INVENTORY CONTROL Definition of Inventory Inventory is an idle resource of any kind, which has some economic value or Inventory

is the material held in an idle or incomplete state awaiting future sale, use, or transformation Types of Inventory Production Inventories MRO Inventories In-process Inventories Finished Goods Inventories Functions of Inventory Inventory exists because supply and demand are difficult to synchronize perfectly and it takes time to perform material-related operations Supply and demand frequently differ in the rates at which they respectively provide and require stock These reasons can be best explained by four functional factors of inventory - time, discontinuity (decoupling), uncertainty and economy Time factor q Enables an organisation to reduce the lead time in meeting demand Discontinuity Factor q Allows the treatment of various dependent operations in independent an economical manner Uncertainty Factor q Concerns unforeseen events that modify the original plans of the organisation Economy Factor q Enables the organisation to purchase or produce items in economic quantities Note v Inventory is a necessary part of doing business v The functional factors explain the existence of inventory; this does not mean that attempts at its reduction should not be pursued v Inventory can hide operational problems or make problems easier to live with v It is more desirable to eliminate problems than to cover them up with excess inventory INVENTORY PROBLEM CLASSIFICATION 1) Repetitiveness a) Single order b) Repeat order 2) Supply Source a) Outside supply b) Inside supply 3) Knowledge of Demand a) 1) Constant demand 2) Variable demand b) 1) Independent demand 2) Dependent demand (See fig. 1 which shows the distinction between Independent and dependent demand) 4) Knowledge of Lead Time

a) Constant lead time b) Variable lead time 5) Inventory System a) Perpetual b) Periodic c) Material requirements planning d) Distribution requirement planning e) Single order quantity

Fig. 1 Independent versus Dependent Demand PROPERTIES OF INVENTORY Common Properties - Demand, Replenishments, Constraints and costs Demand Categorized according to size, rate and pattern Size refers to magnitude and has the dimension of quantity Size is same from period to period - constant otherwise - variable Size known- deterministic - not known- probabilistic-discrete or continuous Rate is the demand size per unit of time Pattern refers to how units are withdrawn from inventory Replenishments Categorised according to size, pattern and lead time Size quantity to be received into inventory - constant or variable Pattern how units are added to inventory - instantaneous, uniform or batch Lead time length of time between the decision to replenish an item and its actual addition to stock - constant or variable Constraints Limitation placed on the inventory system

Space constraints, capital constraints INVENTORY COSTS 1. Purchase cost 2. Order/setup cost 3. Holding Cost 4. Stockout cost In the inventory analysis relevant costs are considered Purchase Cost Unit purchase price - from an external source Unit production cost produced internally Unit production cost includes direct labour, direct material and factory overhead Order/Setup Cost Expense of issuing a purchase order to an outside supplier or from internal production setup costs Vary directly with number of orders or setups Order cost includes transportation cost, and cost for requisition, analysing vendors, writing purchase orders, transportation cost to transport the order quantity, receiving materials, inspecting materials, following up orders and doing the process necessary to complete the transaction Holding Cost or Carrying Cost Cost associated with investing in inventory and maintaining the physical investment in storage Contains capital costs, taxes, insurance, handling, storage, shrinkage, obsolescence, and deterioration Stockout Costs Economic consequence of an external or an internal shortage External shortage when customers order is not filled Internal Shortage When an order of a group or department is not filled External shortages can incur backorder cost, present profit loss and future profit loss Internal shortage can result in lost production and delay in completion date GOALS OF MATERIALS MANAGEMENT Major goals Minimise inventory investment Maximise customer service Assure efficient plant operation Common Subgoals Low unit cost High inventory turnover Consistency of quality Favourable supplier relation Continuity of supply Inventory turnover A performance measure for inventory control It is the velocity with which materials move through the organisation

It is the ratio of the annual cost of goods sold to the average or current inventory investment For a company these values can be obtained from financial statement o Cost of good sold from income statement o Inventory investment from balance sheet average of opening balance and closing balance This ratio computes the number of times the inventory has turned over during a year