INVENTORY MANAGEMENT

K. Aswathappa, K. Shridhara Bhat

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A.J INSTITUTE OF MANAGEMENT

Inventory:
It includes- raw, in process, finished packaging, spares & others stocked in order to meet an unexpected demand or distribution in the future. Inventory Cost includes: (Ordering Cost, Carrying Cost, Storage Space Costs, Handling Equipment Costs etc.)

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Factors Influencing Inventory Management & Control:

- Type of the Product: If the materials used in the manufacture of the product have a high unit value when purchased, a much closer control is usually in order. - Type of Manufacture: Where continuous manufacture is employed the rate of production is the key factor. - Volume of Production: ( E.g. Manufacture of a large locomotive involves the planning & control of thousands of items of inventory. - The objectives of the company as they relate to inventories - The capabilities of personnel who will be responsible for managing the system on a continuing basis
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Benefits of Inventory Management & Control:

- Inventory Control ensures an adequate supply of materials, stores etc, minimizes stock-outs, shortages, & avoid costly interruptions in operations; - It permits a better utilization of available stocks by facilitating inter-department transfers within a company; - It provides a check against the loss of materials through pilferage; - It eliminates the duplication in ordering by centralizing the source from which purchase requisitions give out; - It enables management to make cost & consumption comparisons between operations & periods.
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Inventory Control Techniques: - ABC Analysis:

ABC Analysis is a basic analytical management tool which enables top management to place the efforts where the results will be greatest. The technique tries to analyze the distribution of any characteristic by money value of importance in order to determine priority.

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A.J INSTITUTE OF MANAGEMENT

Procedure for developing ABC Analysis:

- List each item carried in inventory by number or some other designation; - Determine the annual volume of usage & rupee value of each item; - Multiply each items annual volume of usage by its rupee value; - Compute each items percentage of the total inventory in terms of annual usage in rupees; - Select the top 10% of all items which have the highest rupee percentages & classify them as A items; - Select the next 20% of all items with the next highest rupee percentages & designate them B items; - The next 70% of all items with the lowest rupee percentages are C items.
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Advantages of ABC Analysis:

* This approach helps the materials manager to exercise selective control & focus his attention only on a few item when he is confronted with lakhs of stores items. * Many organizations have claimed that the ABC Analysis has helped in reducing the clerical cost & resulted in better planning & improved inventory turnover.

Limitations:
* ABC Analysis in order to be fully effective, should be carried out with standardization & codification. * Some items, though negligible in monetary value may be vital for running the plant & constant attention is needed.
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Problems:

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ROL:
Re-order level is predetermined point, & when the existing stock of inventories reaches this point or falls below it, the purchase action is initiated to replenish them. It fundamentally deals with When to order to replenish the inventories. Generally ROL lies between minimum stock level & maximum stock level. It depends on various considerations - Lead time; ( Is the time taken to receive the delivery after placing order with the supplier. OR the number of days required to receive the inventory from the date of placing order. ) - Average periodic consumption; - Safety stock. ( To avoid stock out firm may require to maintain safety stock or to safeguard against shortages. Stock out occurs when demand exceeds the available inventory in stock. )
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Service Level:
There are several ways to determine the amount of the safety stock. 1 Popular method is to establish a safety stock that will meet a specified service level. The service level is the probability that the amount of inventory on hand during the lead time is sufficient to meet expected demand i.e. the probability that a stock out will not occur. A service level of 90% means that there is a 0.90 probability that demand will be met during the lead time, & the probability that a stock out will occur is 10%.

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EOQ:
In EOQ there are 2 issues: When to order, & How much to order. The problem of When to order is decided by prescribing reorder level. Other issue is How much to order, which means what should be the size of order. In bulk buying there is a high carrying cost, & in small quantities reduces holding cost but adds to ordering cost. EOQ strikes a balance between the ordering cost & the carrying cost. It devices such a quantity of each order at which the total ordering cost & carrying cost would be minimum. As both these costs are mutually exclusive the total of both costs will be minimum at a point where ordering cost equates carrying costs.
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VED Classification:
The VED Analysis is done to determine the criticality of an item & its effect on production & other services. It is specially used for classification of spare parts. If a part is vital, it is given V classification, if it is essential then it is given E classification & if it not so essential the part is given D classification. For V items a large stock of inventory is generally maintained, while D Desirable items minimum stock is enough.

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Just-In-Time System: JIT means

- producing the quantity of units that is needed, no more, or less, - producing them on the date & at the time required, not before & not after, - that a supplier delivers the exact quantity demanded, at the scheduled time & date. Any deviations from these requirements mean that either resources are being unnecessarily wasted or that customers needs are not being respected.

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Benefits of JIT System:

- Inventory levels are drastically reduced; - Product quality is improved & hence the cost of scrap is reduced; - With less-in-process inventory, less space is taken up by inventory & material handling equipment; - Elimination of unpleasant suppliers such as those with late deliveries & unacceptable quality; - Reduction in floor space needs due to lesser work-in-process inventory & smaller lot sizes.

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