Professional Documents
Culture Documents
02a Inventory Management
02a Inventory Management
(Part I)
Outline
Basic Inventory Concepts
Types of Inventory
Inventory Costs
Classification of Inventory Planning Techniques
Classification of Inventory System
Characteristics of Inventory System
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What is Inventory ?
Inventory is a stock of items kept by an organization to
meet internal or external customer demand.
Internal customers are inside the organization such as
machine operator waiting for a part or partially completed
product to work on.
External customers are outside the organization for
example, customers for grocery products, retail items, and
cars.
Managing inventories is one of the most important
functions of operations management in both manufacturing
and service organizations.
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i.
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Inventory Management
Inventory managers are responsible for planning and
controlling inventory before, during and after production to
support operation and meet customer demand.
As the level of inventory increases to provide better
customer service, inventory cost increases, whereas lost
sales and loss of customers decreases. However,
maintaining large stock of inventory is costly and wasteful.
The approach to inventory management is to maintain a
level of inventory that reflects a compromise between
inventory costs and customer service.
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Types of Inventory
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Types of Inventory
Inventories can be classified according to the function they
perform. The categories are given below.
i. Cycle inventory
ii. Safety stock inventory
iii. Work-in-process inventory
iv. Finished goods inventory
v. Pipeline inventory
vi. Anticipation inventory
vii. Decoupling stock
viii. Dead stock
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Drivers of Inventory
Type of Inventory
Driver ( Logic)
Cycle Stock
Economies of scale
Safety Stock
Seasonal stock
Speculation Stock
Pipeline Stock
Lead-time in
production/transportation
process
Dead Stock
Inventory Costs
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Inventory Costs
Three basic costs are associated with inventory:
i.
ii.
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Ordering Costs
Ordering costs: The costs associated with placing an order
either within the factory or to a supplier. Ordering cost is
independent of order size. The main components of the
ordering cost include the following:
i.
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ABC Classification
ABC classification principle is based on Paretos law. The
Paretos law says that a small number of SKUs account for
most of the inventory value (or usage in terms of dollar). It is
usually found that the relationship between the percentage of
SKUs and the percentage of annual dollar value follow a
pattern in which three groups can be defined:
A-category SKUs: About 15% to 20% of the SKUs account for
about 70% to 80% of the dollar value.
ABC Classification
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UNIT COST
($)
ANNUAL USAGE
(count)
1
2
3
4
5
6
7
8
9
10
60
350
30
80
30
20
10
320
510
20
90
40
130
60
100
180
170
50
60
120
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9
8
2
1
4
3
6
5
10
7
TOTAL
VALUE
$30,600
16,000
14,000
5,400
4,800
3,900
3,600
3,000
2,400
1,700
% OF TOTAL
VALUE
35.9
18.7
16.4
6.3
5.6
4.6
4.2
3.5
2.8
2.0
% OF TOTAL
QUANTITY
6.0
5.0
4.0
9.0
6.0
10.0
18.0
13.0
12.0
17.0
% CUMMULATIVE
A
B
C
6.0
11.0
15.0
24.0
30.0
40.0
58.0
71.0
83.0
100.0
$85,400
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CLASS
A
B
C
ITEMS
9, 8, 2
1, 4, 3
6, 5, 10, 7
% OF TOTAL
VALUE
% OF TOTAL
QUANTITY
71.0
16.5
12.5
15.0
25.0
60.0
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VED Classification
VED classification: SKUs are based on criticality: vital (V),
essential (E), and desirable (D). Based on VED classification,
one can fix different service levels for different SKUs. Of
course, a firm prefers to work with a very high service level
for V-category spare SKUs. D-category SKUs have lower level
of service requirements.
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FSN Classification
FSN classification: SKUs are classified based on volume of
usage: first moving (F), slow moving (S), and non-moving
(N). Fast-moving SKUs are usually stocked in a decentralized
fashion while slow-moving SKUs are stocked centrally.
Non-moving SKUs are candidates for disposal and the firm
will like to make sure that non-moving SKUs do not take up
a significant share of inventory investment. This
classification is quite popular in the retail industry.
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Inventory Level
Order quantity, Q
Average
inventory
Demand
rate
Q
2
Reorder point, R
Lead
time
Order Order
placed receipt
Lead
time
Order Order
placed receipt
Time
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Cycle Counting
Cycle counting is a repetitive physical counting of inventory
throughout the year. It ensures that all items are counted
and higher value items (A-category) are counted more
frequently than lower-value items (B and C categories).
The benefits of cycle counting are:
i.
Perishable Item
A perishable item either deteriorates or become obsolete
after a certain period. For example fruit, milk, cheese, and
medicine have a limited life in shelf.
Cricket match or concert tickets have no value after the
game or performance.
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Inventory in hand
Days of supply =
Average daily usage
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References
i.
ii.
v.
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