ORDER PROCESSING

&

INVENTORY CONTROL MODEL

FOR EFFECTIVE

SUPPLY CHAIN MANAGEMENT

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PURCHASING PROCEDURE

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TYPES OF MATERIALS REQUIRED IN
AN INDUSTRIAL UNIT
• Raw materials for producing the end product.
• Spare parts for repair and maintenance.
• Consumables for repairs and maintenance of
plant and machinery and also for support
functions necessary to run the organization,
such as cleaning materials for up-keep of the
buildings.
• Chemicals and glassware for testing laboratory
supporting the quality control activities.
• Uniforms and safety gadgets such as helmets,
shoes and goggles etc for safety of persons.
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 IMPORTANCE OF MATERIALS IN
PLANT OPERATIONS
• Materials are used in every activity of the
organization.
• 60% of the cost of the production of the end
product is the cost of materials.
• It is important for continuing operations and
should be available in right time.
• Control on the cost of materials helps to keep
the competitiveness of the organization.

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INVENTORY CONTROL MODEL

Maximum
-level
Reorder
Inventory Level

Working
quantity point

Minimum
-level Safety- Lead Receipt of
stock time materials

Time

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 HOW INVENTORY CONTROL
MODEL OPERATES - 1
• In a stabilized production operation inventory
of an item is controlled in such a way that:
– There is a minimum stock at any time.
– That material should never cross the maximum
level.
• These levels are fixed with the help of
operations staff in the plant based on
historical data and the expected
requirements of materials keeping in view
the condition of the plant and machinery.

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 HOW INVENTORY CONTROL
MODEL OPERATES - 2
• Crossing the maximum level means over stocking.
• When the inventory level goes below the minimum level, it
could result in stock out.
• A reorder point is set in between these two set points i.e. the
maximum and the minimum level of inventory.
• Order for material is placed at the reorder point is reached.
• The reorder point is set in such a manner that ordered
material is received before the stock level reach the
minimum stock level.
• An order is placed for the working quantity of the material.
• The working quantity is received at the end of the lead time,
and when the inventory has reached to the minimum level.
• On receipt of material, the stock level of inventory jumps to
the maximum level.
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 INVENTORY CONTROL
CONCEPT - 1
• Materials kept in the warehouse are known as
inventory.
• These may include raw materials and spare parts
and consumables.
• Materials are issued for use when needed.
• There should not be any shortage of materials
when needed.
• Excess of materials in the stores is also not
desirable.
• Control on the quantity of each item in the
inventory is known as inventory control . 8
 INVENTORY CONTROL
CONCEPT - 2
• Inventory control is to maintain inventory items in
such a quantity that the items in the inventory do not
remain in stock for long and has high turnover.
• Inventory should not block the useable financial
resources.
• Inventory items should be in sufficient in quantity:
– so that they are available when needed and do not
results in loss of production
– Do not delay in repair and maintenance of the
machines.
• Cost of inventory is another aspect and is to be kept
low by purchasing right quantity at right price and at
right time.
• Inventory control is used as a tool for cost reduction. 9
 ASSUMPTIONS IN INVENTORY
CONTROL MODEL
• The consumption of inventory is at a uniform rate
through out the cycle,
• The order is placed when the inventory level reaches
the reorder point.
• The ordered quantity is received by the time inventory
level reaches to the minimum level.
• The lead time does not change between reorder point
and the point when inventory reaches the minimum
level when fresh quantity is received.
• However, in real life situations there are variations in
each condition due to both internal and external
factors and inventory controller has to review the
situation regularly.
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 ELEMENTS OF INVENTORY
CONTROL
• Minimum stock level.
• Maximum stock level.
• Safety stock level
• Reorder level.
• Lead time.

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 MINIMUM STOCK LEVEL
• It is the level below which the inventory level is not allowed
to fall.
• If the level of inventory is below this level, there are chances
that plant operations are adversely affected.
• As soon as the stock level reaches the minimum level for
any reason:
– The matter is to be reported to the higher management
immediately
– Extra efforts are made or additional resources are
deployed to ensure that the material is received at the
earliest.
What is done?
The item could be received by faster mode of transport
say by air or by courier service in place of sea or rail or is
purchased from any other source even at a higher cost.
• Minimum level is an indication of the danger and provides
alert for stock out situation.
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 MAXIMUM STOCK LEVEL
• It is the inventory level, beyond which the stock level is not allowed to
exceed.
• The maximum level is used as a control point to avoid any extra
stocks.
• Order quantity for material is controlled in such a way that when the
material is received the inventory level is below the maximum level.
• However, at times the maximum level is crossed:
– To avail benefits of attractive discounts,
– Saving on the transportation/freight charges,
– Due to strategic buying decision.
• The maximum level if crossed with prior evaluation of overall benefits
is a correct approach.
• If it crossed due to lack of control, the matter should be viewed
seriously.
• Failure to control the maximum level may result in non-moving or slow
moving items and in some cases obsolete items.
• Inventory turnover would be adversely affected if maximum level is not
controlled.
• Maximum level is fixed by taking into consideration the lead time for
the item.
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 SAFETY STOCK -1
• Safety stock is the level of inventory which is to be
maintained always to take care of unforeseen factors such
as:
– Delay in ordering,
– Delay in supply by supplier,
– Delay in transportation
– Hindrances' in execution of orders by the supplier, which
may be beyond his control like war, flood or strike.
• A very high degree of safety would need high level of
inventory,
• A low degree of safety would require low inventory stock.
• Safety stock follows the path of ‘S’curve.

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S CURVE – PATH OF SAFETY
STOCK
Level of Inventory

Degree of safety

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 SAFETY STOCK -2
• Higher level of inventory is to be maintained
for high level of safety and blocking of
financial resources:
• The safety level is decided depending on:
– The criticality of the stoppage of
operations,
– Reliability of source of supply,
– Location of supplier
– Number of sources of supply.
• The desired safety level of inventory level
then determine the ‘Safety Stock’.
• Normally, most of the organizations maintain
safety stock equal to minimum stock level.
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 REORDER POINT
• Reorder point is important tool for controlling inventory and
to ensure that there is no stock out.
• Reorder point is dependant on lead time.
• It is set in such a manner that if order is placed at reorder
point, the material is received by the time the inventory level
reaches minimum stock level.
• Reorder point shifts with the change in rate of consumption
and is set based on average yearly consumption.
• The lead time if changes, the reorder point should be
adjusted.
• In practice, the reorder point is established quite correctly
based on:
– Past experience,
– Rate of consumption
– Lead time.
– Reorder point is normally calculated by computer
automatically.
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 CALCULATION OF MAXIMUM, MINIMUM, REORDER
AND AVERAGE STOCK LEVELS

The formulae used for fixing various levels are:

Expected minimum
consumption in
Maximum = Reordering - units during least + Reorder
level time to obtain quantity
level delivery

Maximum = Reorder - Average usage x Average time to

level per period obtain delivery
level
Reorder level = Maximum reorder period x Maximum usage

Maximum level + Minimum level

Average stock level = 2

Reorder Point = Average daily usage x Lead time in days + Safety Stock
 FACTORS INFLUENCING
INVENTORY CONTROL
• An operating plant faces new problems
every time, which have an impact on
inventory control activities.
• Rate of consumption of materials, order
quantity, reorder point and lead time
undergo changes for one or the other
reasons and disturb the theoretical
inventory control model.

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EFFECT OF HIGHER RATE OF
CONSUMPTION
Normal rate of Higher rate of
consumption consumption
Maximu
m-level Need for early
Reorder
Inventory Level

Working replenishment of
point materials
quantity

Minimu
m-level Safety Lead Receipt of
-stock time materials

Time

The effect of higher rate of consumption of material call

for
replenishment of inventory earlier than schedule
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 EFFECT OF LOWER RATE OF
CONSUMPTION
Normal rate of Lower rate of
consumption consumption
Maximum
-level
Reorder
Inventory Level

Working
quantity point

Minimum- Scheduled
level Lead
Safety time Planned
-stock receipt of
materials
Time

Need for delayed

replenishment of lead time
The lower rate of consumption on inventory would generate high inventory 21
in the stock and therefore call for delay in replenishment of materials
INCREASE IN INVENTORY LEVEL DUE TO SHORTER LEAD
TIME THAN THE SCHEDULED LEAD TIME

Maximum inventory
Normal rate of
level is higher than
consumption
Maximum the normal level
-level
Reorder Actual receipt of
Inventory Level

Working material
quantity point

Minimum
-level Safety Planned
-stock receipt of
materials
Shorter lead time Time

Scheduled
Lead time

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SHORTAGE OF INVENTORY DUE TO LONGER LEAD
TIME THAN THE SCHEDULED LEAD TIME

Shortage of inventory
Maximum-
level
Reorder Actual receipt of
Inventory Level

Working material
quantity point
Order quantity
Minimum
-level Safety Planned
-stock receipt of
materials
Longer lead Time
time
Scheduled
Lead time

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