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BY:K.MOHAN VENKAT VINAYCH.NARSI TEJA REDDY

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Inventory Definition A stock of items held to meet

future demand Inventory is a list for goods and

materials, or those goods and materials themselves, held available in stock by a business.

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Introduction Constitute significant part of current assets

On an average approximately 60% of current assets in Public Limited Companies in India

A considerable amount of fund is required

Effective and efficient management is imperative to avoid unnecessary investment

Improper inventory management affects long term profitability and may fail ultimately

10 to 20% of inventory can be reduced without any adverse effect on production and sales by using simple inventory planning and control techniques

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Work inprocess

Work inprocess

Work inprocess

Finishedgoods

RawMaterials

Vendors Customer

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Nature of Inventories Raw Materials – Basic inputs that are converted into finished product

through the manufacturing process Work-in-progress – Semi-manufactured products need some more

works before they become finished goods for sale Finished Goods – Completely manufactured products ready for sale Supplies – Office and plant cleaning materials not directly enter

production but are necessary for production process and do not involve significant investment.

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Objective of Inventory Management

To maintain a optimum size of inventory for efficient and smooth production and sales operations

To maintain a minimum investment in inventories to maximize the profitability

Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality

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An effective inventory management should

Ensure a continuous supply of raw materials to facilitate uninterrupted production

Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes

Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service

Minimize the carrying cost and time Control investment in inventories and keep it at an optimum level

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An optimum inventory level involves three types of costsOrdering costs:- Quotation or tendering Requisitioning Order placing Transportation Receiving, inspecting and

storing Quality control Clerical and staff

Stock-out cost Loss of sale Failure to meet delivery

commitments

Carrying costs:- Warehousing or storage Handling Clerical and staff Insurance Interest Deterioration,shrinkage,

evaporation and obsolescence

Taxes Cost of capital

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Dangers of Over investment

Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity cost

Excessive carrying cost

Risk of liquidity- difficult to convert into cash

Physical deterioration of inventories while in storage due to mishandling and improper storage facilities

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Dangers of under-investment

Production hold-ups – loss of labor hours

Failure to meet delivery commitmentsCustomers may shift to competitors

which will amount to a permanent loss to the firm

May affect the goodwill and image of the firm

Classification of inventory

• ABC Classification

• HML Classification

• XYZ Classification

• VED Classification

• FSN Classification

• SDF Classification

• GOLF Classification

• SOS Classification

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ABC Classification

• In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity.

• A typical manufacturing operation shows that the top 15% of the line items, in terms of annual rupees usage, represent 80% of total annual rupees usage.

• Next 15% of items reflect 15% of annual rupees• Next 70% accounts only for 5% usage

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A

B

C

XYZ Classification

On the basis of value of inventory stored

Whereas ABC was on the basis of value of consumption to value.

X – High Value Y – Medium value Z – Least value

Aimed to identify items which are extensively stocked.

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HML Classification On the basis of unit value of item

There is 1000 unit of Q @ Rs. 10 and 10,000 units of W @ Rs. 5.

Aimed to control the purchase of raw materials.

H – High, M- Medium, L - Low

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VED Classification

• Mainly for spare parts because their consumption pattern is different from raw materials.

• Raw materials on market demand• Spare parts on performance of plant and

machinery.• V – Vital, E – Essential, D – Desirable

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Therefore V items has to be stocked more

and D Items has to be less stocked

FSN Classification

According to the consumption pattern

To combat obsolete items

F – Fast moving

S – Slow moving

N – Non Moving

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SDF & GOLF Classification

Based on source of procurement

S – Scarce, D- Difficult, E- Easy.

GOLF

G – Government, O – Ordinary, L – Local, F – Foreign.

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SOS Classification

Raw materials especially for agriculture units

S – Seasonal

OS – Off seasonal

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EOQ – Three Approaches

Trial and Error methodOrder-formula approachGraphical approach

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EOQ & Re-order point

EOQ – gives answer to question “How much to Order”

Re-order point – gives answer to question “when to order”

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Trial & Error MethodAssumptions:-

Annual requirement (C)=1200 units

Carrying cost (I) = Rs.1

Ordering cost (O) =Rs.37.5Order size Q 1200 600 400 300 240 200 150 120 100

Average inventory Q/2 600 300 200 150 120 100 75 60 50

No. of orders C/Q 1 2 3 4 5 6 8 10 12

Annual carrying cost I* Q/2

600 300 200 150 120 100 75 60 50

Annual ordering cost O*C/Q

37.5 75 112.5 150 187.5 225 300 375 450

Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500

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Order- Formula approach 1/2

EOQ =(2CO/I)

C = Annual demand

O = Ordering cost per order

I = Carrying cost per unit

1/2

EOQ =(2*1200*37.5/1) = 300 units

Graphical method to find EOQ

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Cost

in

RS.

Order quantity

Ordering cost = DS/Q

Carrying cost = CQ/2Total cost

EOQ0

A Review

So we have dealt with

1. EOQ model

2. Its extension

3. And now we will be dealing with special inventory models

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Special inventory model

Non – Instantaneous replenishment

Quantity Discount

One – period decision

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Non – Instantaneous replenishment

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Special inventory model

A B C DA B C

Thus the inventory is replenished gradually than in lots

Particularly in situation were manufacturers use continues production processe.g. FACT makes Ammonium on a continual basis

Capacity 10 units

Discount Quantities If discount increases with the order quantity, then the price of

inventory is no more constant

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Special inventory model

Hence a new approach is needed to find the best lot size

Total cost

Annual holding cost

Annual ordering cost

Annual cost of materials= + +

One period decisions

If a newspaper seller does not buy enough papers to resell on the street corner, sales opportunity is lost. If the seller buys too many, the overage cannot be sold because nobody wants yesterdays newspaper.

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Special inventory model

Applicable to fashion goods, seasonal goods and

due to change in technology

The newsboy problem

Inventory management under uncertainty

1. Option price model

2. Risk adjusted discount cash flow (DFC) Model

3. Dynamic inventory model

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Option price model

Option is a contract that gives the holder a right to acquire or sell certain things at a predetermined price without any obligation.

Calculated by integrating the market information and inventory control.

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Risk adjusted discount cash flow (DFC) Model

• Inventory control problem is converted to capital budget problem

• Suppose a television dealer decides to hold an additional inventory of 1000 television per month. The cost of holding inventory is spread overtime.

• Inflows = no: of units × probability × present value

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Beneficial for projects like oil drilling were the benefit is acquired only after a long time but once oil is struck the additional expanse is covered.

Dynamic inventory model

1. Uncertain variables are identified

2. Probability associated with them is taken

3. Simulation techniques are applied

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Emerging trends in inventory management• Entering into log term contract at a fixed price to

reduce uncertainties• Just-in-time• Kanbans – Japanese technique (Only produce

when demand comes)• Internet based ordering system• Vendor development• Investment in plant and machinery• Continuous-flow manufacturing• Visual control• Supply chain management

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Theories under Supply chain Managment

Resource-based view (RBV)

Transaction Cost Analysis (TCA)

Knowledge-Based View (KBV)

Strategic Choice Theory (SCT)

Agency Theory (AT)

Institutional theory (InT)

Systems Theory (ST)

Network Perspective (NP)

Materials Logistics Management (MLM)

Just-in-Time (JIT)

Material Requirements Planning (MRP)

Theory of Constraints (TOC)

Performance Information Procurement Systems (PIPS)

Performance Information Risk Management System (PIRMS)

Total Quality Management (TQM)

Agile Manufacturing

Time Based Competition (TBC)

Quick Response Manufacturing (QRM)

Customer Relationship Management (CRM)

Requirements Chain Management (RCM)

Available-to-promise (ATP)

and many more

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