TERM-PAPER

ON

INVENTORY MANAGEMENT & CONTROL

AT

SIEMENS

SUBJECT-PRODUCTION & OPERATIONS MANAGEMENT

SUBMITTED TO: SUBMITTED BY:

Dr. B.L.BAJPAI SABA KAZMI
HOD,DBA MBA 2nd SEM.
UNIVERISTY OF LUCKNOW
 ACKNOWLEDGEMENT

The making of this term paper has become possible due to the guidance,
efforts and co-operation given by umpteen people who knowingly or
unknowingly played a role however small or big in it’s successful
completion.

I would like to thank Dr.B.L.Bajpai for his guidance and willingness to help
me whenever it is required because without his help this term paper cannot
be completed timely.

At the last I would like to thank my family and friends who have been a
great support while the making of this paper.

SABA KAZMI
INVENTORY CONTROL MANAGEMENT AT SIEMENS
Inventory database
An important component of inventory planning involves access to an inventory database.
It is a structured framework that contains the information needed to effectively manage
all items of inventory, from raw materials to finished goods. This information includes the
classification and amount of inventories, demand for the items, cost to the firm for each
item, ordering costs, carrying costs and other data.
The task of inventory planning can be highly complex. At the same time it rests on
fundamental principles. In doing so we must understand and determine the optimal lot
size that has to be ordered. The EOQ (economic order quantity) refers to the optimal
order size that will result in the lowest total of order and carrying costs and ordering
costs. By calculating the economic order quantity the firm attempts to determine the
order size that will minimize the total inventory costs. In examination of the two curves
reveals that the carrying cost curve is linear i.e. more the inventory held in any period,
greater will be the cost of holding it. Ordering cost curve on the other hand is different.
The ordering costs decrease with an increase in order sizes. The point where the
holding cost curve i.e. the carrying cost curve and the ordering cost curve meet,
represent the least total cost which is incidentally the economic order quantity or
optimum quantity.

PRODUCTIVITY
In the industries there will be a competitor who will be a low cost producer and will have
greater sales volume in that sector. This is partly due to economies of scale, which
enable fixed costs to spread over a greater volume but more particularly to the impact of
the experience curve. It is possible to identify and predict improvements in the rate of
output of workers as they become more skilled in the processes and tasks on which they
work. Bruce Henderson extended this concept by demonstrating that all costs, not just
production costs, would decline at a given rate as volume increased. This cost decline
applies only to value added, i.e. costs other than bought in supplies. Traditionally it has
been suggested that the main route to cost reduction was by gaining greater sales
volume and there can be no doubt about the close linkage between relative market
share and relative costs. However it must also be recognized that logistics management
can provide a multitude of ways to increase efficiency and productivity and hence
contribute significantly to reduced unit costs.
In today’s more turbulent environment there is no longer any possibility of manufacturing
and marketing acting independently of each other. It is now generally accepted that the
need to understand and meet customer requirements is a prerequisite for survival. At the
same time, in the search for improved cost competitiveness, manufacturing
management has been the subject of massive renaissance. The last decade has seen
the rapid introduction of flexible manufacturing systems, of new approaches to inventory
based on materials requirement planning (MRP) and just in time (JIT) methods, a
sustained emphasis on quality.
Equally there has been a growing recognition of the critical role that procurement plays
in creating and sustaining competitive advantage as part of an integrated logistics
process.

In this scheme of things, logistics is therefore essentially an integrative concept that

seeks to develop a system wide view of the firm. It is fundamentally a planning concept
that seeks to create a framework through which the needs of the manufacturing strategy
and plan, which in turn link into a strategy and plan for procurement.

Inventory Flow:

The management of logistics is concerned with the movement and storage of materials
and finished products. Logistical operations start with the initial shipment of a material or
component part from a supplier and are finalized when a manufactured or processed
product is delivered to a customer. From the initial purchase of a material or component,
the logistical process adds value. By moving inventory when and where needed. Thus
the material gains value at each step. For a large manufacturer, logistical operations
may consist of thousands of movements, which ultimately culminate in the delivery of the
product to an industrial user, wholesaler, dealer or customer. Similarly for a retailer,
logistical operations may commence with the procurement of products for resale and
may terminate with consumer pickup or delivery.
The significant point is that regardless of the size or type of the enterprise, logistics is
useful and requires continuous management attention.
INVENTORY- related costs

Inventory carrying cost (ICC):

Tax
Storage
Capital
Insurance
Obsolescence
Ordering:
Communication
Processing, including material
handling and packaging
Update activities, including
receiving and date-processing

BASIC INVENTORY DECISIONS

Basic Inventory Decisions

How much? When?

Lot sizing decision Lot timing decision

Determination of the quantity to Determination of the timing for

be ordered. the orders.

RELEVANT INVENTORY COSTS

 Relevant Inventory Costs

Item Costs Holding Costs Ordering Costs Shortage Costs

Direct cost for Costs associated Fixed costs Costs associated
getting an item. with carrying associated with with not having
Purchase cost for items in placing an order enough inventory
outside orders, inventory. (either a to meet demand.
manufacturing Storage and purchase cost for
cost for internal other related outside orders, or
orders. costs. a setup cost for
internal orders).
EOQ:
The EOQ can be calculated with the help of a mathematical formula. Following
assumptions are implied in the calculation:
1. Constant or uniform demand- although the EOQ model assumes constant demand,
demand may vary from day to day. If demand is not known in advance- the model must
be modified through the inclusion of safe stock.
2. Constant unit price- the EOQ model assumes that the purchase price per unit of
material will remain unaltered irrespective of the order offered by the suppliers to include
variable costs resulting from quantity discounts, the total costs in the EOQ model can be
redefined.
3. Constant carrying costs- unit carrying costs may very substantially as the size of the
inventory rises, perhaps decreasing because of economies of scale or storage efficiency
or increasing as storage space runs out and new warehouses have to be rented.
4. Constant ordering cost- this assumption is generally valid. However any violation in
this respect can be accommodated by modifying the EOQ model in a manner similar to
the one used for variable unit price.
5. Instantaneous delivery- if delivery is not instantaneous, which is generally the case;
the original EOQ model must be modified through the inclusion of a safe stock.
6. Independent orders- if multiple orders result in cost saving by reducing paper work
and the transportation cost, the original EOQ model must be further modified. While this
modification is somewhat complicated, special EOQ models have been developed to
deal with it.
These assumptions have been pointed out to illustrate the limitations of the basic EOQ
model and the ways in which it can be easily modified to compensate for them.

Limitations of the EOQ formula-

1. Erratic changes usages- the formula presumes the usage of materials is both predictable
and evenly distributed. When this is not the case, the formula becomes useless.
2. Faulty basic information- order cost varies from commodity to commodity and the
carrying cost can vary with the company’s opportunity cost of capital. Thus the
assumption that the ordering cost and the carrying cost remains constant is faulty and
hence EOQ calculations are not correct.
3. Costly calculations: the calculation required to find out EOQ is extremely time
consuming. More elaborate formulae are even more expensive. In many cases, the cost of
estimating the cost of possession and acquisition and calculating EOQ exceeds the
savings made by buying that quantity.
4. No formula is a substitute for common sense- sometimes the EOQ may suggest that we
order a particular commodity every week (six-year supply) based on the assumption that
we need it at the same rate for the next six years. However we have to order it in the
quantities according to our judgment. Some items can be ordered every week; some can
be ordered monthly, depends on how feasible it is for the firm.
5. EOQ ordering must be tempered with judgment- Sometimes guidelines provide a
conflict in ordering. Where an order strategy conflicts with an operational goal, order
strategy restrictions should be developed to permit honoring the goal.

Quantity discounts: In the EOQ analysis, it has been assumed that material prices and
transportation costs were constant factors for the range of order quantities considered. In
practice, some situations occur in which the delivered unit cost of a material decreases
significantly if a slightly larger quantity than the originally computed EOQ is purchased.
Quantity discounts, freight rate schedules and price increases may create such situations.
These additional variables can also be included in the formula.

Cost of carrying inventory:

Carrying material in inventory is expensive. A number of studies indicated that the
annual cost of carrying a production inventory averaged approximately 25% of the value
of the inventory. The escalating and volatile cost of money has escalated the annual
inventory carrying cost to a figure between 25% - 35% of the value of the inventory. The
following five elements make up this cost:
1) Opportunity cost (12% -20%)
2) Insurance cost (2% – 4%)
3) Property taxes (1% - 3%)
4) Storage costs (1%- 3%)
5) Obsolescence and deterioration (4% - 10%)
Total carrying cost (20% - 40%)
Let us briefly look into these costs:
Opportunity cost of invested funds-
When a firm uses money to buy production material and keeps it in the inventory, it
simply has this much less cash to spend for other purposes. Money invested in external
securities or in productive equipment earns a return for the company. Thus it is logical to
charge all money invested in inventory an amount equal to that it could earn elsewhere
in the company. This is the opportunity cost associated with inventory investment.

Insurance cost
Most firms insure the assets against possible losses from fire and other forms of
damage.

Property taxes
This is levied on the assessed value of a firm’s assets, the greater the inventory value,
the greater the asset value and consequently the higher the firm’s tax bill.

Storage costs
The warehouse is depreciated every year over the length of its life. This cost
can be charged against the inventory occupying the space.

Obsolescence and deterioration

In most inventory operations, a certain percentage of the stock spoils, is damaged, is
pilfered, or eventually becomes obsolete. A certain number always takes place even if
they are handled with utmost care.
Generally speaking, this group of carrying costs rises and falls nearly proportionately to
the rise and fall of the inventory level.

The ABC Classification:

Indicators that classifies a material as an A,B or C part according to its consumption
value .The classification process is known as the ABC analysis.
The three indictors have the following meanings:
A-important part , high consumption value
B-less important , medium consumption value
C-relatively unimportant part , low consumption value
The ABC classification system is to grouping items according to annual sales volume, in
an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory
management.
Reorder Point: The inventory level R in which an order is placed where R = D.L, D =
demand rate (demand rate period (day, week, etc), and L = lead time.

ABC Inventory Classification

The ABC classification process is an analysis of a range of items, such as finished
products or customers into three categories: A - outstandingly important; B - of average
importance; C - relatively unimportant as a basis for a control scheme. Each category
can and sometimes should be handled in a different way, with more attention being
devoted to category A, less to B, and less to C.
Inventory Control Application: The ABC classification system is to grouping items
according to annual sales volume, in an attempt to identify the small number of items
that will account for most of the sales volume and that are the most important ones to
control for effective inventory management.
Break-even analysis depends on the following variables:
1. Selling Price per Unit: The amount of money charged to the customer for each
unit of a product or service.
2. Total Fixed Costs: The sum of all costs required to produce the first unit of a
product. This amount does not vary as production increases or decreases, until
new capital expenditures are needed.
3. Variable Unit Cost: Costs that vary directly with the production of one additional
unit.
Total Variable Cost The product of expected unit sales and variable unit cost, i.e.,
expected unit sales times the variable unit cost.
4. Forecasted Net Profit: Total revenue minus total cost. Enter Zero (0) if you wish
to find out the number of units that must be sold in order to produce a profit of
zero (but will recover all associated costs)
Break-Even Point in siemens: Number of units that must be sold in order to produce a
profit of zero (but will recover all associated costs). In other words, the break-even point
is the point at which your product stops costing you money to produce and sell, and
starts to generate a profit for your company.
where:
Q = Break-even Point, i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
UP = Unit Price
Therefore,
Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)

Stock control and inventory

Stock control, otherwise known as inventory control, is used to show how much stock
you have at any one time, and how you keep track of it.
It applies to every item you use to produce a product or service, from raw materials to
finished goods. It covers stock at every stage of the production process, from purchase
and delivery to using and re-ordering the stock.
Efficient stock control allows you to have the right amount of stock in the right place at
the right time. It ensures that capital is not tied up unnecessarily, and protects production
if problems arise with the supply chain.

Supply chain vendor management inventory:

Allows supply chain partners to share critical order, demand and inventory information in
real-time and uses both integrated and web based applications to reduce administration
costs, shortening cycle times and help lower inventory levels. Our unique, managed
supply hub requires little upfront investment, yet quickly starts delivering high
performance in real time

Inventory Control Overview

Normal Inventory
As it sounds, this type of inventory item will be used for the majority of your parts. It will
correctly track the inventory received and sold on a first in first out basis, will handle cost
of sales, and will warn you when you're out of stock.
Non-Inventory Type
This is used for selling things that are not really inventory items. For example, you could
be selling warranty, but because you don't have warranty in a box to sell, and you'll
never run out of stock, you won't need to keep inventory control on it. As well, there is no
cost of sale adjustments with non-stock items. The system will not calculate how much
you paid for the item, and therefore will not try to remove that value from inventory in the
general ledger. If you are selling something that does cost you money, you will have to
handle these details manually.

Labor Parts
You (probably) don't have technicians hanging from hooks in your back room, so like
non-inventory items, the system will not try to remove them from inventory when you sell
a labor item. The two differences between Non-Inventory items an Labor items are that
you can optionally have the system ask you for the technician code that did the work so
that you can print reports showing who did what work. As well, the system will optionally
ask for a comment to explain what was done so that the description of the service work
can be printed on the invoice.

Note too that you can optionally keep track of how much time was spent and how much
time was billed for on a per job basis. At the end of the month, you can then print
technician productivity reports to compare total time spent compared to billable hours. In
the automotive industry, some mechanics can do the work faster than is what is billed
because the billing is based on industry standards.

Consignment Items
Consignments can be used to keep track of inventory that you don't own, but at the time
you sell it, you must pay for it. You'll be able to generate several reports, including a list
of inventory that is on consignment but not sold and a list of inventory sold on
consignment, but not yet paid for.

Floor Plan Inventory

Floor planning is very similar to consignment, except that you take possession and own
the inventory when you receive it, but you don't have to pay for it until it's sold, or until it's
been in the store for a negotiated period of time. However, you do own the inventory and
do have to pay for it sometime.

Some floor planning companies want the ability to check the inventory serial number by
serial number for the larger items, and others may just want to count the number of each
model number on hand. Regardless, Windward System Five can handle it.

On the accounts payable side, you will be able to keep track of who you owe the money
too (Floor Planning Company) and who you actually bought the inventory from (Supplier)
and generate proper histories of each.

Tire Inventory
Windward System Five has the ability to sort and categorize tires by their size, aspect
ratio and rim size. In addition, you will also be able to search for the tires by just entering
in some of the search criteria and having the system bring up a window of all matches.

When the list brings up a list of tires that can all fit the vehicle, the system can sort the
list to show the items with the highest quantity in stock at the top of the list and the items
that are out of stock at the bottom of the list. This will help you sell what you actually
have to sell instead of creating special orders.

Product Inventory
Products are items such as vehicles that you might service or repair after selling them to
the customer. That is, they are an item in the database that can be sold, and when sold,
are automatically added to the customer's list of products that can be worked on.

Examples are vehicles, trucks, recreational vehicles, fridges, air conditioners, and
chainsaws. The system will let you keep additional information on these products, such
as make, model, year, and other comments, and will also be able to list all the work or
repairs performed between two dates.

Windward System Five can also track whole goods such as recreational vehicles by
keeping track of the cost of the item before the sale, add ones and pre-delivery
inspection items. In addition, the system can generate a "wash out" report one level
deep to show the costs and income associated with the trade in.

Serialized Inventory
Those items that need to be tracked by their serial numbers can be marked as serialized
inventory. For example, fridges, stoves, computers, and chainsaws might all be
serialized. Note that if you plan on servicing these items in the future and keeping track
of all work you do on them, they should be entered as products instead of serial
numbers.

TYPES OF INVENTORY
Several different types of inventories are conducted, depending upon the type of
materiel involved and type of information needed. Bulkhead-to-Bulkhead Inventory of a
specific storeroom is taken when a random sampling inventory of that storeroom
fails to meet the inventory accuracy rate of 90 percent when directed as a result of
a A bulkhead-to-bulkhead inventory is a physical count of all stock materiel within
the ship or within a specific storeroom. A bulkhead-to-bulkhead inventory supply
management inspection (SMI). It is also taken when directed by the commanding
officer or when circumstances clearly indicate that it is essential to effective
inventory control.

Specific Commodity Inventory

The specific commodity inventory is a physical count of all items under the same
cognizance symbol, FSC, or that support the same operational function, such
as- boat spares, electron tubes, boiler tubes, or fire brick. This inventory is taken
under the same conditions as a bulkhead- to-bulkhead inventory; however, prior
knowledge of specific stock numbers and item location is required to conduct a
specific commodity inventory

Special Material Inventory

A special materiel inventory requires the physical count of all items that, because
of their physical characteristics, costs, mission essentiality, and criticality, specifically
designated for separate identification and inventory control. Special materiel
inventories include, but are not limited to, stocked items designated as classified or
hazardous. Special materiel inventories also include controlled equipage and
presentation silver

Advantages of Inventory Control

The inventory Control gives you the ability to handle your inventory your way. As one of
the most flexible and comprehensive modules in the Advantage, you can choose the
level of control that best suits your specific business needs. Your inventory can be
valued on a LIFO, FIFO or Average cost basis. You can choose to use parts explosions,
serialized inventory, parts allocations, vendors, warehouses and an audit trail. The
system can also track the quantity sold for each item for the last 12 months and, using
this data, provides a sales analysis report to help you better manage your stock.
Financing is aided by the serialized aged report that shows which serialized items have
been in your inventory the longest and how much you have outstanding. Pricing can be
standardized by rounding to a given factor or by being set to a specific suffix. With the
Below Minimum report, reordering stock is automatic and accurate. Inventory Control is
a stand–alone module that can also be integrated with Purchase Orders, Point of Sale,
Billing/Order Entry, Job Cost, Time Billing and Quick Sale.
21–character alphanumeric item number field
Lookup on item number, item description (21 characters) and group (15 character) fields
Tracks serialized items
Allows for superseded, preceded and substitute items
Unlimited additional descriptions can be added to items
Handles markup and gross profit cost basis
Can automatically update item pricing and discounts
Handles core pricing
Produces a re–order report based on minimum stock quantities
Tracks unlimited vendors per item and recommends a ‘best’ vendor
Tracks allocations including explosion allocations
Up to 254 discounts per item, including quantity break discounts
Unit conversions can be defined for each item for both buying and selling quantities
Allows for warehouse transfers and other quantity adjustments
Set up special sale dates for item discounting

Produces physical inventory forms

Imports physical inventory and received quantities from data collected with hand-held
computers
Provides up to 255 levels of parts explosion to allow you to identify all components of
your assembled stock
Automatically updates cost and price on explosion items based on subassembly
changes
· Reports the best and worst selling items in each of eight different categories
· Tracks items by location or quantity in multiple warehouses
· Can automatically generate items based on a template item
· Utilizes Rapid Entry to facilitate entry of item data

Disadvantages of inventory control

• conveyor needs to be slightly declined for carton movement (one way);
• may require addition of powered booster units in some applications;
• cannot be used for inter-floor movement except for down travel;
• goods need to be manually pushed when horizontal;
• no positive control over moving carton;
• produces line pressure when accumulating.
. Require efficiency of land

We propose a method for valuing new, recoverable, and recovered assemblies

(products, components, parts, etc.) in production systems with reverse logistics. Values
of assemblies influence their opportunity holding cost rates and are hence essential for
comparing inventory strategies in average cost models. We argue that the proposed
method is 'correct' from a discounted cash flow (DCF) point of view. We refer to some
previous results on valuing assemblies in systems without disassembly of returned
products that seem to confirm this. Furthermore, we test the method for a specific
example with disassembly of returned products. The simulation results indicate that the
method indeed leads to (nearly) DCF optimal inventory strategies.

Packaging
In siemens, with its large product volumes, low margins and fierce competition, is
constantly seeking efficiency improvements in its supply chain. The grocery retail
industry uses an immense amount of packaging and is directly affected by packaging
logistics activities. There is, therefore, a potential for efficiency improvements in the
grocery retail supply chain through the integration and development of new systems of
packaging and logistics. Packaging handling is identified as one of the main activities
that has a strong impact on the overall logistical cost of chain. This research article
investigates packaging handling evaluation methods and discusses how these are
employed to benefit the industry from the industry, have been used to evaluate
packaging and logistics activities. This work, together with a literature review, was used
to identify the need for evaluative methods and the present availability of such methods.
The results indicated a lack of sufficient and usable packaging handling evaluation
methods in today's grocery and packaging industry especially from a logistical point of
view. The paper also highlights the lack of systematization among the few methods used
and discusses how these can be used to build a systematic and multifunctional
evaluation model in order to utilize the information from different studies to build a
knowledge base for the future

Vendor-Managed Inventory
Siemens is a leading global manufacturer, focused on delivering operational services to
high-tech companies, needed to take advantage of vendor-managed inventory (VMI)
postponement and optimal fulfillment solutions to stay competitive in its low-margin
manufacturing marketplace. Its objective was to find ways to reduce inventory
redundancy, improve customer responsiveness by reduced cycle times and simplify
supplier management and procurement administration. The manufacturer also needed to
augment existing infrastructure, while reducing investments in additional personnel,
facilities and systems Vendor Managed Inventory (VMI)

Vendor Managed Inventory supports the efficient flow of materials into the market.
Working closely with you and your suppliers, we automate the forecast management
process with Web-based software that enables the flow of supply to more accurately
mirror store – and even shelf-level – demand.
Move your inventory in and out of our distribution centers and manage demand planning.
We can store and stage product for replenishment at our often freeing or limited store
rooms. We provide forecast visibility, comparing actual demand against DC-on-hand,
store-on-hand and in-transit inventory. When store or inventory falls below pre-
determined levels, auto alerts are sent to you and your supplier to prompt replenishment.

Advanced Shipping Notices (ASNs) provide detail on in-transit inventory from suppliers
so you have visibility to inventory deeper into the supply chain. This allows for confident
commitment to orders based on this inbound flow.
Postpone inventory ownership until shipment to your site. Once your inventory is moved
to the we work with your suppliers to transition inventory ownership until demand occurs.
Perform value-added services, allowing you to more efficiently manage the flow of goods
into manufacturing or directly to market.

Vendor Managed Inventory (VMI)

Vendor Managed Inventory by Kuehne + Nagel supports the efficient flow of materials
into the market. Working closely with you and your suppliers, we automate the forecast
management process with Web-based software that enables the flow of supply to more
accurately mirror store – and even shelf-level – demand.
Move your inventory in and out of our distribution centers and manage demand planning
with Web-based applications. We can store and stage product for replenishment at our
DCs, often freeing up your own DC space or limited store rooms. We provide forecast
visibility, comparing actual demand against DC-on-hand, store-on-hand and in-transit
inventory. When store or DC inventory falls below pre-determined levels, auto alerts are
sent to you and your supplier to prompt replenishment.

Advanced Shipping Notices (ASNs) provide detail on in-transit inventory from suppliers
so you have visibility to inventory deeper into the supply chain. This allows for confident
commitment to orders based on this inbound flow.
Postpone inventory ownership until shipment to your site. Once your inventory is moved
to the Kuehne + Nagel DC, we work with your suppliers to transition inventory ownership
until demand occurs.

Perform value-added services, allowing you to more efficiently manage the flow of goods
into manufacturing or directly to market.