PRODUCTION & OPERATION MGMT, PPT

8/6/2019 PRODUCTION & OPERATION MGMT, PPT

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PRESENTATION ON

INVENTORYMANAGEMENT

:BY PALLAVI VARSHNEY AND

PRASHANT TIWARI


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INVENTORY

Inventory:inventory constitutes one of the most importantelements of any system dealing with the supply, manufacturingand distribution of any goods and services. inventory is the stockof any material or finished goods on hand at a given time

The term inventory can be used to mean several different thingssuch as:vThe stock on hand of materials at a given time;vAn itemized list of all the physical assets;vTo determine the quality of items on hand;vThe value of the stock of goods owned by an organization at aparticular time


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SURVEY BASED INFORMARTION:

qPractical example for effective inventory improvementsystem:Ina study entitled, Retailed and Consumer Packaged GoodsInventory Trends , ARCHSTONE consulting give followingtrends:

after a period of improvement in retailinventory productivity gains have increased from 2006 to 2007.q

q

q

qWal Marts recent inventory productivity gains kept pace with

those of last four years ,but didnt perform as per retailersexpectations in just few years ago.


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Classification of inventory

NATURE OF MATERIALFUNCTIONAL CLASSIFICATION ON BASIS OF UTILITY

USES OF MATERIAL

roduction inventoryRO inventory

n-process inventoryinished goods inventory

Working stockSafety stockAnticipation stockPipeline stockDecoupling stockPsychic stockDead stock

Transaction inventorySpeculative inventoryPrecautionary inventory


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INVENTORY Consists of.

INVENTORY

Raw-Material Work-in-Progress

FinishedGoods

Consumables& Spares

RM: Physical Resources tobe converted into FG

WIP: Semi-Processed RM,which still requires someoperations

FG: Final Items waiting inwarehouse as a buffer, tobe supplied

C&S: Consumable itemsother than RM whichhelps in production andessential parts ofmachines & equip


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INVENTORY Basic Problem

Managing the level of inventory is likemaintaining the level of water in a bath tubwith an open drain.

The water is flowing in and out continuously.

If water let in two slowly the tub will be empty

soon, if the water let in is too fast the tuboverflows.


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Costs Associated with Inventory

Purchase Cost or Capital Cost

Ordering Cost / Setup Cost

Carrying Cost / Holding Cost

Stock-Out Cost


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qPurchase Cost or Capital CostqNominal Cost of Purchasing or ProducingqPrice x Quantityq

qOrdering Cost or Setup CostqCost of Planning & Placing an Order

qSalary of related StaffqRent of the BuildingqCost of miscellaneous office items like stationery,

postage, telephone, internet etc.

qCarrying Cost or Holding CostqCosts associated with maintaining inventory

qRent of warehouse or storage placeqCost of capital tied up in inventoryqExpenses of the warehouse like electricity,

telephone, insurance, security etc.qCost of damages & Obsolescence

qStock-Out CostqIndirect Cost of not serving the customers

qIdle time for Machine and ManpowerqDelay in work (production) leads to penaltiesq

Loss of Sale (Profits)qDissatisfaction of customers & Loss of Goodwill


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Inventory Control / Management

qA process of finding a balance between:

qMinimum Cost in Inventory andqAvoiding Stock-Outsq

q

qBy using scientific methods and techniques.

qPurpose is that to keep the stock in such a way thatneither there is overstocking nor under stocking

qFor proper management of inventory level, two issues needattention And analysis:q ORDER QUANTITY: how much to order of each materialwith either outside suppliers or production dept. withorganization.q ORDER POINTS: when to place the orders. It is also calledreorder level points.


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Objective Inventory Control

vTo ensure smooth supply of materialsvTo avoid both over stocking and under stocking

vTo maintain investment in inventories at optimum level asrequiredvTo keep materials cost under control so as to reduce cost ofproductionvTo eliminate duplication in ordering or replenishing stocks

vTo minimize losses through deterioration ,pilferage, wastagesand damagesvTo design proper organization for inventory management.vTo ensure perpetual inventory control so that materials shownin stock ledgers lying in stores.vTo ensure right quality goods at reasonable prices.vTo facilitate furnishing of data for short term and long termplanning and control of Inventory.v


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Techniques of Inventory Control

1.Fixed Order Quantity System (Q System)2.

3.Fixed Order Period System (P System)4.

5.Economic Order Quantity Model (EOQ Model)6.

7.ABC Analysis8.

9.VED Analysis10.

11.FSN Analysis12.

13.SDE Analysis


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1. Fixed Order Quantity System (Q System)

Various levels of inventories are decided based onConsumption of MaterialAvailability of materialLead Time

Different Levels of Inventories are:Reorder LevelMinimum Level (Safety Level)

Maximum Level

Minimum Level (Safety Level)That quantity which must always be in

stockTo counter with uncontrollable factorsCalculated based on past and current

factors

Maximum LevelLevel above which inventory should never

be maintainedBased on ast ex erience and stora e


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Reorder LevelLevel (point) at which if stock in store

reachesImmediate Order should be placed

Reorder Level depends on these factorsMaximum Consumption Per dayLead Time (Time Gap b/w Order and

Receipt)Pre-Decided Safety Stock

REORDER LEVEL = Maximum Usage (Per Day) X Lead Time +

Safety Stock


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1. Fixed Order Quantity System (Q System)

Time

Inven

tory

Le

vel

O1 S1 O2 O3S2 S3

Maximum Level

Safety Level

Re-Order Level

T1 T2 T3

LT1 LT2 LT3

Q1Q2

Q3

O

An order of pre-decided quantity is given to thesupplier as soon as re-order level comes.

Q1 = Q2 = Q3 T1 # T2 # T3


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2. Fixed Order Period System (P System)

Position of Inventory is reviewed after fixed point of time Any Shortfall is ordered to make it near to Max Level

T1 = T2 = T3 Q1 # Q2 # Q3

Time

Inve

ntory

Le

vel

Maximum Level

Safety Level

T1 T2 T3

Q1Q2 Q3

O


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2. Fixed Order Period System (P System)

Time

Invento

ry

Leve

l

Maximum Level(5000)

Safety Level(500)

T1 = 30

O

4000

3000

2000

1500

1000

Q1 = 4000

5000

4000

3000

2000

Q2 = 3000

1500

Q3 = 3500

T2 = 30 T3 = 30


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3. Economic Order Quantity (EOQ Model)

Another approach to control the inventoryby answering two questions

How many times (in a year) Order should be

placed? (Ordering Cost)

Each order should be of what quantity?(Holding/Carrying Cost)


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3. Economic Order Quantity (EOQ Model) -

Factors

Once again to remind. Ordering Cost are:

Cost of Planning & Placing an Order Salary of related Staff

Rent of the Building Cost of miscellaneous office items like stationery,

postage, telephone, internet etc.

Holding/Carrying Costs are: Costs associated with maintaining inventory

Rent of warehouse or storage place Cost of capital tied up in inventory Expenses of the warehouse like electricity,

telephone, insurance, security etc. Cost of damages & Obsolescence


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Problem

Suppose, Total Consumption of a RM is 5000 units in a year.

Order can be placed in form of 1 Order of 5000 units

5 Orders of 1000 units 10 Orders of 500 units 20 Orders of 250 units

As we increase the no. of orders, Total Ordering Cost willincrease

With increase in no. of orders, quantity to be hold will

decrease, will reduce the holding cost.


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Problem

Invento

ry

Leve

l

O1

4000

3000

2000

2500

1000

0

5000

Time

Average Inventory(2500)


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3. Economic Order Quantity (EOQ Model) - Problem

Invento

ry

Leve

l

O1

500

0

1000

TimeO2

1000

O3

1000

O4

1000

O5

1000

500500

0

500

0

500

0 0



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Problem

Invento

ry

Leve

l

O1

250

0

500

Time


0

250

0

250

O2

500

O3

500

O4

500

O50 0

O6 O7 O8 O9 O10

0000

250 250 250 250 250 250

500 500 500 500 500

0

500


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Problem

Inverse Relationship b/w ORDERING COST & CARRYING COST.

If we select 1 Order of 5000 units Ordering Cost will be very Low of 1 Order

Carrying Cost will be very high of 2500 units If we select 20 Orders of 250 units

Carrying Cost will be very Low of 125 units Ordering Cost will be very high of 20 Orders

Therefore, Solution lies in minimizing the sum of both the cost.

A combination which minimizes total cost I.e. OC + CC will be optimumsolution I.e. EOQ(Economic Order Qty.)


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Solution

Suppose in the current example Ordering Cost (O) is Rs.100/- per order Carrying Cost (C) is Rs.1/- per unit

Different O+C combinations can be:

Order Size (Q) 5000 1000 500 250

No. of Orders (A/Q) 1 5 10 20

Average Inventory (Q/2) 2500 500 250 125

Annual Carrying Cost (C x Q/2) 2500 500 250 125

Annual Ordering Cost (O x A/Q) 100 500 1000 2000

Total Annual Cost (Rs.) 2600 1000 1250 2125


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Solution

Quantity

Cost(Rs.)

OrderingCostCarrying

Cost

Total Cost

EOQ


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Solution

Mathematical Formula for calculating EOQ

CCADOCEOQ = 2

unitsEOQ 10001

50001002=

=


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Limitations

Not exact as Demand for FP is generally not constant

Lead time can not be predicted exactly

It is also difficult to calculate exact carrying cost and ordering Cost


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4. ABC Analysis - Concept

If we generalize this concept, we will find out

Small no. of items in small quantities contribute

maximum value

Large no. of items in large quantities contributes lessvalue

Therefore, Much greater control is required on smallno. of items contributing large value.


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4. ABC Analysis - Working

Under this analysis, we divide inventory in 3 categoriesi.e. A, B & CA 15% inventory 70% Value

B 30% inventory 20% ValueC 55% inventory 10% Value

Focus on inventory control is given accordingly.


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4. ABC Analysis Graphically

Percenta

ge

of

Value

Percentage ofUnits

70 %

90 %

100 %

15 % 45 % 100 %

A

B

C


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5. VED Analysis - Concept

Like ABC Analysis

ABC is as per consumption value

VED is as per items criticality.


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6) FSN ANALYSIS

qWhen analysis is carried out on the basis of the rate ofmovement of materials in the stores or on the basis of

consumption pattern of consumption ,it is known as FSN analysis.

qThe three letters stand for Fast moving , Slow moving , andNon-moving Items.

q

The demand for fast moving items is generally high. Thusspecial care should be taken in respect of these items ,otherwisethe production may be interrupted due to shortage of suchmaterials. Inventories which have only a low turnover arebrought under the category of slow moving items. These itemsare not issued at frequent intervals

qqThe items with almost nil consumption are brought under thecategory of non moving items .All obsolete inventories constitutethis category.


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7) SDE ANALYSIS

qThe SDE analysis is generally done on the basis of the problem

faced in procurement of an items. These letter stand for scarceitems, those which are difficult to obtain and those which arefairly easy to obtain.q

qA scarce item might be an item which is not easily available in

the market and might require source development. A difficultitem on the other hand might be an item which is intricate tomanufacture.q

qThe easy classification covers those items which are readilyavailable.

q

qA purchase department usually adopts the SDE analysis todetermine the method of buying and to fix the responsibilities ofbuyers.


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PRODUCTION & OPERATION MGMT, PPT