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Inventory Management
:STOCK, STOCK, BEAUTIFUL STOCK:PILES ON THE SHOP FLOOR AND THE
WARE-HOUSE AND MORE IN THE DOCK.
:SOME OF IT ANICIENT, SOME OF IT NEW:ALAS AND TOMORROW ANOTHER LOT IS
DUE….
-- UNKNOWN AUTHOR
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
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
Goals of Inventory Management
• Maximize customer service (this requires carrying substantial inventory).
• Minimize inventory investment (this requires carrying little inventory).
– Customer service must be a strategic issue.
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
• Carrying cost or Holding cost
• Ordering cost
• Shortage costs
Carrying 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
SHORTAGE COST
Costs arising out of pushing the order back and rescheduling the production system to accommodate these changes
Rush purchases, uneven utilisation of available resources and lower capacity utilisation
Missed delivery schedules leading to customer dissatisfaction and loss of good will
The effects of shortage are vastly intangible, it is indeed difficult to accurately estimate
Inventory Control Systems
• 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?
The Inventory Order Cycle
Demand rate
0 TimeLead time
Lead time
Order Placed
Order Placed
Order Received
Order Received
Inve
nto
ry L
eve
l
Reorder point, R
Order qty, Q
Total cost of carrying
Total cost of ordering
Sum of the two costs
Minimum Cost
EconomicOrder Qty.
Level of Inventory
Cost
of
Inven
tory
EOQ MODELA GRAPHICAL
REPRESENTATION
EOQ Model
• Balance holding cost against ordering costs
• Calculate the optimal EOQ:
* 2DSQ
Ch=
•No of orders per year = D/Q*
Inventory Control Systems
Continuous Review System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
Periodic Review System
Physical count of items made at periodic intervals
Inventory Control Systems
•Continuous review -Fixed order quantity model - Two-bin system
-Less responsive to change in demand
-Difficulty of ordering of multiple items from same supplier
Periodic Review - Fixed time period model
ROP
SS
Q
L
Inven
tory
Level
Time
Safety Stock
Mean Demand during LT
Inventory Position Physical Inventory
CONTINUOUS REVIEW (Q) SYSTEM
AN ILLUSTRATION
Fixed Order Quantity Model
Reorder = Expected demand + Safetypoint during lead time stock
Fixed Time Period Model
• Reviewed at fixed specified time interval.• Place an order for a quantity that, when added
to the quantity on hand, will equal a predetermined maximum level.
• Independent demand is the usual situation.• Difficult to record withdrawals and additions
from stock.• Groups of items are purchased from a common
supplier.• Items that have limited shelf life.
SS
L
Inven
tory
Level
Time
Safety Stock
Inventory Position Physical Inventory
R 2R 3R
QRQ2R Q3R
Order Up to LevelS
PERIODIC REVIEW (P) SYSTEM
AN ILLUSTRATION
Fixed Time Period Model
• Small tools, manufacturing supplies.
• Common commercial parts such as nuts, bolts, washers.
• Office supplies.
• Perishable items such as dairy products, fruits and vegetables.
• Chemicals, solvents used in the manufacturing process.
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
• Special case of fixed time period model.• 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.
AA - very important
BB - mod. important
CC - least important
Annual Rs volume of items
AA
BB
CC
High
Low
Few ManyNumber 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.
ALTERNATIVE CLASSIFICATION SCHEMES
ABC Classification (on the basis of consumption value)
XYZ Classification (on the basis of unit cost of the item)
High Unit cost - Medium Unit cost - Low unit cost
FSN Classification (on the basis of movement of inventory)
Fast Moving - Slow Moving - Non-moving
VED Classification (on the basis of criticality of items)
Vital - Essential - Desirable
On the basis of sources of supply
Imported - Indigenous (National Suppliers)- Indigenous (Local Suppliers)
INVENTORY TURNOVER AND SERVICE LEVELS
Simple physical techniques may provide more economical
control of inventories.