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Inventory Management

Inventory Definition

A stock of items held to meet future demand Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.

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Inventory Management

Types of Inventories
Raw Materials Basic inputs that are converted into finished product through the manufacturing process Work-in-progress Semi-manufactured products need some more works before they become finished goods for sale Finished Goods Completely manufactured products ready for sale Supplies Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant 5/18/2012 2 investment.

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Inventory Management

Types of Inventory

Work in process
Vendors

Raw Materials Work in process

Work in process

Finished Customer goods

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Inventory Management

Types of Inventories (Contd)

Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers

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Inventory Management

Functions of Inventory

To meet anticipated demand To smooth production requirements

To make operations
To protect against stock-outs

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Inventory Management

Functions of Inventory (Contd)

To take advantage of order cycles To help hedge against price increases To permit operations To take advantage of quantity discounts

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Inventory Management

Effective Inventory Management

A system to keep track of inventory

A reliable forecast of demand Knowledge of lead times Reasonable estimates of

Holding costs Ordering costs Shortage costs

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Inventory Management

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

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Inventory Counting Systems (Contd)

Inventory Management

Two-Bin System - Two containers of inventory; reorder when the first is empty Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached
0

214800 232087768

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Inventory Management

Key Inventory Terms

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, usually a year Ordering costs: costs of ordering and receiving inventory Shortage costs: costs when demand exceeds supply

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Inventory Management

Reasons To Hold Inventory(Need)

Meet variations in customer demand:

Meet unexpected demand Smooth seasonal or cyclical demand Temporary price discounts Hedge against price increases Take advantage of quantity discounts Internal upsets in parts of or our own processes External delays in incoming goods

Pricing related:

Process & supply surprises

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Inventory Management

Objective of Inventory Management

To maintain a optimum size of inventory for efficient and smooth production and sales operations To maintain a minimum investment in inventories to maximize the profitability Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality

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Inventory Management

Cost Associated with Inventory

Carrying costs: Warehousing or storage Handling Clerical and staff Insurance Interest Deterioration,shrinkage, evaporation and obsolescence Taxes Cost of capital

Ordering costs: Quotation or tendering Requisitioning Order placing Transportation Receiving, inspecting and storing Quality control Clerical and staff Stock-out cost Loss of sale Failure to meet delivery commitments
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Inventory Management

Basic EOQ Model

Assumption Seasonal fluctuation in demand are ruled out Zero lead time Time lapsed between purchase order and inventory usage Cost of placing an order and receiving are same and independent of the units ordered Annual cost of carrying the inventory is constant Total inventory cost = Ordering cost + carrying cost

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Inventory Management

EOQ Three Approaches

Trial

and Error method Order-formula approach Graphical approach

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Inventory Management

EOQ & Re-order point

gives answer to question How much to Order Re-order point gives answer to question when to order
EOQ

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Inventory Management

Trial & Error Method

Assumptions:Annual requirement (C)=1200 units Carrying cost (I) = Rs.1 Ordering cost (O) =Rs.37.5
Order size Q Average inventory Q/2 No. of orders C/Q Annual carrying cost I* Q/2 1200 600 1 600 600 300 2 300 400 200 3 200 300 150 4 150 240 120 5 120 200 100 6 100 150 75 8 75 120 60 10 60 100 50 12 50

Annual ordering cost O*C/Q

Total annual cost
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37.5

75

112.5

150

187.5

225

300

375

450

637.5

375

312.5

300

307.5

325
17

375

435

500

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Inventory Management

Order- Formula approach

EOQ =2AO/C A= Annual consumption or usage O = Ordering and receiving cost C= Carrying cost or inventory cost

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Inventory Management

Certainty case of the inventory cycle

Inventory level order quantity

Q Average inventory = Q/2

T1

T2 Time

T3

T4

1. Here the negative slope from Q to T1 represents the inventory being used up 2. T1, T2, T3, T4 represents the replenishment points 3. The inventory varies between 0 and Q

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Inventory Management

Graphical method to find EOQ

Cost in RS.

EOQ Order quantity

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Inventory Management

Classification of inventory

ABC Classification HML Classification XYZ Classification VED Classification FSN Classification SDF Classification GOLF Classification SOS Classification

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Inventory Management

ABC Classification

In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity. A typical manufacturing operation shows that the top 15% of the line items, in terms of annual rupees usage, represent 80% of total annual rupees usage. Next 15% of items reflect 15% of annual rupees Next 70% accounts only for 5% usage

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Inventory Management

ABC Classification System

Figure 9.1

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

A - very important B - mod. important C - least important

High Annual $ value of items Low

A B C
Few

Many

Number of Items

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Inventory Management

XYZ Classification

On the basis of value of inventory stored Whereas ABC was on the basis of value of consumption to value. X High Value Y Medium value Z Least value Aimed to identify items which are extensively stocked.

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Inventory Management

HML Classification

On the basis of unit value of item There is 1000 unit of Q @ Rs. 10 and 10,000 units of W @ Rs. 5. Aimed to control the purchase of raw materials. H High, M- Medium, L - Low

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Inventory Management

VED Classification

Mainly for spare parts because their consumption pattern is different from raw materials. Raw materials on market demand Spare parts V items has toof plant and more Therefore on performance be stocked machinery. and D Items has to be less stocked V Vital, E Essential, D Desirable

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Inventory Management

FSN Classification

According to the consumption pattern To combat obsolete items F Fast moving S Slow moving N Non Moving

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Inventory Management

SDF & GOLF Classification

Based on source of procurement S Scarce, D- Difficult, E- Easy.

GOLF G Government, O Ordinary, L Local, F Foreign.

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Inventory Management

SOS Classification

Raw materials especially for agriculture units S Seasonal OS Off seasonal

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Inventory Management

Economic Order Quantity Models

Economic order quantity model Economic production model Quantity discount model

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Inventory Management

Assumptions of EOQ Model

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