Inventory Control

Topics Covered
• Inventory System Defined. • Types of Inventory. • Trade off Between Inventory and Service level • Inventory control across the supply chain. • Inventory Management in JIT • Inventory Accuracy. • Symptoms of poor Inventory Management. • Inventory Costs. • Independent vs. Dependent Demand • Evaluation of Inventory Management

Inventory System

• Inventory is 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 • An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Purposes of Inventory

1. To maintain independence of operations 2. To meet variation in product demand 3. To allow flexibility in production scheduling 4. To provide a safeguard for variation in raw material delivery time 5. To take advantage of economic purchase-order size

In-Process Inventories. .Types-Nature of Materials • • • • Production Inventories. Finished-goods Inventories. MRO Inventories.

Types-Use of Material • Transaction Inventory. • Speculative Inventory. • Precautionary Inventory .

Functional Classification of Inventory. • • • • • Working stock Safety stock Anticipation stock. Decoupling stock Psychic stock .

Trade off Between Inventory and Service level .

• Always Better Control (ABC) Analysis.Inventory control across the supply chain. . • Radio Frequency identification(RFID). • FSN Analysis. • Barcoding. • VED Classification.

• ABC analysis has universal application for fields requiring selective control. .Always Better Control (ABC) Analysis • This technique divides inventory into three categories A. B & C based on their annual consumption value. • It is also known as Selective Inventory Control Method (SIM) • This method is a means of categorizing inventory items according to the potential amount to be controlled.

receipts. etc. & close control is maintained.Advantages of ABC Analysis • • • • Helps to exercise selective control Gives rewarding results quickly Helps to point out obsolete stocks easily. . In case of “A” items careful attention can be paid at every step such as estimate of requirements. inspections. purchase. safety stock. issues.

may be dispensed with or combined.• In case of “C” items. • Helps better planning of inventory control • Provides sound basis for allocation of funds & human resources. etc. recording & follow up. .

• When other important factors make it obligatory to concentrate on “C” items more. . • Periodic review becomes difficult if only ABC analysis is recalled.Disadvantages of ABC Analysis • Proper standardization & codification of inventory items needed. the purpose of ABC analysis is defeated. • Considers only money value of items & neglects the importance of items for the production process or assembly or functioning.

• Vital items – Its shortage may cause havoc & stop the work in organization. . Essential & Desirable classification • VED classification is based on the criticality of the inventories.VED Classification • VED: Vital. They are stocked adequately to ensure smooth operation.

but the efficiency of operations is adversely affected due to expediting expenses. If not available. reasonable risk can be taken. the plant does not stop.Here. They may be stocked very low or not stocked. . They should be sufficiently stocked to ensure regular flow of work.• Essential items . • Desirable items – Its non availability does not stop the work because they can be easily purchased from the market as & when needed.

transport industries. • VED analysis can be better used with ABC analysis in the following pattern: Category “V” items “E” items “D” items “A” items Constant control & regular follow up Moderate stocks Moderate stocks Nil stocks “B” items Moderate stocks Low stocks “C” items High stocks Moderate stocks Very low stocks . etc.• It is useful in capital intensive industries.

. is taken to determine the no. whichever is later. slow moving & non moving • Classification is based on the pattern of issues from stores & is useful in controlling obsolescence. • Date of receipt or last date of issue. of months which have lapsed since the last transaction.FSN Analysis • FSN: Fast moving.

• For analysis. • If there are no issues of an item during the period. It is also useful in facilitating timely control. it is “N” item. the issues of items in past two or three years are considered. . • It helps to avoid investments in non moving or slow items.• The items are usually grouped in periods of 12 months.

• Then up to certain limit. • The period of consideration & the limiting number of issues vary from organization to organization. . of issues during the period are “F” items. the item is “S” item • The items exceeding such limit of no. say 10-15 issues in the period.

. • EPOS system verifies. – Lot tracking.Barcoding • Invented in 1950s. barcodes accelerate the flow of products and information throughout business. checks and charges tansaction provides instant reports. Production reporting – Automatic warehouse application picking and shipping – Identification of production bottlenecks – Package tracking. • Production application for barcoding – Counting raw Material and finished goods.

– Reduce Labor cost. – Faster access to information. – Faster data entry.• Barcoding provides the followinf benefits. – Greater accuracy. – The ability to automate warehouse. – Elimination of cost over or understocking. – Greater responsiveness to customer and supplier .

to reading device. . and an antenna able to transmit the no.Radio Frequency Identification • An RFID contains a silicon chip that carriers an identification no.

.Advantages of RFID • • • • • • Line of sight. Read/Write. Range Bulk Read Selectivity. Durability.

Metal Radio. Moisture. Electrical Interference.Limitation • • • • • • • Cost. Accuracy. Security. . Overcompensation.

JIT(Just In Time) Akshay S Bhave 1-25 .

• In simpler words. JIT delivers the right items at right time in the right amounts . It uses timeliness as a lever to lower costs. improve quality and improve responsiveness.Defination • Just-in-time (JIT) is defined in the APICS dictionary as a philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity • It’s a long-term approach to process improvement.

SPC – Manpower reduction . kanban.JIT versus a traditional OM philosophy Traditional Goal: maximize production by minimizing disruptions Management Assumption: we can sell what we make Manufacturing Objectives: – Spread resources evenly: line balancing – Decouple operations: line pacing and extensive scheduling – Dependable and efficient operations: automation and forecasting JIT Goal: Produce salable goods as quickly and efficiently as possible Management Assumption: we make what we can sell Manufacturing Objectives: – Clean up the workplace (5Ss) – Flow manufacturing: GT/CM and cross training – Level production with visual control: JIT.

Reduce lead times 5. Flexible work force 7. Preventive maintenance 6. Reduce lot sizes 4. Small lot (single unit) conveyance .Key elements of JIT 1. Stabilize and level the inventory with uniform plant loading 2. Reduce or eliminate setup times 3. Require supplier quality assurance and implement a zero defects quality program 8.

Role of Inventory Reduction • Inventory = Lead Time (less is better) • Inventory hides problems .

discard what you do not need)  Seiton: Orderliness (assign a separate location for all essential items)  Seiso: Cleanliness (keep the workplace spotless at all times)  Seiketsu: Cleanup (maintain equipment and tools)  Shitsuke: Discipline (stick to the rules scrupulously) . identify what you need.5S  Seiri: Proper arrangement (sort through and sort out.


Inventory Flow .

zero defects either though good working practices or though a cost penalty  Availability of nearby suppliers and buyers . e.g.When to use JIT is a suitable production system when:  have steady production of clearly defined standard products  a reasonable number of units made  a high value product  have flexible working practices and a disciplined workforce  short setup times on machines  quality can be assured.

Benefits  better quality products  quality the responsibility of every worker. work-in-progress and finished goods  cost savings  higher productivity  higher worker participation  more skilled workforce. of raw materials. able and wiling to switch roles  reduced space requirements  improved relationships with suppliers . not just quality control inspectors  reduced scrap and rework  reduced cycle times  lower setup times  smoother production flow  less inventory.

Push Production Systems • make to stock – production decisions are based on forecasts of demand – appropriate when uncertainty about demand is low – generally not compatible with JIT .

or “internal” customer (e. last station in line) • generally compatible with JIT .Pull Production Systems • Make to order • work is triggered by order from external customer.g.

entire supply chains can be – Push – Pull – Push-Pull Hybrid • Some components are push. others pull .Push & Pull Supply Chains • Just as individual firms can implement push or pull operations.

INVENTORY ACCURACY • Meaning • Causes of Inventory inaccuracy • Auditing inventory records – Periodic (annual) inventory – Cycle counting .

Inventory Models • Mathematical equation or formula that helps a firm in determining the economic order quantity. to keep goods or services flowing to the customer without interruption or delay. Types of models Deterministic model Stochastic Inventory Models . and the frequency of ordering.

• EOQ model – Monetary unit lot size – Non instantaneous Receipt Model • Periodic review system/Periodic order quantity model • Continuous Review model .

INVENTORY ACCURACY • • • • Meaning Causes of Inventory inaccuracy Importance of inventory accuracy Auditing inventory records – Periodic (annual) inventory – Cycle counting .

Evaluation of inventory performance. • Financial evaluation – Inventory turnover ratio • Methods of evaluating inventory – FIFO – LIFO – Average cost – Standard cost .

Symptoms of poor Inventory Management • • • • • • Increasing number of backorders Increasing cancelled orders Increasing numbers of returns High customer turnover rate Large number of obsolete items Periodic lack of storage space .

Ways to Reduce Inventory Levels • • • • • • • Lead-time analysis Delivery-time analysis Eliminate low turnover items Eliminate obsolete items Analysis of package size Analysis of discount structure vendors/suppliers .

• Examine returned goods procedures • Measurement of fill rate by stockkeeping unit (SKU) • Analysis of customer demand • Improve forecasting • Improve Electronic data interchange with .

etc • Shortage costs – Costs of canceling an order. etc • Setup (or production change) costs – Costs for arranging specific equipment setups. insurance. etc .Inventory Costs • Holding (or carrying) costs – Costs for storage. etc • Ordering costs – Costs of someone placing an order. handling.

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