inventory control techniques

INVENTORY CONTROL

TECHNIQUES……..

INVENTORY CONTROL TECHNIQUES :OPERATIONAL ASPECT OPERATIONAL ASPECT OF THE INVENTORY MGTOF THE INVENTORY MGT

REALISE THE OBJECTIVE REALISE THE OBJECTIVE OF INVENTORY MGT OF INVENTORY MGT &CONTROL.&CONTROL.

ALL DEPENDS ON THE

CONVIENIENCE OF THE FIRM TO

ADOPT ANY OF

THE TECHNIQUES

Most commonly used techniques………

ABC ANALYSIS…….….. ALWAYS bETTER CONTROL.ALSO KNOWN AS PVA( ( AND SIM

TECHNIQUE(SELECTIVE INVENTORY CONTROL)DIVIDES INVENTORY INTO THREE

CATEGORIES-A,B AND C ……ON THE BASIS OF THEIR ANNUAL CONSUMPTION VALUE….!!!

objective= is to vary expenses associated with mantaining appropriate control.

THIS IDEA HAS DRWAN FROM VILFREDO PARETO ,an italian economist…

it categorises the inventory into a,b,c classes

acc to the potential amount to be control.After classifieng…..

the firm decide where to put efforts.. mainly strong control on a items.

Moderate control on B ITEMSLOOSE CONTROL ON C ITEMS.

Procedure for abc analysis:

1. List each invenotry item with number 2. Determine the annual volume of usage

and rupee value of usage.3. Multiply each item of annual volume

usage with rupee volume,4. Calculate each item’s percentatge of

total inventory on terms of the usage.5. Categorize===== “A “ to 10% of all

ites with high %6. “B”20% of all items with high %7. “c” rest of all 70% of all the items

Example:Inventory item

Annual use (iin rs

% of total inventory usage

classification

1 3000 1.33

2 4000 1.77

3 6000 2.66

4 2000 0.88

5 10,000 4.44 B

6 18,000 8 A

7 5000 2.22

8 12000 5.33 B

9 1000 0.44

10 2000 0.88

Total 10 items

Total=2,25,000

REST ALL ARE IN C CATEGORRY

ITEMS IN A ITEMS IN B ITEMS IN C

ITEM NUMBER 6

•VERY STRICT CONTROL•HANDLED BY SENIOR•MAXIMUM EFFORTS TO REDUCE LEAD TIME•ACCURATE FORECAST•NO SAFETY STOCK•WEEKLY CONTROL STATEMENTS

5 AND 8 NUMBER ITEM

1. MODERATE CONTROL

2. LOW SAFETY3. ORDER ONCE IN 3

MONTH4. QUATERLY

REVIEW5. MODERATE

EFFORTS6. ESTIMATE BASED

ON PAST DATA

ITEM NUMBER=.1,2,3,4,7,9,10

1.LOOSE CONTROL2.HIGH SAFETY STOCK3.BULK ORDERING CAN BE MADE4 ROUGH ESTIMATE5 REVIEW ANUALLY,QUATERLY6 MINNMUM EFFORTS

2.EOQ MODEL (ECONOMIC ORDER QUANTITY)

WHAT SHOULD BE THE SIZE OF WHAT SHOULD BE THE SIZE OF ORDER???????ORDER???????

TECHNIQUE SOLVE THE PROBLEM OF TECHNIQUE SOLVE THE PROBLEM OF THE MATERIAL MANAGER…!!!THE MATERIAL MANAGER…!!!

CARRYING COST+ ORDERING COSTA MATERIAL MANAGER TORN BETWEEN

THE KEEEPING LOW INVENTORY BY ORDERING IN SMALL QUANTITY AND

BY DESIRE TO REDUCE COST BY BUYING LARGE QUANTITY…

PROCEDURE FOR CONSTRUCTIN THE MODEL:

1. DELEVELOP A FUNCTIONAL RELATIONSHIP B/W THE VARIABLES OF INTEREST AND MEASURE THE EFFECTIVENESS,,,BY THIS:

TOTAL COST=ANNUAL PURCHASE COST+ANNUAL ORDERING COST+ANNUAL HOLDING COST

TC=DC+D*S/Q+Q*H/2WHERE:TC=TOTAL COST,D=DEMAND,C=PURCHASE COST

PER UNIT,Q=QUANTITY TO BE ORDER,S=COST OF PLACING AN ORDER,H=HOLDING COST PER UNIT OF AVRG INVENTORY

I=COST OF CARRYING INVENTORY AS PERCENTAGE.

2. CALCULATE ORDER QUANTITY,Q,FOR WHICH TC IS MINIMUM,(TOTAL COST IS MINIMUM AT THE POINT WHERE ORDERING COST AND CARRYING COST MEETS. OR EQUAL.

DS/Q= QH/2

EOQ OR

WHERE

D= DEMAND,

S=COST OF PLACING AN ORDER,

H= COST OF PLACING AN ORDER

LETS REPRESENT EOQ GRAPHICALLY……!!—A POINT WHERE CARRYING COST CURVE AND

ORDERING COST MEET REPRSENT THE LEAST TOTAL COST WHICH INCIDENTALLY THE ECONOMIC ORDER QUANTITY….

ASSUMPTIONS OF EOQ MODEL:

WEAKNESSES OF EOQ ERRATIC USAGESCOSTLY CALCULATIONFAULTY BASIC INFORMATIONEOQ ORDERING MUST BE TEMPERED WITH

JUDGEMENTNO FORMULAE IS SUBSTITUTE FOR

COMMONSENSE.

3)Order point problem(reorder level)

At what level shoud the order be placed??? if inventory level is high -------block the

capital….!!!If the level is toooooo low--------disturb

production…..!!!So……. Efficient mgt of inventory NEEDS to

maintain optimum inventory level…!Where there is no stock out and cost are

minimum…!!!!

now…the Different stock levels:

1. Minimum level:--- need to be maintained for smooth production.

how to fix min level?????? first need to know… lead time…(taken to receive the

delivery aftr placing order wwith suplier.,,,). Consumption rate (based on past

experience & production plan) material nature…(requirement of

material=whaethr for special or regular production)

Formula for calculating minmimum stock level=

re order level-(normal usage*avrg delivery time)

2.Re-order level: Is the level of stock at which the order

should be placed. For replenish the current stock .

Lies btwn minimum stock level and maximum stock level.

Lead time avrg daily usage reorder point.

(above is on asumption that the usage is consistent and lead time is fixed))))

3.Maximum level: level of stock beyond which the firm should

not maintain the stock. stock Beyond maximum level is called

overstocking.Serves as a safety marginExcess inventory cause.. high cost..!! blocks firms capital fundsMaximum stock level= reorder level+ re order

quantity - ((minimum usage *minimum delivery time))

Safety stock-Prediction of avrg daily usage.& lead time

is difficult……No doubt…. The raw material varies…. Day

to day…!!!!!Re order point= lead time* avrg

usage+safety stock

Average stock level:Average stock level:

(minimum level + stock (minimum level + stock level)/ 2level)/ 2