Introduction to Inventory

Any stored resource used to satisfy acurrent or future need (raw materials,work-in-process, finished goods, etc.) Represents as much as 50% of investedcapitol at some companies Excessive inventory levels are costly.

Inventory Planning and ControlFor maintaining the right balance between high and low inventory to minimize cost.

Main Uses of Inventory.1. The decoupling function.2. Storing resources.3. Irregular supply and demand.4. Quantity discounts.5. Avoiding stockouts and shortages.

ABC Analysis Divides inventory into three classesbased on annual dollar volume Class A - high annual dollar volume Class B - medium annual dollarvolume Class C - low annual dollar volume Used to establish policies that focuson the few critical parts and not themany trivial ones

ABC Analysis

ItemStockNumber

ItemStockNumber

AnnualVolume(units

UnitCost

AnnualDollarVolume

Percent ofAnnualDollarVolume

Class

#10286

20%

1,000

$ 90.00

$ 90,000

38.8%

A

#11526

500

154.00

77000

33.2%

A

#12760

1550

17.00

26350

11.30%

B

#10867

30%

350

42.86

15001

6.40%

B

#10500

1000

12.50

12500

5.40%

B

#12572

600

14.170

8502

3.70%

C

#14075

2000

0.60

1200

0.50%

C

#01036

50%

100

8.50

850

0.40%

C

#01307

1200

0.42

504

0.20%

C

#10572

250

0.60

150

0.10%

C

ABC Analysis Other criteria than annual dollarvolume may be used Anticipated engineering changes Delivery problems Quality problems High unit cost

Policies employed may include More emphasis on supplierdevelopment for A items Tighter physical inventory control forA items More care in forecasting A items

Basic EOQ ModelImportant assumptions

1. Demand is known, constant, andindependent2. Lead time is known and constant3. Receipt of inventory is instantaneous and complete.4. Quantity discounts are not possible5. Only variable costs are setup and holdin6. Stockouts can be completely avoided.

Economic Order Quantity (EOQ) Determining How Much to Order

One of the oldest and most well knowninventory control techniques Easy to use Based on a number of assumptions

Assumptions of the EOQ Model1. Demand is known and constant2. Lead time is known and constant3. Receipt of inventory is instantaneous4. Quantity discounts are not available5. Variable costs are limited to: orderingcost and carrying (or holding) cost6. If orders are placed at the right time,stockouts can be avoided.

The EOQ ModelQ = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per yearAnnual setup cost = (Number of orders placed per year)x (Setup or order cost per order)=(Annual demand/Number of units in each order)*(Setup or order)Annual setup cost =(D/ Q)*(S)

The EOQ ModelQ = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per yearOptimal order quantity is found when annual setup cost equals annual holding cost(D/Q)S =(Q/2) HSolving for Q*2DS = Q2HQ2 = 2DS/HQ* = 2DS/H

An EOQ ExampleDetermine optimal number of needles to orderD = 1,000 unitsS = $10 per orderH = $.50 per unit per yearQ* = (2DS)/HQ* = 2(1,000)(10) 0.50

=200units.

VED Classification

It is the analysis for monitoring and control of stores and spares inventory by classifying them into 3 categories viz., Vital, Essential, Desirable.

Class

NumberOfItems

% ofNumberof Items

100%

90%

80%

70%

60%

50%

V

22

06.60%

-

-

-

2

4

16

E

113

33.60%

-

-

4

14

40

55

D

201

59.80%

3

4

17

26

62

89

TOTAL

336

100.00%

3

4

21

42

106

160

FSN Classification

It is the analysis for monitoring and control of stores and spares inventory by classifying them into 3 categories viz., Fast, Slow and non-moving items.

Material no

FSN - Cons.

Material no

FSN - Stay

FSN

1

N

1

N

N

2

N

2

S

N

3

N

3

S

N

4

F

4

F

S

5

S

5

F

F

CONCLUSION

Thus, The objective of inventory management is to strike a balancebetween inventory investment and customer service One of the most expensive assets of many companies representing asmuch as 50% of total invested capitalso, Operations managers must balance between inventory investment and customer service in order to sustain profitability.