. Class B Items: 30% of items which account for approximately 20-30% of the total inventory cost y Moderate control.ABC Item Classification y y y Class A Items: 20% of items which account for approximately 60-80% of the total inventory cost y Tight control. frequent batches. y Good records. Class C Items: 50 % of items which account for remaining 5-15% of total inventory cost y Minimal control.

Sartaj Singh Bajwa .Economic Order Quantity Er.

Sartaj Singh Bajwa .Assumptions of EOQ Model y y y y y y 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 Er.

Sartaj Singh Bajwa .The Inventory Cycle Q Quantity on hand Profile of Inventory Level Over Time Usage rate Reorder point Receive order Place Receive order order Place Receive order order Time Lead time Er.

Total Cost Annual Annual Total cost = carrying + ordering cost cost TC = Q H 2 + DS Q ACC = average number of units * carrying cost per unit per year Average number of Units = Q/2 H = Holding / carrying cost per unit per year AOC = (number of orders per year) * (ordering cost) Number Of Orders per year = annual demand inunits(D) ordered quantity(Q) S = ordering cost per order Er.Sartaj Singh Bajwa .

Sartaj Singh Bajwa Optimal Order Quantity Order Quantity . This occurs when the Ordering Cost = Carrying Cost Cost Curve of Total Cost Minimum Total Cost Carrying Cost Curve Ordering Cost Curve Er.Inventory Costs in the EOQ Situation Optimal Order Quantity is when the Total Cost curve is at its lowest .

Sartaj Singh Bajwa .Finding the EOQ y When the EOQ assumptions are met. total cost is minimized when Annual ordering cost = Annual holding cost D Q S ! H Q 2  Solving for Q 2 DS ! Q 2 H 2 DS ! Q2 H 2 DS ! Q ! EOQ ! Q * H Er.

50 2 DS 2(1.000 units y Ordering cost = $10 per order y Average carrying cost per unit per year = $0.Sartaj Singh Bajwa .Sumco Pump Company Example y y Company sells pump housings to other companies Would like to reduce inventory costs by finding optimal order quantity y Annual demand = 1.50 * Er.000)(10) Q ! ! ! 40.000 ! 200 units H 0.

Sartaj Singh Bajwa .000 200 ! (10 )  (0.5 ) 200 2 ! $50  $50 ! $100 Er.Sumco Pump Company Example Total annual cost = Order cost + Holding cost D Q TC ! S H Q 2 1.

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

Sartaj Singh Bajwa .Reorder Point: Determining When To Order y y Once the order quantity is determined. the next decision is when to order The time between placing an order and its receipt is called the lead time (L) or delivery time L y Inventory must be available during this period to met the demand y When to order is generally expressed as a reorder point (ROP ± the inventory level at which an order should be ROP) placed Demand per day v Lead time for a new order in days ROP ! !dvL Er.

Procomp·s Computer Chip Example y y y Demand for the computer chip is 8.Sartaj Singh Bajwa .000 per year Daily demand is 40 units Delivery takes three working days ROP ! d v L ! 40 units per day v 3 days ! 120 units  An order is placed when the inventory reaches 120 units  The order arrives 3 days later just as the inventory is depleted Er.