Presentation Topic: Inventory

Management

Presenting By: Ziad Khan BBA (019)Date: sept 22, 2011

Inventory ManagementInventory Management

Inventory is an idle stock of physical goods that contain Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an economic value, and are held in various forms by an organization in its custody awaiting packing, processing, organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time.transformation, use or sale in a future point of time. All organizations engaged in production or sale of All organizations engaged in production or sale of

products hold inventory in one form or other. products hold inventory in one form or other. Inventory can be in complete state or incomplete Inventory can be in complete state or incomplete

state. state. Inventory is held to facilitate future consumption, Inventory is held to facilitate future consumption,

sale or further processing/value addition. sale or further processing/value addition.

The reasons for keeping stockThe reasons for keeping stock1)1) Smooth-out variations in Smooth-out variations in

operation operation performances performances

2)2) Avoid stock out or shortage Avoid stock out or shortage

3)3) Safeguard against price changes Safeguard against price changes and and inflation inflation

4)4) Take advantage of quantity Take advantage of quantity discounts discounts

All these stock reasons can apply to All these stock reasons can apply to any owner or productany owner or product

Inventory costs Inventory costs

1. Holding or carrying costs:1. Holding or carrying costs:-- Interest on Investment.Interest on Investment. Losses from deterioration and spoilage.Losses from deterioration and spoilage. Storage-space costs, including Rent, Rates, Taxes, Storage-space costs, including Rent, Rates, Taxes,

Electricity, etc.Electricity, etc. Insurance, in addition- fixed costs in form of Insurance, in addition- fixed costs in form of

salaries, salaries, wages etc of employees connected with this wages etc of employees connected with this work in work in stores and Material handling Departmentsstores and Material handling Departments

Annual holding cost = Order quantity/2 Annual holding cost = Order quantity/2 × holding cost per holding cost per unit per year unit per year

Ordering Cost :Ordering Cost : Preparing purchase or production orders, receiving and Preparing purchase or production orders, receiving and

preparing and processing related documents. preparing and processing related documents. Incremental costs of purchasing or transportation for Incremental costs of purchasing or transportation for

frequent orders.frequent orders. Out of pocket costs of postage, telephones, telegrams, Out of pocket costs of postage, telephones, telegrams,

cost of stationery, traveling etc.cost of stationery, traveling etc. Extra costs of numerous small production runs, overtime, Extra costs of numerous small production runs, overtime,

setups, training etc. In addition- fixed costs in form of setups, training etc. In addition- fixed costs in form of salaries, wages of employees connected with this work in salaries, wages of employees connected with this work in purchasing, receiving, inspection and Material handling purchasing, receiving, inspection and Material handling Departments.Departments.

Annual ordering cost = no. of orders placed in a year Annual ordering cost = no. of orders placed in a year × cost cost per orderper order

Techniques of inventory control:Techniques of inventory control:

1)1) Economic order quantity (How Economic order quantity (How much to order)much to order)

2)2) Reorder level (when to order)Reorder level (when to order)

3)3) Minimum inventory or safety stockMinimum inventory or safety stock

4)4) Maximum inventory levelMaximum inventory level

Economic order quantity Economic order quantity

It is the level of inventory that minimizes total inventory It is the level of inventory that minimizes total inventory holding costs and ordering costs. It is one of the oldest holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework classical production scheduling models. The framework used to determine this order quantity is also known as used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was Wilson EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a developed by F. W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for consultant who applied it extensively, is given credit for his in-depth analysis.his in-depth analysis.

AssumptionsAssumptions

1)1) Order arrives instantly Order arrives instantly

2)2) No stock out No stock out

3)3) Constant rate of demandConstant rate of demand

Example:

Cost to Purchase = $4.00 per line item purchased

Cost to Carry = $0.30 per dollar of inventory per year

Qty Used/Month = 10 pieces per month

Cost of item “A" = $1.00 each

Reorder level Reorder level This is that level of materials at which a new order for This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order somewhere between maximum and minimum levels. Order points are based on usage during time necessary to points are based on usage during time necessary to requisition order, and receive materials, plus an allowance requisition order, and receive materials, plus an allowance for protection against stock out.for protection against stock out.

The order point is reached when inventory on hand and The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity quantities due in are equal to the lead time usage quantity plus the safety stock quantity.plus the safety stock quantity.

Ordering level = Max - daily or weekly or monthly usage × Lead time

Example:Maximum daily requirement 800

unitsTime required to receive emergency supplies 4 daysAverage daily requirement 700 unitsMinimum daily requirement 600 unitsTime required for refresh supplies One month (30

days)

Calculate: ordering point or re-order level

Minimum Inventory or Safety Minimum Inventory or Safety StockStockThe minimum level or minimum stock is that

level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies.

Minimum level = Re-order level – Average or normal usage × Average lead time

Example:Normal usage 100 units per day

Maximum usage 130 units per day

Minimum usage 70 units per day

Re-order period 25 to 30 days

Calculate Minimum limit or level

Maximum inventory levelMaximum inventory levelThe maximum stock limit is upper level of the inventory and the quantity that must not be exceeded without specific authority from management. In other words, the maximum stock level is that quantity of material above which the stock of any item should not normally be allowed to go. This level is fixed after taking into account such factors as: capital, rate of consumption of materials, storage space available, insurance cost, risk of deterioration and obsolescence and economic order

quantity.Maximum level = Re-order level – (Min- usage × Min- lead

time )+ Economic order quantity

Example:Normal usage 100 units per day

Maximum usage 130 units per day

Minimum usage 70 units per day

Re-order period 25 to 30 days

Economic order quantity 5,000 units

Calculate: Maximum limit or level.

Danger LevelDanger Level

Some enterprise also calculate danger level. When this level of stock is reached, then emergency steps are taken by the management to acquire material supplies.

When danger level is reached, the try is made to purchase materials from the nearest possible source or place so that the workers and plant and machinery may not remain idle due to shortage of materials supplies.

Danger level = Average daily usage × Time required to get emergency supply

Example:Normal usage or average requirement 700 units per dayMaximum usage 800 units per dayMinimum usage 600 units per dayRe-order period 25 to 30 daysTime required to receive emergency supplies 4 Days

Calculate danger level.

Enough for today. . .