INVENTORYcONTROL 317

11.1 Introduction
Inventory means all the materials, parts, supplies, expense tools
finished products recorded o n the books by a n
11
and in-process or
kept in its stocks, warehouses or plant for some period
CHAPTER organisation and
time.
Inventory is an essential part of an organisation. Every business/
however big or small has to maintain some
manutacturing organisation
inventory. There are many definitions of inventory in a system.
INVENTORY CONTROL explaining various aspects of inventory analysis. Some of these are:
6) Inventories are the piles of raw materials and finished goods
in the warehouse.
ii) All the material, parts and in-process or finished products
recorded on the books by an organisation and kept in its stores,
and plants inventories.
lnventory Control is
the technuque of maintauning stock-keep1ng ttems (item warehouses are
known as
that is completely specified as to size, shape etc) at the desired level, whether (i) Inventory is a list of names, quantities and/or monetary values
they be raw-materials, goods un process or finished products. of all
or any group of items.
CONTENTS
(iv) Inventory is a detailed list of those movable items which are
11.1. Introduction
11.2. Objects of inventory control. necessary to manufacture product and to maintain the equipment and
a
11.3.
11.4.
Importance of inventory control.
Relevant costs in inventory system.
machinery in good working order. The quantity and value of every item
is also mentioned in the list.
11.5. Methods of inventory control. 11.1.1. Characteristic of
11.6. Economic lot size. inventory
11.7. Consideration of Re-order Point.
11.8. ABC Analysis From all these definitions it is clear that inventory is stock of
material, semi-finished and finished goods maintained by an
raw
Questions XI
organisation.
The concept of inventory and its relation with
performance of any
system can be very well explained by the following statements:
i) Inventories serves as
cushions to absorb shocks. An
organisation has to deal with several customers and vendors
who are
not necessarily close
to there works.
But due to their unpredictable
behaviour, there are always tluctuations in demand or supply of the
items which disturbs the schedule of an
these fluctuations and helps in
organisation. Inventories absorbs
stable
maintaining undisturbed production and
employment rates 1.e.
we
from the customer and the vendor
decouple the manufacturing operation
successfully by cushions of stocks.
(ii) Inventory for any
organisation is a
necessary evil:
Inventories require valuable space and consumes taxation and
insurance charges. This leads to considerableinvestment and causes
considerable opportunity loss. This
remains idle till
capital invested in inventories
items present in stocks are not used.On the other hand
no organisation can work witthout
maintaining some inventory 1.e. 1t 15
 318 PRODUCTION OPERATION MANAGEMENT
a necessity. It is observed that costs of not having inventorics are usually
IwVENTORY cONTROLatue 319
than the costs of having them. Thus inventories are necessary increase inventory in the form of
bufler and anticipation stock is elear,
greater the ability of the
organisation to commit the necessary funds
evil may be
(ii) Inventories are the result of many interrelated decisions and
severely taxed. These are also known as Safety Stocks.
the direct
(iv) Decoupling Inventories: The existence of
policies within an organisation: The behaviour of inventories is
result of diverse policies and decisions within a company. Marketing, linkage points in a production procese makes inventories t
at major
activities on either eide of the point relatively possible.to earry an
production, finance and decisions directly influence the level
purchasing (v)
independent of each other.
nventory can also be elaesified aceording to the
of inventory.
Stocks stocked nature of items
namely raw materials; in-proeess inventories, finished
(iv) Inventory provides production economics: brings inventories and spare part inventories. goods
economy in purchase of various inputs due to discounts on bulk
purchase. This also minimises ordering, transportation and other costs.
They also reduces the number of setups 11.2. Inventory Controt
Inventory control keeps track of inventories. It is observed that
11.1.2. Importance of lInventory too much, "too little or badly balanced inventories are all to
be avoided
The importance of inventory to an organisation can be listed as: because they cost too much on
many counts. Too much leads to undue
(a) provides and maintains good customer service. carrying charges in the form of taxes, insurance,
and depreciation and undue proportion of totalstorage,
obsolescence
(b) enables smooth flow of
goods through the production process. working capital is
(c) provides protection against the uncertainties of demand and invested in them. "Too little
implies of too frequent ordering, loss of
quantity discounts and higher
(d)
Supply.
various production operations can be performed economically low' in view of likely
transportation charges. It may
shortages future future increase in
in or
be too
and c independently. It can allow temporary variations in shortfall in prices or
output. Again due to dynamie and unpredictable
environmental situation "Too little" at
operating rates.: become "Too much" in a
one time can be very quickly
(e) ensures a reasonable utilisation of equipment and labour.
(f)with purchases in bulk discount can be availed. purchased at
subsequent period. Similarly inventoryy
higher prices remaining unused im stoek or uncancelable
order represent loss to the organisation. The balance between 'too much
and too
11.1.3. Inventory Classification low can be done by means of effective
inventory control. Some
of the definitions
All inventories may be described performing
as of
one or more
()
of inventory control are:
transit. Cycle, buffer, seasonal and decoupling function. The following Inventory control is a system of
ordering based on the
is maintenance of the stock in a store
the classification of inventories according to functions. stock level.
using a re-order rule based on the
i) Transit Inventories: These are primarily pipeline inventories
and their existence arises becau5e of the need to transport inventories (ii) Inventory control is the technique of maintaining the size of
from from one point to another larger the distance of supply source, the inventory at some desired level keeping in view the best
economie
larger is the transit inventory. Work in process transit inventories are interests of an organisation.
(i) Inventory control is concerned
determined by process design and plant layout. with various items stocked at
(1) Cycle inventories: These exist because of managements predetermined level or within some safe limits
attemptto provide Economie Order Quantity. Here inventories tend to iv) Inventory control is that part of a produetion program which
accumulate at various points in the system. specifies the material requirements and schedules the order of wwork to
e done.
ii Buffer Inventories: In any organisation a result of as
uncertainties of ,the demand and supply of units/price changes, some y) Stock control is often said to be an
inventory is to be compromise balancing the
exercise in the art of
maintained. The size of bufffer inventory may be o conflicting needs of
significant financial consequence to a firm. These can be reduced by (a) Economical production
reducing uncertainties of demand and supply and price variations. In (b) Quick delivery and
periods of shortages and rapidly rising prices, although the need to (c) Low inventory value.
 PRODUCTION OPERATION MANAGEMENT
320
Here the conflicting influences must be expressed in some common
INVENTORY CONTROL 321
(a) Capital invested in inventories does not exceed the funds
units so that they can be weighed against cach other. Generally thís
available for the purpose.
unit is taken to be money.
(vi) Inventory control means keeping a track of inventories, so (b) The amount invested in inventory is correctly recorded in
accounts book.
This is
that items
(a)
are available when they are
needed.
Purchasing items at economic price at a proper time and in
achieved by et (c) Protection against theft is ensured.
(vi) Control of Stock Distribution: Stock is to be
sufficient quantity. analysis done
(b) Provision of suitable and secured storage location with sure
that it in balance and that obsolescence
is and depreciation
kept at the minimum possible level. Thus inventory managers try to
are
sufficient: space.
(cInventory identification system.
determine the appropriate size of the inventory keeping in view the
d Upto date and accurate record keeping by a responsible staff interest of the production department as well as of the outside customer
(e Appropriate requisition procedures. and side by side holding down the costs.
Inventory is maintained due to to following reasons:
sales
11.2.1. Objectives of Inventory Control ( 1 ) T o carry
reserves in order prevent stock outs o r cost
ie., never to run out of any thing.
Though inventory control may not be treated as executive
function but it is one of the most important functions in an enterprise.
an
(ii) Never having much of anything on hand.
To economies in purehase by buying items beyond the
The
tollowing the
are
main objectives of inventory control: ii)
desired amount.
gain
Protection against fluctuations in demand: The demand
torecast of any product can never be exact or accurate. There is likely to (iv) To maintain reserves in stocks for the period of replenishment.
be some difference that too of varying Thus a well formulated inventory policy of an enterprise in likely
magnitude, in predicted demand
and actual demand of the product. If sufficient items are available in to ensure smooth and efficient running of production operations
the inventory, then 1 the fluctuations in demand can be providing optimum utilisation of man, machine and material.
easily adjusted The decision regarding the appropriate size of the inventory is of
and
the organisation can protect itself
from untoreseen economic losses.
decision cannot be made arbitrarily. An
(ii) Better u s e of men,
machines -and planning can In paramount significance. This
manufacturing system producing for stock the productionmaterial: unreasonably big or small inventory is uneconomical to any organisation.
be done with an object to have The decision regarding size of the inventory should be based on somne
optimum use of resources
namely, men,
machines and materials. Here the resources can
slack period of demand and there will be no need of
remain engaged during sound principles and techniques. This is provided by techniques
inventory contro.
of
generating
additional resources in the boom periods as then the
in slack
inventory enlarged
period
utilisation
can to utilised.
of resources
This well lead to uniform and
available with the
proper 11.3. Factors affectingInventory Control Policy
(iii)
enterprise. Theinventory poliey of an organisation has an impact on the whole
Protection against fluctuations in output:
important function of inventory is to reduce the gap betweenAnother
system. There are a number of factors, which can affect the inventory
actual decisions. These can be broadly divided in the following categories:
and scheduled production. In practice, production schedule cannot be (A). Characteristics of the manufacturing system:
adhered due to a number of reasons e.g. sudden breakdown in
raw materials, machines, supply of
labour strikes etc. In such cases the The nature of the productionhaveprocess, the produet design,
in actual
production and the planned output can be bridged difference
by
production planning
poliey. Some of
and plant layout
these
significant affect on inventory
inventories. factors are:
(iv) For Production economies: The (i) Degree of specialisation and differentiation of the product at
production runs can be
planned in economic lot sizes when there is a policy to produce for stocks.
viarious stages: 'The degree of changes in the nature of the product from
The concept raw material to final product at various stages of transformation viz
of economic lot size is explained in section six of this chapter.
(v) Control of Stock Volume:
with the size and the value of Inventory control is concerned final assembly, assembly and packaging determines the nature of
inventory control operation eg. if nature of produet remains more or
goods preent in stock. It is responsible to
forecast the value of the stockx at
regular intervals, so that Iess same at various stages of production then economies can be achieved
by keeping the right balance of stocks of semifinished product
 322 PRODUCTION OPERATION MANAGEMENT
INVENTORY cONTROL 323
i Process Capability and flexibility: Process capability is
characterised by processing time of various operations e.g. the (v) The accuracy, frequency and detail of demand forecasts:
replenishment lead-time
(length of delay in execution after issuance of Fluctuation stock exists when forecasts are not exact. The responsibility
a replenishment order) directly influences the size of inventory. of forecast errors for inventory needs should be clearly recognised."
Similarly how rapidly and economically a system can adjust its
(vi) Protection against breakdown or other interruptions in
produetion rate, shift production facilities from one
operation to another production.
operation and change from (C) Organisational Factors: There are certain factors, which
the
equipment one product to
another determines
magnitude of lexibility. Inventory policy should aim towards are related to the policies, traditions and environment of any enterprise.
balancing the production flexibility, capability, inventorylevels and Some of these are:
customer service needs.
(ii) Production i) Labour relation policies of the organisation.
Capacity and Storage facility: The
capacity of (i) Amount of capital available for stock.
production
afects
system as well as the nature of storage facilities considerably ii) Rate of return on capital available if invested elsewhere.
the
inventory
oil production in an oil
of an policy
e.g. organisation
tor
capacity heating
(D) Other factors: These are related to the overall business
refinery is governed in part by its thorough-put environment of the region viz.
capacity and in part by its distribution system. (1) Inflation
Similarly if tor any
produet the cost of
storage fncility is high then it sets a limit on the ii) Strike situation in communication facilities.
storage capacity (ii) Wars or some other natural calamities like famines, floods
(iv) Quality requirements. shelf-life and obsolescence risks.
(vThe nature of (iv) Differences between input and output.
the number of
the produetion system, It is characterised by
manufacturing stages and the interrelutionship betwoen
various production operations e.g. in product-line system 11.3.1. Measures of Inventory Performance
control is Impler than in Job-type system. Similarly when inventory
many operational stager then the
there are Every inventory is link chain
a in of inventories stretching from
Nmooth adjustment of
early
inventory control aystem must provide
operating stag(e8 and
thepoint of raw-material extraction to the point
single index serves to describe the performance
of
of an consumption.
No
Inventory. Three
fuctuations In finished stock. inventories to
Interrelated factors must be considered in rating the performance,
B.
Amount of Protection ugainst
Shortages: There is always namely
Variation in demand and
supply of the product. The (i) The size of inventory in money or unit amounts, averaged over
Nuch
unpredictable varintion can be done by meansprotection against the period.
The furtors
responsible for such variations are of butfer stocks. (ii) Cost of
(i)
replenishment i.e. the total re-order cost for purchased
Changes in 8ize und frequeney of orders: the amount of goods or setup costs for manufactured goods over the period.a
product old in a
large number of orders of small size (ii) The degree to which it
with leas inventory. cun be operated provides stock when demanded i.e.
service level-average stock available in
ii) money/unit terms expressed as
in demand
Unpredictability
of
of Sales: If there ure too many
fluctuations
a fraction of amount demanded.
a
produet then
these can be handled
large capncity of only by flexible and
ii) Physicalinventury ojerations. 11.3.2. Limitatlons of Inventory
and economie xtructure of () Eficient
Control
inventory control methods
Longer the channel of distribution the more is the distribution pattern: eliminate business risk.
can reduce but cannot
Ficld inventories inventory
baseally imnprove service to retailers requirement. ii) the
of the by removing some objectives of better sales
through improved service to
burden of
keepng stocks. customer; reduction in inventories to
(iv) Cotas uNsoCiated with failure reducing cost reduce size of investment and
heuvy penalty on any delay
to meet demand: When there
is of production by smoother production operations are
should bc large.
in fulfillment of any order then conflicting with cach other.
inventory (iii) the control of inventories is
complex
functions it performs. It should be viewed because of the many
as a shared
responsibility.
 325
PRODUCTION OPERATION MANAGEMENT INVENTORY cONTROL they
24 in subject to legal restraint;
Quantity discounts are most cases in cost of manufacture
11.4. Relevant Costs in Inventory-System to retlect-demonstrable diiferences power.
are presumedrather
resides in the identification of
or handling than the purchasers economic unit cost of
The heart of inventory analysis item produced the average per
is observed that there many factors whose costs Similarly larger the due to reduction in the cost of purchased raw-
relevant costs. It are
production will decrease increase
inventory directly either advocating to decrease the is an encouragement to
alfect the size of to this property there
size of inventory or sugkesting an increase in the inventory size e-g. the material. Due goods.
tor raw-materalshas tofnished
both and
with of
the
size of the inventory incur expenditure
risk of the manufacturer for loosing sales decreases
inventory but on the other hand expenditure on storage will increase.
size the (iii) Procurement
costs: An organisation are
related to typing
on
thepreparation purchase
ot order. These cDsts
the system one and screening the quotations,
Thus for an
effective inventory analysis and control of associated and paper work to an
place order, inviting
a clear picture about the behaviour of costs with date by sending reminders, contacting
should have making efforts for supply on due
different factors.
the supplier and lastly on inspection
of the after receiving the
goods
These costs are explained below fixed costs viz salaries of the permanent
supply. These costs c a n be ()
(A) Costs that encourage to have larger Inventories: departments. This expenditure upto
staff of purchase and inspection variable costs
() Set up costs o r In a
orderingcosts: process production after of the size of lots ordered, i )
each run the organisation has to incur in
Some stage is independent It is fact
production expenditure starting viz. processing an order and dispatching o vendor.
it the
of
a
the next production run viz. process set-up costs in adjusting machine
the lots purchasedinsmaller
that larger the size of will be the number
tools or machine, in changing over an assembly line to a new item etc. With the number of ordert fixed
decreasing
This expenditure is independent of the size of the production and is
orders
and inspection.
cost remaining constant,
known as set- up cost. This cost can be reduced by planning with fewer reduce average annual cost on
the variable cost will decrease. This will
setups of large size production increase in the size of
run leading to an
procurement.
the inventory.
iv) Depreciation Costs: In every organisation the value of the
Similarly ordering costs include order reading, pricing, shop order
production scheduling and expediting ete. If stocks run out or there is capital invested decreases with time.
Thas
there s a tendency among
an imminent danger of running out, special steps may be taken to hurry organisations to reduce its capital investment on machines and other
The depreciation costs are thus reduced. Naturally the
equipment.
up the delivery of replenishment stocks. This costs
of
money i.e. Salaries desired amount of production with reduced can be
number of machines
expeditors, transport costs, telephone bills ete. machines in slack period, thus inereasing the
These discounts
obtained by running the
are conventionally
in
quoted terms of
price breaks, size of inventory.
volume limits within which fixed unit price apply or in terms of discount
schedule showing percentage allowance granted on orders or quantities (v) Loss due to non-fulfillment of demand
and delay in
If the organisation is not able to meet some demand
due
of given amounts or over. These can also be prescribed in terms of free production:
production then this wil adversely
goods, prepaid shipment, deferred payment ete. offered on quantity tosmaller inventory or delay in
the
purchased. These allowances are usually converted to an equivalent affect the profits of enterprnse. then there
discount rate or amount 1s a Sometimes, if a company is unable to comply some ordder
on a single order of 24000 units, the
eg. there discount of 5% on the
cost price is some penalty to be paid. This may also imply loss of goodwill. The
supplier has offered 1 % commission risk of loosing orders count can be minimised by increasing the
on this
in price if the company buys only two times a year or the discount
Similarly procduction delays due to
finished
goods.
schedule form can be 812e ot
for
inventory of raw-materials' or spare parts for machines can be
non-availability
Purchaseprice/kg Re. 1 for order below 2000 kgs
=
avoided by keeping suficient stocks of these items in inventery-4his
Rs. 0.95 for order of 2000
=
kg reduce the losses due to unexpected delay in replenishment
of
Rs. 0.80 for single order.
=
can also
The rate of discount generally increases with increase in the size the inventory.
of (vi) Direct material and labour costs: Itis observed that items
orders and results a reduction in average annual cost of items
trial of the equipment.
purchased. are likely to be scrapped during each setup or
This results in increased costs on material and labour. If the: size of lots
 326
PRODUCTION OPERATION MANAGEMENT INVENTORYCONTROL 327
n each production run is increased then there will be fewor setups and will (a) technologically
oss
on materials ii) The risk that a particular item in become
Costs
and labour costs due to serapping will be reduced.
Incurred on overtime, hiring,
obsolete
go out of style. Their value stock decay with life. AnD
(vii) training and lay. to obsolescence has been used on occasion
of: If inventory is not of sufticient size, then the exponential decay of value due
organisation may have in such situations.
to employ additional stafi, pay overtime cte. to meet the requirement, The product may become out of date
viz pharmaceutical
Overtime also reduces the efficiency
of workers. In such bor ii)
the cases
produets.
staff in boom periods and are subject
OrEni8at0n staff have
rentrench the may to employ
in slack period.
more
iv) Pilferage, breakage, evaporation
ete.
Some goods
o r accidental losses etc.
Both to theft and misappropriation, breakage
situations may result in employing untrained stafi leading to Valuables are m o r e tempting to be stolen and thus be kept
under lock.
additional expenditure and adversely affecting the efficiency of a s percentage los.
The costs due to these factors c a n be quantified
production. could provide the arithmetic
The only alternative is to Past write offs and the inventory levels
produce more for stock in slack periods. This data for such a computation. i t varies between b to 7Percent.i
will lead to efficient and uniform use of resources. to 2
B.
(d) Insurance: Most of the firms get insurance cover and
which encourage
Costs
(a)
smaller inventory:
Inventory carrying costs: For any company inventory is an percent may be taken a s the representative percentage. Total
inventory
stock duringa year
investment, where the capital is tied carrying costs a r e around 20% of the value of averge
up in the form of material and is Rs. 60,000 and the inventory
goods. Had this capital been free, it could be utilised elsewhere e.g. If the average stocka sduring a year
e.g. carrying is
cost taken average inventory then its value
20% of the
developing a new product to
buy new equipment 1.e. an
or
cost exists. Thus by holding inventory the
opportunity will be
organisation forgoes the use
of invested capital in some alternative
way. 60,000x Rs.12,000
Sometimes the inventory investment is made by borrowing size to
money The organisation may like to maintain low inventory
on which interest is to be
paid. Furthermore the inventories for tax minimise inventory carrying costs.
purposes are considered to be fixed assets and the amount of tax of inventory carrying costs c a n be:
increases with the size of he inventory. This is
The general breakup
generally taken as 10 to 10 to 15%
15 percent (i) Cost of money tied up
(b) Storage costs: Maintenance of (i) Cost of storage space 1 to
inventory means storage costs. (iii) The cost of special packing to prevent deterioration in store
These include expenditure made on inventory staft, expenditure on room 1 to 220.
providing various facilities like heating, lighting, floor space, shelves Loss by acidental damage, deteriorationI5
and racks, bins and containers, material (iv)
handling equipment and other to pilferage obsolescence ete: 1 % i 3
provisions for safe and proper storage of items. These costs generally ( Loss due 9
depend upon thevolume to value ratio of an item.
(vi) Cost of insurance 1.5%
between lto3%. Generally
it varies (vii) Administrative costs 19 to 26%.
This advocates smaller size of the Due to these reasons the organisation may like to maintain low
inventory. like to
keep inventory the as
(c) Deterioration. obsolescence and pilferage: inventory size i.e. the organisation may
are likely to
deteriorate in quality with Some
time e.g. food stuff. If items small possible. The total storage costsoare
as
around
r decrease with the sise of
.
Costs which may inerease
store for considerable time, then the organisation maysuch items
are in C.
decide to
dispose them at a loss. This results undue loss to the enterprise. inventory.Handling Costs: The size of consignments and the material
the demand for certain
products may fall due to Also, (i)
introduction and handling facilities in the store determines these costs.t9observea
development of new products. In such cases the manufacturer handing costs
to may decide
that upto a certain level of inventory size the per unit
scrap the product or sell it at some loss. decreases with increase in size of inventory, but beyond
that level tbe
These costs may ake various
forms viz.
(i) Outright Spoilage: The loss is wholly borne per unit handling cost starts inereasing
period of time by the
at some fixed
Normally handling product in and out of inventory
costs of are
manufacturer ypically excluded from direct consideration.
result
High inventories may
 PRODUCTION OPERATION MANAGEMENT INVENTORY CONTRO 329
328
with lot size. But after certain level
in inefficient stacking or crowding. Substantial expenditure is incurred this the total cost tend to decrease
costs slows down and the rate of
in loading, trucking and unloading items in inventories. of lot size the rate of decreasing
in the total cost.
(ii) Price fluctuations: The variations or ups and down in the increasing costs up. This leads to a n inerease
steps
The phenomenon is illustrated in figure 11.1.
Here
price of a commodity is a natural phenomenon. If there is increase in
the price of the commodity then storing-may be for
encouraged finished
goods. Besides this some other factors like fluctuations in demand, lead -.fotalC -
time, and stock replenishment also play a significant role in inventory
analysis. Cost Dicreasin Inventory
CarryingCoss
Evidently all these factors cannot be considered simultaneously
in the formulation of appropriate inventory policy. In practice only those
factors which are likely to play a significant part and for which reliable
information regarding their behaviour is available are considered in With Lot Siz
inventory analysis. Variation in
Various Costs with Lot Size
11.5. Methods of inventory control
The Fig 11.1
fundamental purpose of inventory
analysis isto the stoc
of items at such a level that there is a balance between the costs which
Total cost Purchase price + cost due to factors whose cost
increase or decrease with the size of the
increases with lot size+ cost due to factors whose costs decreases with
inventory. lot size.
This needs determination of i) quantities that should be ordered
each time and (i1) the time at which this Order should be placed so that The lot size , (fg. 11.1)for which the total cost per time periodis
both inventory carrying costs and the losses arising out of stock-outs minimum is known as Economic Lot Size.
are kept at the minimum. These The determination of Economic lot Size is diffieult due to problems
objectives are accomplished by in the calculation of carrying costs. Carrying cost is related to a number
determining:
(i) Economic Lot Size of factors, which are difficult to be assessed in practice.
(ii) Re-order level The following assumptions are made in determination of Economic
Order Quantity.
11.6. Economic Lot Size (i) Demand D is assumed to be known with certainty.
The amount of material ii) The size of each order is constant.
procured or quantity produced during
production run by an enterprise is known as lot size. The quantity to be
one
the
(ii) The procurement cost C, is assumed to be linearBy related to
number of orders.
ordered, whether from
inside
on a number of factors. The sources
or from
outside agencies
depends The flatness of the total cost curve in fig. (11.1) around the minimum
size of inventory depends on lot size. As
described in section (11.4)
due to increase in
inventory size is worth The implication of this is that even if we deviate from
noting.
on storage, deterioration etc. is likely to increase expenditure Qwithin reasonable limits we are not incurring substantially extra
whereas
on
setting-up of plant, procurement of materials ete. will expenditure cost over and above the minimum at Q
with lot size, there are two set of
decrease. Thus Now we shall try to tackle the problem of Eoonomic Lot Size under
factors having opposite contributions
towards the expenditure i.e. one different situations of inventory system:
encourages the lot size and other
discourage. The total cost as5ociated with particular lot size is
combination of expenditures on all these factors. a 11.6.1.Replenishment Le. supply of the items is instantaneous
These This is a most ideal system, where the enterprise is not worried
total costs. It
opposing forces exhibit an interesting
behaviour towards
is observed that the factors whose costs about the replenishment of inventory. There is no time lag between the
size has a
tendency to decrease at a faster rate
decrease with lot placement of an order and its supply. The items ordered are immeciately
in cost of those factors
than the rate of increase
whose costs increase with supplied. It is also assumed that demand remains uniform throughout
inventory size. Due to
 Size of Inventory 5

135
 32 PRODUCTION OPERATION MANAGEMENT
333
INVENTORY CONTROo
Example 2. The XYZ manufacturing company has determined from Co Rs. 50 per order
a analysis of its accounting and production data for part No. 625, that C Rs. 10.00 per unit.
its cost to purchase is Rs. 36 per order and Rs. 2 per part. Its inventory Now inventory-carrying cost is 10% per unit of average inventory
carrying charge i 18% of the average inventory. The demand of this part in addition to Re. 1.00. Hence
is 10,000 units pe
annum. Cs 1.00 + 10% of As 10.00 = 1.00 1.00
(a) What should the economic order quantity be? = Rs. 2.00 per unit of average inventory.
What is the optimum number of day's supply optimum
order?
(6) per Using (11.1), we get the economic lot size
Solution: Here D = 10,000 per annum. 2x12000x 50
Co = Rs.36 per order qo 2
C Rs. 2 per part = 775 units.
Cs= inventory
18% of average
=0.18 x 2.00
Now number of orders to be placed in a year
= 0.36 Annual Demand
Thus economic order quantity qo from (11.) Economic order quantity
12000
775
and Average size of inventory
2 x 10,000 x 38)
= qo/2 units.
0.36
=
1000/2 1414 units. = Hence Total Minimum cost
Annual demand is 10,000 units Procurement cost + cost of the material +Storage cost
So the number of orders
per annum will be 12000(50)+(12000x10) (775 x2)
Annual Demand 10,000 775
Supply per order = Rs. 1,21,549.
1414
Thus the optimum number of days supply per optimum order will
11.6.2.
Economic lot sizewithdifferent rates of demand in different cycles
(Replenishment Is lInstantaneous).
No. of days in a vear
365 In 11.6.1 it was assumed that demand rate is uniform. But with
No. of optimum orders in a year 7
Varying demand rate the stock will vanish at different time periods.
52days.
Example 3. A company requires 1000 units per month. Order cost
wth a policy of ordering same quantity for replenishment
the situation be
of inventory.
IN estimated to be
Rs 50.00 per order. In addition to
can graphically represented by fig. 11.3.
costs are 10°% per unit of
1.00 the Re. carrying Different Rates of Demand
average inventory per year. the
is
Rs.
10.00 per unit. Find the economie lot purchase price
size to be ordered and the
total minimum cOst
Solution. Here demand is given inmonths,
is
given per annum. So
whereas carrying cost
demand is also caleulated for the whole
D year i.e.
=
monthly demand x 12
= 1000 x 12
12000 units per
year
-tl
Fig. 11.3
 334 PRODUCTION OPERATIiON MANAGEMENT INVENTORY cONTROL 35
Let the demand in different time periods be D, D..D, respectively,
Let p denote the rate of replenishment per unit of time.
with usual notation
so, that the total demand in time T is given by D = D, + D +D
where T- t, +,++t,
=
Here Tis the total time period. With the Procurement cost
=oD
same notations
of (11.6.1).
Do Cost of material = CD
Cost of ordering in time Tis given by
Cost of purchasing D
Now
unit D x C
The average inventory =
inventory carrying cost tor time T
= (Average inventory in time t,) Cs
2
(Average inventory in time t,) Cs +
+(Average inventory in time t) Cs and cost of storage
= (1/2) (9,,) Cs+(1/2) (9,4,) Cs+...+Cs(1/2) (4,t) Cs
= (1/2q,Cs (t,+t*...+,)
= (1/2)q,Cs T
Hence total cost DCo ,pc+ gol1-D/p)Cs
Hence the total cost incurred in Time T Qo
11 = (D/g,) C, + (Cx D) + (1/2) q,Cs T
Minimising total cost with respect to qo, we get economic order
Minimising w.r.t.4, we get the economic order quantity quantity equal to
2CoD (11.3)
qo CsT ...(11.2) goCs(1-D/punits
Here D_D2 * D2...7Da =Average demand in different and the time of one cycle is
T ti+t2t..*ta perioas Examplé4. A producet is produced at the rate of 50 items per day.
The relation (11.2) is similar to(11.1), with the only difference that The demand occurs at the rate items per
of 30 day. Given that setup
in (11.2) uniform demand is replaced by average demand. The methods
of calculation remain same.
cost per order is Rs. 1000 and holding cost per unit time is Rs. O.05.
Find the economic lot size and the associated total cost per eycle
assuming that no shortage is allowed.
11.6.3. Situation when Replacement is not instantaneous:
Solution. Here D- 30 units per day
for
Ttis a more
general and realistic situation. Suppose it takes timet1 Co Rs. 1000
replacement and time t2 is required for inventory to be exhausted.
Cs Rs. 0.05
Then in this case each order cycle is of (t, + t,) time units. Again the
demand rate in each cycle is assumed to be uniform. The
p= 50 units per day.
inventory Then using (11.3), we get
pattern in this situation can be explained by fig. 11.4.
Replenishment not instantaneous
2DCo
qCs(-D/P)
2x 30x 1000 (1-30/50)I782 units
(0.05 x
The total cost is given by
DCDC9o(1-D/ PCs
2
TIME PERIÓD cyele we do not cansider cost of the materiai
Note: Here in caleulating the total cost per
* pce per unit of the product is not given.
Fig 11.4
 iNVENTORY CONTROL
337
336 PRODUCTION OPERATION MANAGEMENT
If D represents the demand, then t=
30 x
1000 1732(1-30/ 50 (0.05)
1732 2
= 17.32+ 17.32 and
Rs.34.64
Average inventory level per cycle= (1/2)
11.6.4. Economic Lot size when shortages are allowed
There are situations in business enterprises that due to some other
Q
shortages Here we consider the case,
permitted.
considerations
where
are
Similarly average back order level =20
(a) Replenishment is instantaneous. If Cs is the per unit inventory carrying cost and C, is the per unit
(b) Back orders are carried out aslhe fresh stock arrives.
shortage r cost, then the total inventory cost with shortages Will be
C) Time period of the cycle is fixed.
The situation is illustrated graphically in fig. 11.5.
replenishment instantaneous
T
29SCa 24 co-DC
shortages allowed where D is the level of demand. Co is cost per order and C per unit cost
of the item.
to Q and putting it equal to zero,
Differentiating T with respect
we et
s(C +Cs) +2DCo 114)
Cs
. we have
if Tis also to be minimized w.r.t S, then
o /2DCo (Cs +C
Example 5. The xyz company requires 1000 components per month
automobile generators. If
throughout the year for manufacturing
ordering cost is Rs. 25 per order, unit cost is Rs. 2.50 per component,
at 20%. Find E0Q for
and annual inventory holding costs are charged
The period of one cycle is t units. Demand is more than
supply. At
order
decides to operate with5 back
a
the initial stage. There are q, units in inventory which are exhausted by
this component. If the company per unit per
time t,. Then shortages
allowed for time t, after which inventory is
are inventory policy then taking back order cost to be Rs.
replenished instantaneously. Evidently t, + t, = t. The shortages are year, find the new EOQ
equal to D Solution: Here Co Rs. 25
-4
Here storage cost for time t, C1 Rs. 5
for time t, (1 /2) Cs
(1/2) Csq,t, and cost due to shortages
=
D 12000 units per year
shortage cOst.
=
(D-4,t wherg Cs is per unit
and Cs= 206 of(2.50)
Let the number of ordered at time = Rs. (0.50) per unit per year.
=
units
0-S: where S is the shortage in time
t, be 0 units. Evidently 9
t 2x12000x 346 units
Then average Inventory level in time t, +t, =/2)qot +0.t2 EOQCsCo
when back orders are permitted, then for
0.5
shortages to be minimum, we
(1/2)(Q S)t can use (11.4A) to gve
 339
PRODUCTION OPERATION MANAGEMENT INVENTORY CONTRoL
338
The discount rate affects the inventory analysis in
two ways:
fh
2Dgo(C+ Cs) (i) This reduces price of the materia.
EOQ- Cs
(ii) The orders of bigger size reduces the number of orders and
the
thus the ordering cost is also reduced. Due to this, it happens that
= 2x12000x25 (5+0.5) total cost with economic lot size is found
to be more than the expenditure
0.5 5 in bulk with discounts. The fact is
with a policy of making purchases
illustrated with the help of following examples.
2x12000 x5x55 units of a raw
Example 6. A company uses annually 24,000 Rs. 22.5
0.5 1.25 per unit.Placing each order costs
= 1149 units material, which costs Rs. of the average inventory. Find
and the carrying cost is 5.4% per year the cost of
the lot size and the total inventory cost including
11.6.5. Economic lot size when quantity discounts or breaks are available economic
material).
suppliers generally offer discounts if the purchases in bulk the company the offer made by the supplier to
The
discount: 1gShould acept of 24000
are two ways of offering this discount of 5% on the cost price on a single order
quantity. There the discounts provide a
(i) On every unit purchased some discount is given; units?
depends on the size of the order. Solution: Here D=240000
extra units purchased after C=Rs. 1.25
(i) a fixed discount is given on
prescribed limit. Co Rs.22.50
of the be form Cs =5.4% of Rs. 1.25 =.054 x 1.25
The discount schedule offered by the vendor may
Lot Size 1999 1000-1499 1500-2499 2500-4999 5000 and Above = 0.0675.
1.5% 3% 5% be instantaneous and using (11.1),
Discount Rate on 1 Assuming the replenishment to
basic price we get economic lot size
and
In this case the linear relationship between cost of ordering
the ordering frequency is not valid and the EOQ is invalidated.
simple (2CoD
In such cases the economic quantity can be determined by Simple
enumeration "Total cost for some of the possibilities of number of orders.
We can also determine the maximum quantity that can be economically 2x 225x 24000
for discount in units cost by the formula
0875
ordered to qualify a
= 4000 units.
Cs
=2d+(1-d) Qo Now total inventory cost
Here d is the fraction by which the
basic price.
price will be reduced from the
Co+CD+a/2oCs
D: annual demand, r. inventory carrying charges and q, = EOQ at
basic price.
24000
4000
(22.5) + (1.25 x 240000)+ (/2)(4000) (0.0675)
e,g. when d =
5%, D = 12000 and qo =
3000 and 1 =
20%, then Rs. 30,270.
costs-Rs. 135+Rs. 135- Rs 270
205 X 1200, 0.95 3000 Here storagescost +
ordering the reduced
20/ 100 Now 5%
on cost price is offered then
when discount of
ice becomes (1.25-5% of 1.25) = Rs. 1.1875
= 6000+2850 cost with only one order of 24000 is Rs. 22.50.
8850 Now ordering
In such cases one can derive the benefits of discount at the expense The cost of the material= Rs. 1. 1875 x 24000 Rs.
Now the storage cost per unit will become Cs
28,500,
(0.054 x 1.1816)
of extra stockholding cost and to find optimum decision, balance is to be 24000
made between the benefits of discount and extra stock holding costs. If Hence the storage cost for 24000 units (0.054 * L1875)
Rs.1539.
No. Size of
of each
Discount Price at Inventory AverageS Storage Ordering Cost Total cost
rate discount camying cost
inventor COst cOst material
orde | Order P
T
Cs 0.26p (1/2), CQ Cx (D! 6300Xp S+Q+0
S Q1
6300 Q)EQ2
0.95 0.247 3150 778.05 10 5985.0 6773.05
3I50396 0.97 0.2522 1575 397.21 20
2100 1.5% 0.985 6111.06528.21
0.2561 |1050 268.90 30 6205.5 6504.40
1575 1.5% 0.985 0.2561 787.5 201.6840 6205.5 6447.18
| 1260 1% 0.99 0.2574 630
|1050 1% 0.99 0.2574 25
16.1650 | 6237.0 6449.16
135.13 60 6237.0 6432.13
900 1.00 0.26 450 117.00 70 | 6300.0 6487.00
787.5 1.00 0.26 393.7 102.3 80 6300.0 6482.36 |
9 700 1.00 0.26 350
10 630 0.26
91.00 90 6300.0 6481.00
1.00 315 81.90 100 6300.06481.90
PRODUCTION OPERATION MANAGEMENT INVENTORY CONTROL
So to avail a discount of 1% with orders of size 1000 units
appear
to be most economic.
The procedure described above can be summarized by the following
steps:
(i) Determine the economic lot size for each price level by
substituting the corresponding carrying cost in the economie lot size
formula.
(ii) If the value calculated in step (i) is less than or equal to the
minimum quantity that must be purchased to obtain that price, this
minimum quantity is the economic lot size at that price.
(ii) f the calculated lot size in step i) exceeds the minimum
quantity to avail that price then the lot size in step i) is the economie
lot Size.
(iv) Once the economic lot size at various price levels is
determined in step (ii) ealculate the total cot generated for various
price levels to identify the one which yields lowest cost. Some
adjustments for change of units in caleulations ofE0Q.I fItis important
to be sure that the units used in the formula are consistent. Some of the
considerations a r e :
(a) The units of order quantity and usage rate should be same
i.e. either both should be in pbysical units or in money units
(b) The inventory cost and the usage should be based
rate on the
be yeari month
same and
time
of
material units ie. units both should or
both should be expressed either in
any other time period. Similarly
terms of physical units or in terms of money units.
Criticism of EOO concept: due to
The Economic order quantity criterian is mainly criticized
its (i) unrealistic assumptions (i) difficulties in mea5urement of various
cost (iv) computational
costs (iii) criteria of minimising total
The following
complications and (v) difficulties in its implementation.
are the explanations regarding-these points:
various
) The basic B.O.0. model has been suitably amended for
assumptions relaxed one by one in turm
of the latness of the total cost
) Regarding measurement costs, model. Sometimes instead of
Curve is itself an argument in favor ot the
a graph or trade-off
computing batch size for each item individually
of orders and the inventory level over the
between the total number be used to manipulate between the total
entire stocks of items can circumstances of bad cash
number of orders and inventory size. In reduce
the number of orders to
position the organisation can reduce
more capital investment
of pocket expenditure with a policy of in
out Magee
to "Despite the diffieulty
through large lot sizes. According using8
solution of economic lot size problem
measuring costs an analytical of prineiple.
Crude data often helps in classifying the questions
 344
PRODUCTION OPERATION MANAGEMENT INVENTORYCONTAOL
Cn Regarding minimisation of total cost criterion, Tate analysed the choice of
appropriate point at which 345
the problem with other criterions also,
namely (a) maximum profit per inventory is to an order
signíficance. The levelreplenish
to
be the
batch (bmaximum return which is the ratio of the profit
per unit to the at which a reorder placed
should
1s ot great
be
placed is
of inventory
cost of producing a unit and (c) maximum rate of return and concluded known as Reorder level
that all these criterion pointThe or Reorder
are either
cost criterion.
cquivalent or inferior to minimum problem of re-order level depends on lead time and
stocks. safety
avThe computational complication aspect of EOQ can be The
defended by saying that even a junior clerk with an
elementary uncertainty in
combination of the
uncertainty in resupply time and the
knowledge of arithmetic can be trained in a fort night to take charge of face in
demand causes the principal problems the businessmen
EOQ computations over thousands of items in the stock.
managing
their
inventories
Nevertheless the
critics of E0Q are not entirely
rather pessimistic and far too realistic. In actual
wrong. They are
11.7.1.Lead Time
deals of difficulties are to be encountered in
implementation great This is the time gap
calculating EOQ but between placement of order and the time
an
precautions are needed to take into account all the relevant factors. of actual supply. It is not
necessarily identical to delivery time. It is
composed of three
components, namely
Lead Time Servicing time + Delivery
11.7. When to order?]
=
time+ Receiving
The economic lot size formula discussed Servicing Time. It is the time taken for placing an order. It time.
in section (11.6) (i) time for inchudes
assumes obtaining
for visiting\potential quotations,and
that the organisation knows with (i) time for
certainty the future negotiating price, Gii) time
requirement of any item and that the supply of the items is demand/h suppliers (iv) time for letting contracts.
instantaneous. Delivery Time: The time taken by the supplier to
Unfortunately
these assumptions are found to be order. Receiving Time. This comply certain
unrealistic because in real world situation there is to be a include (i) time for unerating goods, (ii)
the time gap between time for inspection of
goods, ii) time for movement of goods to store
of placing the order and the receipt of the delivery. This timme and (iv) time for
gap can be due to delay in
transportation, loading and many other factors entering goods in stocks.
All these times never remain
beyond control. constant. Thus the determination of
lead Time is
If an order is placed when the stocks are over, then there is always
a
complicated matter. In
practice either it is taken to be
a chance that constant or some reasonable or
supply of the items may not be at the desired time and the expected value
assigned is to it.
firm may face the situation of Theoreticians recommend that whenever the actual lead time is more
the order before the stock isshortages.
Another alternative is to
place than five times the active time,
completely exhausted i.e. to order in scheduling procedure
should be
advance. Again to determine the
appropriate time when the order should investigated.
be placed in advance is a
diffieult exercise. If an order is
early then it may result in piling of
inventory for a longer period and if placed too 11.7.2. Safety or Buffer Stock:
it is placed too late then The demand and
this may result in
shortages. Both these supply rates can never be assessed exactly. There
situations are not in the interest of the firm. The
1s
bound to be discrepancy between actual and estimated demand and
"when order" and is
to problem is known as supply quantities with fair degree of uncertainty. The
very important for an organisation.
In other words a
organisation with
policy of safeguarding
their interest
Against these uncertainties
ntain the level of inventory at some desired minimum level. This
minimum level of inventory to cover some unforeseen and uncalled for
Situations is known
ncrease as Safety or Buiter Stock. Alternately a butter
stock
Inventory Size can also be defined as the average stock available în inventory hen
Point of Re-order
e resh supply arrives, It is presumed that this stock will be able to,
Point of
cope with the
Re-order
epienishment point VAeplenishment emergency if and when experienced. Generally, burer
order placed
Shotages point
stockis maintained at the desired level by discontinuous replenishments
CrOCEplaced ate at
varying intervals of time.
Factors affecting choice of buffer stocks are:
 PROOUCTiON OPERATION MANAGEMENT
VENTORY CONTROL
the inventory protects
347
i)uncertainty in demand.
(11) degree of insurance for any item. the rate of usage
depends on the nature of short term
the risk fluctuations
in
and the management is prepared to
face
) uncertainty in lcad time, and the shortages. The failure to comply some demand results
in loss to the
(iv) Size of the batch organisation. "The cost of 1ailure meet some demand must be
to balanced
Larger the uncertainty associated with any factor, larger should against inventory cost to determine appropriate level of safety
Service level stock.
be the buffer stock
other factors
can be defined as the
perceatage of total demand value
The buffer stock situation, as well as its relation
with which can be
relevant in inventory analysis can be described with the graph in i g
satistied when it
oceursAnother definition of the service
level is that it is the percentage of order intervals during which no stock
is gven for inventory cycle only. out occurs. In practice due to a number of limitations and conatraints
11.6. The pattern one
the total cost of maintaining a service level cannot be
ascertained. Thus
MAXIM M
the organisation can estabish its service level requirement on the basis
of judgement only. In practice. buffer stoek is determined using
INVENTORY
statistical methods.
ORDER (i) Situation where demand rate varies.
1EVHA Buffer stock = (Lead time) x (Maximum demand rate
LAAD TIME average demand rate)
both Lead time and demand
DEMAND ii) In cases where rate are
BUFPEP
STOCK
fluctuating, then
Buffer stock to meet abnormal demand = (Maximum lead time x
Lead Timee rate)
maximum
demand rate)-(average lead time * avernge demand
(iii) In case lead time varies and demand rate ls uniform.
(Maximum Lead Time Average Lead Time)
x
the size of buffer stock mainly depends on two factors, Buffer stock =
Evidently time.
the demand during lead time and the duration of lead Demand rate.
the lead
following information is provided about
variation in
demand of any item will depend on its nature and Example 8. The
The variation in
ime and the demand pattern of a system
on inter-related factors
behaviour of the consumer. Lead time depends
24000 units.
dcscribed in section 11.7.1. (1) Annual requirement
which the problem of buffer stock (Ii) Lead time 10 days.
There arc a
number of ways through (ii) There are 240 working days per year.
can be solved. rate has as high as 140
Computation the use gone
Determination of Buffer/ Safety Stock: (iv In the past two years
Maintenance of buffer stock is very important
for organisation.
an units per day.
stock and Reorder level
variation in demand. Thus to fix Calculate the required safety
Tts size depends both on Lead time and normal behaviour of demand.
the safety stock level two pieces of
information
are required: (a) Considering in demand during the
last two
distribution of difference between
forecast and actual (b) Considering the variations
i) a
demand over the lead time. years.
as to how frequently runouts may be allowed Annual Demand
(1) an agreement rate
occur.
Solution: (a) Normal demand Working day in a year
sort of management
Also setting a safety stock implies
some
uses/demand level to 24000 100 units per day
decision/judgement with regard to the maximum 240
be allowed for, the allowable risk of service
factor or service
the cost of
cost to determine Here no safety stock is required
failure. This must be balanced aguinst inventory rate
level of safety stock. Hence Reorder level Lead Timex demand
appropriate
Service level: The key to setting safety stock level is the reasonable 10x 100
against which 1000 units,
maximum usage during the lead time. The maximum usage
 VENTORY cONTAOL
348 349
PRODUCTION OPERATION MANAGEMENT Average Lead Time
to meet
b) Here maximum demand is 140 per day, Hence additional stock [(0x 2)+(1x0)+(2x0)+(3x243)+52)+(65+(76
abnormal
demand 2+0+0+2+3+2+5+6
CMaximum demand rate-normal demand rate) x Lead Time
=
(140 100) 10 400 units. =
100 days
Hence the Re-order level in this case should be 20
1000+400 =1400 units, = 5 days
Example 8. In system with a uniformdays,
a
demand rate of 1080 items Similarly average demand per day
per year, the lead times are 15.17, 20 and 16 Caleulate
and re-order level.
safety stock,
3
Solution. Here average Lead Time units per day
Now maximum Lead Time is
15+17-20-15 =17 days 7days and maximum demand
rate
6 units per day. is
Demand rate per
Hence buffer stock to meet the variations in
day =19 3 units
per day. lead time and demand
x 30 rates
Maximum Lead Time is 20 days. (Max. Lead Time Max. demand x
Hence the buffer stock to meet rate)-(Average Lead Time
the variation in lead time. x
Average demand rate)
(Max. Lead =
Time-Average
Lead Time) (7 x 6)-(5x3) 27 units. =
x Normal demand rate Now demand in lead time
= (20-17)x 3= 9 units. =
Average Lead Timex Average demand
Also Lead time demand =
Average Lead Time 5 x3 15 units.
=
Normal demand rate Hence Re-order level
i= 17 x3
demand in Lead Time Buffer Stock
5 1 units.
Hence Re-order level 15 +27= 42 units
=
51 +9 = 60 units.
Example 10. For a
system the Lead Time (in 11.7.3. Re-order LevelUPoint
(per day) are distributed as follows.
days) and demand
The concept of re-order
Distribution of Lead Time demand. The problem is that
point is basieally related with lead time
Distribution of demand per day demand can never be aceurately projected
Lead Time in
days Frequency Demand over the lead time. There are a number of methods for demand
Frequency 1orecasting described in chapter 12 of this book. Once we know the
demand in lead time, re-order level can be easily determined.
Mathematically,
Re-order Level Lead Time demand+ Safety Stock.
»
It is observed that the supply situation for replenishment is
eSsentially dynamic, changing at all times. Theretore re-order level,
Salety stock and re- order
Sme
quantity should be regularly reviewed. The
values for any system should not be used for long periods of time.
The determination of Re-order level is illustrated by the following
examples8.
Determine the safety stock and Example 11, A company requires annualy 1200 lbs of a chemical
Solution. Here both Re-order level
shall caleulate Lead time and Demand
rate
whieh costs Rs. 250 per lb. Placing each order costs the company Rs.
average lead time and as well Muetunte. So we 22.60 and carrying coat is 15% of the cast of the average inventory of the
as
average demand rate. ehemical per annum.
a Find the economic order quantity and total expenses on the
eapitnl,
 INVENTORY CONTROL 351
350
PRODUCTION OPERATION MANAGEMENT
stock of
Example 13. A company uses annually 48000 units of raw
maintain a 300
the company decides to Rs. 1.25 per unit. Placing each order costs
6 I fin addition, Rs. 45.00
Ibs., find the maximum as well
a s average inventory.
D 1200 Tbs.
=
materving cost is 15% of the
average inventory. Find the economic
Solution. (a) We find that in the question ity.
Co Rs. 22.50 order the company follows EOQ purchasing policy
Suppose and it
Cs 15% of Rs. 250 Rs. 37.50
=
=
operates for 300 days a year ana tne procurement time is 12 days with
C Rs. 250 opertock of 500 units, find the re-order
point, the maximum,
Hence from (11.1),
minimum, and average inventory.
S o l u t i o n . w e are given D = 48000 units
2DCo
Cs C Rs. 1.25
Co = Rs.45
2x1200x 22.50 Cs = 15% of 1.25 = 0.1875
37.50 Hence from (11.1)
38 bs.
(2DCo
Also Total cost on chemicals qo Cs
(22.50)+
38 (250) (1200)+38/2) (37.50) 2x48000x45
s.
3, 423 go 0 1875
(b) Maximum size of inventory = 4800 units.
=
Safety Stock Economic order quantity The company works for 300 days in a year
300+ 38 338 Ibs.
Safetystock+
Hence average daily demand 48000 160 units per day
Average inventory size 300
Procurement time is 12 days. Hence
38 Lead time demand = Average daily demand x Procurement
300 319lbs.
time
Example 12. In Example 1, the firm follows ofEOQ policy
purchasing. It operates 300 days per year. Procurement time is 14 days,
= 160 x 12= 1920 units.
Thus R.O.L= Safety Stock + lead Time demand
and safety stock is 400 units. Find the re-order point, the maximum 500 1920 2420 units.
inventory and the average inventory. Maximum inventory Safety stock + EOQ
Solution. From example 1, we have q, =1386 units 5 0 0 4 8 0 0 = 5300 units
The demand is 12000 units every Year. Since the firm operates for Stock 500 units.
Safety
=
Minimum inventory =
300 days in a year the average demand per day 40 units
00
Average inventory Safety stock
Hence lead time demand = (Demand per day)x procurement time
40x 14 = 560 units. 500+ - 2000Dunits.
Hence Reorder level = Safety stock + lead Time demand
400 +560 = 960 units.
Maximum inventory = Safety stock+ Economic order quantity
400+ 1385 = 1785 units. 1.8.Systematic Control of Inventories
management requires routine
Average inventory Safety Stock+ Effective and efficient inventory
q/2 task of inventory management
is
one ot
1385 pplication of the concepts. Thethe selection of the time to order and the
-400+ 1093 units. controlling inventory through
2