Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK

:PILES ON THE SHOP FLOOR and
in WARE-HOUSE and MORE IN
THE DOCK
:SOME OF IT ANICIENT, SOME OF IT
NEW
:ALAS and TOMORROW ANOTHER LOT
IS DUE….
-- UNKNOWN AUTHOR
 Meaning and Definition
 The term inventory includes raw material,
work-in-process, finished goods and stores and
spares - stocked to meet an unexpected demand
or distribution in the future.
 MRO inventories required for maintenance,
repair and operating machinery.
Types ; Production, MRO, WIP,FG
 Functions of Inventory

• Decouple components of the operations

and distribution
• Uncertainties/variations in demand
• Flexibility in production smoothing
• Economies of scale in purchase and mfg
• To help hedge against price increases
• To take advantage of order cycles
 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
 Departmental Orientation Towards
Inventory
• Marketing
– Sell the product
– Good customer service
– Large inventory
 Departmental Orientation Towards
Inventory
• Production
– Make the product
– Efficient lot sizes
– Large inventory
 Departmental Orientation Towards
Inventory
• Purchasing
– Buy the required materials
– Low cost per unit
– Large inventory
 Departmental Orientation Towards
Inventory
• Finance
– Provide working capital
– Efficient use of capital
– Low inventory
 Departmental Orientation Towards
Inventory
• Engineering
– Design the product
– Avoiding obsolescence
– Low inventory
 Inventory – Another View
- Hides Problems Areas
- Just in Case(JIC) Approach
Machine
downtime
Tip of the Iceberg Analogy
Scrap Vendor
Work in delinquencies Change
orders
process
queues Engineering design Design
(banks) redundancies backlogs

Paperwork Inspection Decision

backlog backlogs backlogs
 Goals of Inventory Management
• Maximize customer service (this requires
carrying substantial inventory).
• Minimize inventory investment (this requires
carrying little inventory).
• Customer service takes absolute precedence.
– Customer service must be a strategic issue.
– Leading edge discussion now centers on types of
customer service
• Shortened delivery time
• Speed to market
• Design flexibility
 Benefits of Inventory
Management and Control
1. Adequate supply of materials and stores
2. Low investment in inventories
3. Benefits of purchasing economies
4. No duplication in ordering
5. Better utilization of available stocks]
6. Low loss of materials through carelessness or pilferage
7. Better cost accounting
8. Cost comparison
9. Disposal of obsolete items
10. Data for financial statements
 Types of Inventories

• Raw materials
• Components
• Work-in-process
• Finished goods
• Vendor inventories
• Non-moving/slow moving stock
• Safety stock
• In-transit inventories
• Service parts/Consumables
 Inventory Costs
• Holding cost
• Ordering cost
• Setup cost
• Shortage costs
 Holding Cost

• Cost of storage facilities

• Handling cost
• Taxes
• Insurance
• Deterioration
• Obsolescence
• Shrinkage
• Cost of capital
 Ordering Costs
• Preparation of purchase requisition/order
• Mail
• Expediting, including fax, telephone
• Transportation
• Receiving
• Put away
• Updating inventory records
• Paying invoice
 Setup Costs

• Order preparation
• Stock picking
• Setup
• Inspection
• Waiting/Queue-time
• Order close out
• Updating inventory records
 Inventory Control - Strategies

• How often should the assessment of stock

on hand be made?
• When should a replenishment order be
placed?
• What should be the size of the
replenishment order?
 Process of Inventory
Management and Control

Step 1. Determination of optimum inventory levels and

procedures of their review and adjustment.
Step 2. Determination of the degree of control that is
required for the best results.
Step 3. Planning and design of the inventory control
system. Identification, Item number, classification
Step 4. Planning of the inventory control organisation.
 Inventory Management - Counting Systems

• Periodic System
Physical count of items made at periodic intervals
• Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus monitoring
current levels of each item
 Inventory Control Techniques

1. Always better control (ABC) classification.

2. High, medium and low (HML) classification.
3. Vital, essential and desirable (VED) classification.
4. Scarce, difficult and easy to obtain (SDE).
5. Fast moving, slow moving and non-moving (FSN).
6. Economic order quantity (EOQ).
7. Max-Minimum system.
8. Two bin system.
9. Single bin system
 The Inventory Order Cycle
Demand
Inventory Level
Order qty, Q rate

Reorder point, R

0 Lead Lead Time

time time
Order Order Order Order
Placed Received Placed Received
 Safety Stock
Inventory decreases at a
constant rate

In
v Level of Maximum Inventory
e
n
t
o
r
y

L
e
v Q
e
R E O R D E R L E V E L
l

500 units

0
Lead time IInd order is IIIrd order is
(10 days) placed placed Time
Ist order is placed The goods are received The goods are received The goods are
received
Graphic Presentation of EQQ
 EOQ Model Cost Curves

Slope = 0
Annual Total Cost
cost (Rs)

Minimum
total cost
Carrying Cost = (Q/2)H

Ordering Cost = (D/Q)S

Optimal order Order Quantity, Q

Qopt
 Notation

• D = annual demand
• C = per-unit cost
• h = inventory holding rate (%)
• S = order cost/set-up cost
• Q* = Economic order quantity
• R = reorder point
• SS = safety stock
• LT = lead time
 EOQ Model
• Balance holding cost against ordering
costs
• Calculate the optimal EOQ:

•No of orders per year = D/Q*

•Time between orders = Q*/D
 Two-Bin System

• Special case of fixed order quantity model.

• Amount of stock equivalent to the order point is
physically segregated into a second bin and is then
sealed.
• When all the open stock has been used up, the sealed
bin is opened and a new order is placed.
• Practical method for keeping control of low-value
items.
• Without adequate training this system can be abused.
• Quantity in the second bin should be reviewed from time
to time.
 Single-Bin System

• Stock is periodically checked and each item is

ordered to a pre-established stock level.
• Works well on floor stocks located near the
point of use, like large grocery stores.
 ABC Classification System

Classifying inventory according to

some measure of importance and
allocating control efforts accordingly.
A - very important High
A
Annual
B - mod. important Rs volume B
of items
C - least important Low C
Few Many
Number of Items
 ABC Analysis

• Pareto noted that many situations are dominated by a

relatively few vital elements.
• Controlling the relatively vital few will go a long way
toward controlling the situation.
• Applying the ABC principle to inventory management
involves:
– Classifying the inventory items on the basis of relative
importance.
– Establishing different controls for different classifications with
the degree of control being commensurate with the ranked
importance of each classification.
 ABC Classification
A graphical illustration
100%

90%
Class C
80%
Consummption value (%)

Class B
70%

60%
Class A
50%

40%

30%

20%

10%

0%
0%

0%
10

20

30

40

50

60

70

80

90

10
No. of items (% )
 Inventory Turnover and Service Levels

Inventory turnover is the measure of how

well the business is managing its
inventory. It shows how many times a
year the inventory is turning(or moving)
through the organisation. The higher the
turnover,the better.However there is a
larger probability
That stock may not be available when the
customer needs it.
 Inventory Turnover …..

• Inventory turnover in a Retail business

Total sales/Actual inventory
• Inventory turnover in a Manufacturing
business
Cost of Goods sold/Actual inventory
Simple physical techniques may
provide more economical
control of inventories.
 Class Exercise: EOQ

Alpha company estimates that it will sell 12000 units in the

next year. Ordering cost is Rs. 100 per order and carrying cost
per unit per year is 20% of the purchase price per unit. The
purchase price per unit is Rs. 50.

Find out:

A) Economic order quantity (EOQ)-----------------------------

B) No. of orders per year-------------------------------

C) Time between successive orders---------------------------

 Solution: EOQ

D = 12000 units / year h = 20%=0.2

S = Rs. 100 / order h: holding cost
C = Rs. 50 / unit h = 50*0.2= Rs. 10 / unit / yr

 EOQ = √2DS / H = √2*12000*100 / 10 = √240,000

= 490 units

 No. Of orders / year = D / EOQ = 12000/ 490 = 24 orders / Yr

 Time between orders = EOQ / D = 490 / 12000 = 0.04 Yr

= 0.48 month
= 15 days
 ABC ANALYSIS
The store of a engine repair shop has 10 items, whose details
are shown below. Apply ABC analysis and compute inventory.

Component Description Price / Unit Annual Qty

Code
C01 PACKING THE 100 100
THREAD
C02 TOWER BOLT 200 300
C03 HEXAGONAL NUT 50 700
C04 BUSH 300 400
C05 COUPLING 500 1000
C06 BEARING (BIG) 3000 30
C07 BEARING (SMALL) 1000 100
C08 BEARING (SMALL) 7000 500
C09 BEARING (SMALL) 5000 105
C10 DRILL BIT 60 1000
 Solution
Component Price (Rs.) Units / Year Annual Cumulative Value
Code Consumption of Annual
(Rs.) Consumption (Rs.)

C08 7000 500 35,00,000 35,00,000 A

C09 5000 105 5,25,000 40,25,000 B
C05 500 1000 5,00,000 45,25,000 B
C04 300 400 1,20,000 46,45,000 C
C07 1000 100 1,00,000 47,45,000 C
C06 3000 30 90,000 48,35,000 C
C02 200 300 60,000 48,95,000 C
C10 60 1000 60,000 49,55,000 C
C03 50 700 35,000 49,90,000 C
C01 100 100 10,000 50,00,000 C