Professional Documents
Culture Documents
Lecture9_INVENTORYMGMTAZM
Lecture9_INVENTORYMGMTAZM
MAINTENANCE
Includes raw materials and labour costs that are still under work
progress at the end of accounting period.
The packaging and the raw material used in the dress is WIP till it
is sold to the customer are the example of WIP.
• Speculative or hedge inventory protects against some future event, e.g. labor
strike
• Maintenance, repair, and operating (MRO) inventories
Stages in inventory management
1. Purchasing
• Purchase of raw materials to turn into finished products or buying products to sell as a main
product.
2. Production
• Manufacturing inventory or preparing the final product from raw material and its constituent
parts.
3. Stock Holding
• Control system for storage of raw materials and final products before sale.
4. Sales
• Keep track of your inventory and make sure your products reach out to customers in real time
and taking payment.
5. Reporting
• Money flow is vital for businesses. Company needs report on money spent and earned to assess
profitability.
Important of Inventory management
1. Helps the company in inventory tracking.
2. To make sure that there is rarely too much or too little stock on hand.
3. Limits the risk of stock-outs, inaccurate records and restricted cash flow.
4. Beneficial in many ways for a company where it assures that the customer demands
are met at the right time leading to enhanced customer service and satisfaction.
5. Raises the profit of the organization by making you invest in just the right amount of
order quantity of stock and maintaining the cash flow.
Benefit of Inventory Management
1. Saves money
• Understanding the stock trends make you invest money in the right
amount of stock at the right time. This practice saves money as well as
maintains cash flow for the organization.
• It also allows you to keep less stock at each location, be it store or the
warehouse.
2. Improve cash flows
• Allows you to spend money on the inventory counts that sell.
3. Satisfies customers
• makes sure that the customers' demands are met without waiting.
Challenges in Inventory Management
• Inventory management may give you accurate stock of your inventories but the challenge crops up
when your inventory counts are too high and you are not being able to sell it.
• Not having enough inventory to fulfill orders.
• not understanding what items to have in the inventory. Sometimes customer change their decision in
ordering requirement or reduce the quantity of requirement.
• Having accurate stock detail of physical inventory and periodic inventory is vital to know when to
refill the stock or which stock moves well.
• Outdated or manual processes of inventory systems can be error-prone and slow down the work
process.
• Tracking inventory system trends is important to cater to changing tastes and needs of the customers.
Knowing the preferences of the customers is also a challenge for inventory management.
• Customer service and operations become difficult if the type of inventory or products are hard to
locate.
Objectives of Inventory Management
• Provide desired customer service level
• Customer service is the ability to satisfy customer
requirements
• Percentage of orders shipped on schedule
• Percentage of line items shipped on schedule
• Percentage of dollar volume shipped on schedule
• Idle time due to material and component shortages
Inventory Management Objectives
Provide for cost-efficient operations:
• Buffer stock for smooth production flow
• Maintain a level work force
• Allowing longer production runs & quantity discounts
• Inventory Turnover:
annual cost of goods sold $10,000,000
Turnover 26 inventory turns
average inventory value $384,615
• Weeks/Days of Supply:
average inventory on hand in dollars $384,615
Weeks of Supply 2weeks
average weekly usage in dollars $10,000,000/52
$384,615
Days of Supply 10 days
$10,000,000/260
Relevant Inventory Costs
Item Cost Includes price paid for the item plus other
direct costs associated with the purchase
© Wiley 2007
Continuous (Q) Review System Example: A computer company has annual demand D of 10,000.
They want to determine EOQ for circuit boards which have an annual holding cost (H) of $6 per
unit, and an ordering cost (S) of $75. They want to calculate TC and the reorder point (R) if the
purchasing lead time is 5 days.
• EOQ (Q)
2DS 2 * 10,000 * $75
Q 500 units
H $6
• Reorder Point (R)
10,000
R Daily Demand x Lead Time * 5 days 200 units
250 days
© Wiley 2007
EPQ Equations
• Total cost:
D I MAX
TC EPQ S H
Q 2
• Maximum inventory:
d
• d=avg. daily demand rate I MAX Q 1
• p=daily production rate p
2DS
EPQ
d
H
1
p
d
I MAX Q
1 p
D I MAX
TC EPQ S H
Q 2
EPQ Problem: HP Ltd. Produces its premium plant food in 50# bags. Demand is 100,000 lbs. per week and they operate 50
wks. each year and HP can produce 250,000 lbs. per week. The setup cost is $200 and the annual holding cost rate is $.55 per
bag. Calculate the EPQ. Determine the maximum inventory level. Calculate the total cost of using the EPQ policy.
I MAX
Q
d
1 p
I 1 0 0, 0 0 0
MAX 7 7, 8 5 0 1 4 6, 7 1 0b a g s
2 5 0, 0 0 0
5,000,000 46,710
D I
TC EPQ S MAX H TC 200 .55 $25,690
Q 2 77,850 2
Quantity Discount Model
• Same as the EOQ model, except:
• Unit price depends upon the quantity ordered
TCQD
D Q
S H
Q 2
CD
Quantity Discount Procedure
• Calculate the EOQ at the lowest price
• Determine whether the EOQ is feasible at that price
• Will the vendor sell that quantity at that price?
• If yes, stop – if no, continue
• Check the feasibility of EOQ at the next higher price
© Wiley 2007
P System: an auto parts store calculated the EOQ for Drive Belts at 236 units and wants to compare
the Total Inventory Costs for a Q vs. a P Review System. Annual demand (D) is 2704, avg.
weekly demand is 52, weekly σ is 1.77 belts, and lead time is 3 weeks. The annual TC for the Q
system is $229; H=$0.97, S=$10.
Payoff Table
Prob. Of Occurrence .20 .25 .30 .15 .10
Customer Demand 80 90 100 110 120
# of Shirts Ordered Profit
80 $960 $960 $960 $960 $960 $960
90 $900 $1080 $1080 $1080 $1080 $1040
Buy 100 $840 $1020 $1200 $1200 $1200 $1083
110 $780 $ 960 $1140 $1320 $1320 $1068
120 $720 $ 900 $1080 $1260 $1440 $1026
Sample calculations:
Payoff (Buy 110)= sell 100($20-$8) –((110-100) x ($8-$2))= $1140
Expected Profit (Buy 100)= ($840 X .20)+($1020 x .25)+($1200 x .30) +
($1200 x .15)+($1200 x .10) = $1083
ABC Inventory Classification
• ABC classification is a method for determining level of control and frequency of
review of inventory items
• A Pareto analysis can be done to segment items into value categories depending
on annual dollar volume
• A Items – typically 20% of the items accounting for 80% of the inventory value-
use Q system
• B Items – typically an additional 30% of the items accounting for 15% of the
inventory value-use Q or P
• C Items – Typically the remaining 50% of the items accounting for only 5% of the
inventory value-use P
Justifying Smaller Order Quantities