SCM & INVENTORY CONTROL

INVENTORY
• Inventory is the raw materials, components and finished goods a
company sells or uses in production
 ABC
• ABC analysis is an inventory management technique that determines the
value of inventory items based on their importance to the business.
• ABC ranks items on demand, cost and risk data, and inventory mangers
group items into classes based on those criteria.
• This helps business leaders understand which products or services are
most critical to the financial success of their organization.
• The most important stock keeping units, based on either sales volume or
profitability, are “Class A” items, the next-most important are Class B and
the least important are Class C.
• The ABC analysis groups inventory into three classes.
• Class A contains 75 percent of the total value of inventory.
• Class B contains 20 percent of the total value of inventory
• class C contains 5 percent of the total value of inventory.
• The ABC analysis gives a simple and quick review of the inventory.
• The ABC analysis also gives a clear view and meaning of the whole
assortment of products in the inventory, thereby making it an efficient
method to control inventory investment.
• The ABC analysis makes it easy for an inventory manager to devote
resources to only those places where it will have the biggest positive
feedback.
• Nike, Inc is an American manufacturer of shoes. In their ABC analysis,
leather forms class A, sole forms class B while shoe lace forms class C.
• ABC analysis is a vital method for management of inventory.
• A store has 2000 items of consumption and a monthly consumption
of Rs. 10,00,000. 160 items will have a consumption of 750,000. 500
items will account for Rs. 200,000 and 1340 items consumption
material worth Rs. 50,000 only.

•A 160 7,50,000
•B 500 2,00,000
•C 1340 50,000
• Susan, who is engaged in the retail sale of handbags. Last year she
decided to expand her product offering by including more varieties of
sweaters in her inventory.
• Consequently, she purchased 30 different types of handbags instead
of just 10. However, later she realized the demand for the products is
seasonal, and she had invested a lot.
• Hence, she decided to implement the ABC analysis in her business
model to streamline the inventory.
• Category A: The handbags that are either highly in demand,
generate the maximum revenue or are trending in the current
season were classified under this category of items.
• Category B: The handbags that are essential to the company,
but not as much as those in category A. The demand for these
handbags is probably slightly seasonal and not across the
entire year. So, during the season, the sales of these items are
expected to shoot up. Hence, this set of handbags can’t be
neglected, hence category B.
• Category C: In this category, all those handbags that are not of
high value to the company are included. The possible reasons
may be a color combination, pattern, etc. Hence, these
handbags are placed in category C
Advantage
• Strict control
• Manage investment in inventory
• Reduce storage cost
Limitations
• A large number of items keep changing their category (category A to B
or B to C and vice versa) every quarter, making the analysis unstable
and complicated.
• ABC analysis fails to take cognizance of basic demand patterns, such
as seasonality, novelty effect, etc.·
• The choice of parameters used for ABC analysis is arbitrary.
VED
• VED analysis is an inventory management technique that classifies
inventory based on its functional importance.
• It categorizes stock under three heads based on its importance and
necessity for an organization for production or any of its other
activities.
• VED analysis stands f or Vital, Essential, and Desirable.
V-Vital category

• As the name suggests, the category “Vital” includes inventory, which

is necessary for production or any other process in an organization.
The shortage of items under this category can severely hamper or
disrupt the proper functioning of operations. Hence, continuous
checking, evaluation, and replenishment happen for such stocks. If
any of such inventories are unavailable, the entire production chain
may stop. Also, a missing essential component may be of need at the
time of a breakdown. Therefore, the order for such inventory should
be beforehand. Proper checks should be put in place by the
management to ensure the continuous availability of items under the
“vital” category.
E- Essential category

• The essential category includes inventory, which is next to being vital.

These, too, are very important for any organization because they may
lead to a stoppage of production or hamper some other process. But
the loss due to their unavailability may be temporary, or it might be
possible to repair the stock item or part.
• The management should also ensure optimum availability and
maintenance of inventory under the “Essential” category. The
unavailability of inventory under this category should not cause any
stoppage or delays.
D- Desirable category
• The desirable category of inventory is the least important among the
three, and their unavailability may result in minor stoppages in
production or other processes. Moreover, the easy replenishment of
such shortages is possible in a short duration of time.
FSN
• FSN Analysis is an inventory management technique that is based on
the rate of consumption of spares and goods in an organization.
• This analysis divides the inventory into three categories based on
their speed or rate of utilization, their consumption rate, and average
stay.
• FSN stands for:
• F-Fast-moving,
• S-Slow-moving, and
• N- Non-moving.
Fast-moving inventory
• Fast-moving inventory comprises inventory that moves in and out of
stock fastest and most often.
• Therefore these goods have the highest replenishment rate.
• Items in this category generally comprise less than 20% of the total
inventory.
Slow-moving inventory
• Items in this category move slower, so their replenishment is also
slower.
• This category comprises around 35% of the total inventory in an
organization.
Non-moving inventory
• The last category of this analysis is the least moving portion of the
inventory and also includes the dead stock.
• Replenishment of such inventory may or may not occur after
utilization.
• This category can go as high as 55%-60% of the total inventory in
organizations.
MUSIC -3D Analysis

• MUSIC-3D stands for Multi-Unit Selective Inventory Control – Three

Dimensional approach.
• It is an integrated inventory methodology, wherein three inventory
control techniques such as ABC, FSN and SDE analysis are combined.
• In this approach, annual consumption, rate of consumption and lead
time are considered.
• MUSIC 3D is a method to classify item products of the company using
three dimensional approach.
• there are several types of item classifications that need to be
considered in the MUSIC 3D approach
EOQ
Economic Order Quantity (EOQ)
• EOQ is a technique for inventory management that minimizes
ordering and holding costs for the year.
• EOQ is a crucial accounting formula that determines when the
combination of inventory carrying cost, order and costs are the least.
• The result obtained from the formula gives the most effective
quantity to order.
EX:
• Find out the economic ordering quantity (EOQ) from the following
particulars:
• Annual usage = 6000 units
• Cost of material per unit= Rs. 20
• Cost of placing and receiving one order = Rs. 60
• Annual carrying cost of one unit = 10% of inventory value
Ans:
• EOQ = 2CO
I

• C = Annual usage of material =6000 units

• O = cost of placing one order = 60
• I = Annual carrying cost of one unit = ( 20 * 10 ) / 100 = 2
• EOQ = 2*6000*60 / 2 = 600 units
EX:
• Find out the economic ordering quantity (EOQ) from the following
particulars:
• Annual usage = 120,000
• Cost of placing and receiving one order = Rs. 50
• Cost of material per unit= Rs. 120
• Annual carrying cost of one unit = 10% of inventory value
Ans:
• EOQ = 2CO
• I

• C = Annual usage of material =Rs. 1,20,000

• O = cost of placing one order = 50
• I = Annual carrying cost of one unit = 120*10/100 =12
• EOQ = 2*120,000*60 / 12= 1000
• An auto parts supplier sells Hardy-brand batteries to car dealers and
auto mechanics. The annual demand is approximately 1,200 batteries.
The supplier pays 28 for each battery and estimates that the annual
holding cost is 30 percent of the battery’s value. It costs
approximately 20 to place an order (managerial and clerical costs).
The supplier currently orders 100 batteries per month.
• (a) Determine the ordering, holding, and total inventory costs for the
current order quantity.
• (b) Determine the economic order quantity (EOQ).
• (c) How many orders will be placed per year using the EOQ?
• (d) Determine the ordering, holding, and total inventory costs for the
EOQ
• (e) How has ordering cost changed? Holding cost? Total inventory
cost?
• Annual demand: C = 1200 batteries per year
• Item cost: = Rs. 28 per battery
• Holding cost: I = Annual Holding Cost x Item Cost = 30% (28) = 8.40
per battery per year
• Order cost: O = 20 per order
• Current order quantity: Q = 100 batteries
• a) The current ordering = (C / Q) * O = (1200/100 ) *20 = 240
• holding costs = (Q / 2 ) * I = (100/2) 8.40 = 420
• Total inventory cost = 240 +420 = 660

• b) EOQ= 2 * 1200*20
• 8.40

• 75.6 = 76
• C) How many orders will be placed per year using the EOQ?

• D / EOQ = 1200/76 = 15.8 = 16 orders

• (d) Determine the ordering, holding, and total inventory costs for the
EOQ.

• Ordering cost = (Annual Requirement/ EOQ) OC

• = 1200/76)*20 = 315.79
• Holding cost = (EOQ/2) * holding cost = (76/2)*8.40 = 319.20

• Total cost = ordering cost + holding cost = 315.79 + 319.20 = 634.99

• (e) How has ordering cost changed? Holding cost? Total inventory
cost?

• Ordering cost: For 100 units =240

• 76 units =315.79

• Holding cost: 420

• 76 units = 319.99

• Total cost = 660

• 76 units = 634.99

• Profit = 660- 634.99 = 25.01

• An auto parts supplier sells ‘safe-power’ brand batteries to car dealers and
auto mechanics. The annual demand is approximately 1,200 batteries. The
supplier pays Rs. 25 for each battery and estimates that the annual holding
cost is 30 percent of the battery’s value. It costs approximately Rs. 2000 to
place an order (managerial and clerical costs). The supplier currently orders
100 batteries per month.
• (a) Determine the annual ordering, holding, and total inventory costs for
the current order quantity.
• (b) Find the economic order quantity
• (c) How many orders will be placed per year using the EOQ?
• (d) Determine the ordering, holding, and total inventory costs for the EOQ.
• (e) How has ordering cost changed? Holding cost? Total inventory cost?
• The annual demand is approximately 2400 units. The supplier pays
Rs. 25 for each and estimates that the annual holding cost is 20
percent of the unit value. It costs approximately Rs. 30 to place an
order (managerial and clerical costs). The supplier currently orders
200 units per month.
• (a) Determine the annual ordering, holding, and total inventory costs
for the current order quantity.
• (b) Find the economic order quantity
• (c) How many orders will be placed per year using the EOQ?
• (d) Determine the ordering, holding, and total inventory costs for the
EOQ.
• (e) How has ordering cost changed? Holding cost? Total inventory
cost?
• ABC ltd buys its annual requirement of 36,000units in 6 instalments.
Each unit costs Re. 1 and the ordering cost is Rs. 25. The inventory
carrying cost is estimated at 20% of unit value. Find the total annual
cost of the existing inventory policy. How much money can be saved
by giving orders for EOQ?
Ordering cost for 6 orders @ 25 per order 6*25 = 150

Carrying cost @ 20% = (36000/6 * 1 *