basic inventory principles

BASIC INVENTORY PRINCIPLES

FUNCTIONS OF INVENTORIESBASICALLY INVENTORIES ARE IDLE

RESOURCES MAINTAINED IN VARIOUS FORMS.RAW MATERIALSPURCHASED AND MANUFACTURED PARTS SUB ASSEMBLIESFINISHED PRODUCTS

Since inventories represent a sizable investment in a logistic system, we must be aware of the functions they perform.

FIVE CATEGORIES OF STOCKPIPE LINE STOCK (in process stock, in transit stock): it

can be reduced only by improved design of the system.CYCLE STOCKS (batch production owing to

- economies of scale- technological requirements )

• SEASONAL STOCK(time varying requirements of an item)• SAFETY STOCK (supply and demand un certainties, lead

time un certainties)• STOCKS HELD FOR OTHER REASONS (-decoupling

stages of production, price, quantity discounts and speculation)

-

INVENTORY RELATED COSTSPROCUREMENT COSTS:(cost per order is

generally fixed and not dependant on order quantity)

COSTS ASSOCIATED WITH EXISTENCE OF INVENTORIES:( supply exceeds demand):

cost/unit/unit timeiC

inventory carrying cost rate• COSTS ASSOCIATED WITH STOCK OUTS:

(demand exceeds supply)(cost/unit) or (cost/unit/unit time)

PROCUREMENT COSTSProcurement costs cost of goods

cost per order is generally fixed (not dependent on order quantity)ordering cost

- Administrative component- Handling- Transportation- Inspection of arrivals

INVENTORY HOLDING COSTSCOSTS ASSOCIATED WITH EXISTENCE OF

INVENTORIES:( supply exceeds demand): cost/unit/unit time

iCinventory carrying cost rate

-storage and handling-interest on tied up capital-property taxes -insurance-spoilage-obsolescence-pilferage

STORAGE COSTS• COSTS ASSOCIATED WITH STOCK OUTS:

(demand exceeds supply)(cost/unit) or (cost/unit/unit time)Additional costs of special orderBack order if possibleLoss of customer goodwillLost sales

SELECTIVE INVENTORY CONTROLIn a large number there are

Significant fewInsignificant many PARETO’S LAW

Typical organizations deal with a large variety of stocked items (10000-100000 is not uncommon)

Depending on rankings of Value (∑(annual demand * unit price))=ABC analysis

(Always Better Control)Criticality (Vital , Essential, Desirable)= VED analysisUsage frequency= FSN analysis

SUITABLE POLICIES CAN BE CHOSEN BASED ON PRODUCT CHARACTERISTICS

Objective of ABC analysisrationalization of ordering policies:Equal treatment to all:

Annual consumption value(rs)

No: of orders

Value per order

Average inventory

1 60000 4 15000 7500

2 4000 4 1000 500

3 1000 4 250 125Total inventory=8125

Preferential treatment on the basis of ABC analysis

Annual consumption value(rs)

No: of orders

Value per order

Average inventory

1 60000 8 7500 3750

2 4000 3 1333 667

3 1000 1 1000 500Total inventory=4917

Determination of reorder point

Policy implications of selective inventory control