MANAGING INVENTORYBy Divya Francis Jasin Leo Mujeeb

Classification (based on the nature of materials) Production Inventory includes raw materials,

parts & components directly used in production MRO Inventory Maintenance, Repair & Operating supplies, not directly used in production (eg: consumables, spare parts, packing material) In-process Inventory or Work in Process (WIP) Inventory semi finished products Finished Goods Inventory all final products

Inventory Catalogue (list of items in the inventory) Number or Code for each item

Description Annual Consumption (of at least past 3 years) Names of Suppliers (of at least past 3 years) Average life of the item Stock of the item

Classification of Inventory1) ABC Analysis

2) XYZ Analysis3) VED Analysis 4) FSN Analysis 5) PQR Classification 6) SDE Classification 7) GOLF Classification 8) SOS Classification 9) HML Classification

ABC Analysis (Pareto Analysis) Selective technique of controlling different items

of inventory Divides inventory into three categories A, B & C based on their annual consumption value. A category represent 70-80% of total inventory costs, but they account for only 15% of total inventory items. B category represent 15-25% of total value, and they account for 30% of total inventory items. Category C represent only the 5% of total volume, but they include as many as 50-60% of total inventory items..

ABC Analysis

VED Analysis VED: Vital, Essential & Desirable classification VED classification is based on the criticality of the

inventories. Vital items Its shortage may cause havoc & stop the

work in organization. They are stocked adequately to ensure smooth operation. Essential items - Here, reasonable risk can be taken. If

not available, the plant does not stop; but the efficiency of operations is adversely affected due to expediting expenses. They should be sufficiently stocked to ensure regular flow of work. Desirable items Its non availability does not stop the

work because they can be easily purchased from the

XYZ Analysis XYZ analysis is more used in relation of the

customer demand for FG (finished goods). Annual stock value of items (bulk versus weight) is taken into account X is high demand or stock value, Y medium demand, Z very low or exporadic demand

FSN AnalysisClassification is based on the pattern of issues from stores & is useful in controlling obsolescence, based on 1) Average stay of the item in Inventory and 2) Consumption rate of the item. 3 categories Fast moving items shorter stay in warehouse Slow moving items Non moving items long stay in warehouse

PQR Classification Based on shelf life of an item (time for which an

item displays its complete characteristics) P low shelf life, more attention Q medium R high shelf life, least attention

SDE ClassificationBased upon the availability of items and is very useful in the context of scarcity of supply. S refers to scarce items, generally imported, and those which are in short supply. D refers to difficult items which are available indigenously but are difficult items to procure. E refers to items which are easy to acquire and which are available in the local markets.

GOLF ClassificationBased on source of an item G Government special procedures for procurement, more lead time O Open Market large number of suppliers L Local emergency procurement F Foreign sources more paperwork and lead time

SOS Classification Based on the time of availability

S seasonal eg: agricultural products OS Off seasonal

HML Classification Based on unit price of material

H High M Medium L Low

Inventory Control Techniques1) Item reducing a) Preferred number series demand is concentrated around few types or sizes which are numbers derived from fives series in geometric progression b) Value Analysis - To secure maximum benefits, it is essential to select those items for value analysis which offer the highest scope for cost reduction. Only A and B items are selected for detailed value analysis and C items should not be value analysed. c) Standardisation variety (categories, number, sizes etc) is reduced but still meeting demand following the International, National, Industry, Company standards d) Codification alphanumeric unique & identifiable codes allotted to items based on standards, characteristics, usage etc. to prevent duplicate stocks and implement computerization. e) Analysis of frequency distribution of demand / use Normal frequency curve with types/sizes in X-axis and frequency in Yaxis plotted and peak ones retained and others eliminated / reduced.

Inventory Control Techniques 2) Quantity Reducing a) Adhoc approach based on past practices. It is unscientific b)

and useful only in small companies Through stock levels Minimum Level It is the minimum stock to be maintained for smooth production. Reorder Level The stock level at which an order should be placed. Stocks are just sufficient to meet the demands during one lead time before reaching min. level Danger / Warning level Level at which stocks are just sufficient to meet the demands during one lead time getting exhausted. It is lower than reorder level. Safety / Buffer Stock Level (Amber zone) Stock for usage at normal rate during the extension of lead time or fluctuations in supply Stockout level (Red zone) No material left in stock

Inventory Control Techniques Lead time reducing technique

- by maintaining the safety stock, by maintaining

the Consumption rate & Lead Time

Inventory Management System Fixed quantity fixed interval order system EOQ is ordered at

fixed regular intervals and small safety stock is maintained. Fixed order quantity system When stock reaches re-order level, a fixed quantity (usually the EOQ) is ordered. Assumptions:Demand for the product is constant Lead time is constant Price per unit is constant Inventory carrying cost is based on average inventory Ordering costs are constant per order All demands for the product will be satisfied (no back orders) Two-bin system stocks in two bins lower bin contains reorder level stock and upper bin contains difference between max. stock & reorder stock levels. Three-bin system modification of two-bin system where lower bin is split to two one contains reorder level and the other contains safety stock

EOQ Order system fixed order or Q-systemAnnual Annual Annual Total Annual Cost Purchase + Holdin + Ordering = Cost Cost g Cost

TC DC

Q D H S 2 Q

EOQ

2 DS H

TC = Total annual cost D = Demand (annual) C = Cost per unit Q = Order quantity S = Cost of placing order/setup cost H = Annual holding and storage cost per unit of inventory

Fixed interval order system Hybrid system, P-system, Periodic Reorder or Cyclic order system Inventory position is reviewed at fixed time

periods. If the inventory level is found to be above a preset reorder point, no action is taken. If the inventory level is at or below the reorder point, the analyst orders a variable quantity equal to Q=MX Where M Max. stock level X - current quantity on hand and on order. The reorder quantity therefore varies from one review period to the next.

Flow Control System Variation of cyclical system

Applicable in continuous manufacturing

operations that produce the same basic product in large quantities day after day. individual items are stored on the production line near the point of use. Review of material stock daily & imbalances reported

Variable order Variable interval Perpetual inventory system, Optional Replenishment system In such systems, stock levels are reviewed on a

periodic basis, but orders are placed only when inventories have fallen to a predetermined reorder level. At that time, an order is placed to replenish inventories to the level that is sufficient for buffer stocks plus the expected requirements for one cycle, as in the periodic system.