inventory mgmt

Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK:PILES ON THE SHOP FLOOR and

in WARE-HOUSE and MORE IN THE DOCK:SOME OF IT ANICIENT, SOME OF IT NEW:ALAS and TOMORROW ANOTHER LOT

IS DUE….-- UNKNOWN AUTHOR

Functions of Inventory

• Decouple components of the operations and distribution

• Uncertainties/variations in demand

• Flexibility in production smoothing

• Economies of scale in purchase and mfg

• To help hedge against price increases

• To take advantage of order cycles

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Departmental Orientation Towards Inventory

• Marketing– Sell the product– Good customer service– Large inventory


• Production– Make the product– Efficient lot sizes– Large inventory


• Purchasing– Buy the required materials– Low cost per unit– Large inventory


• Finance– Provide working capital– Efficient use of capital– Low inventory


• Engineering– Design the product– Avoiding obsolescence– Low inventory

Inventory Hides Problems Areas

Work inprocess queues(banks)

Changeorders

Engineering designredundancies

Vendordelinquencies

Scrap

Designbacklogs

Machine downtime

Decisionbacklogs

Inspectionbacklogs

Paperworkbacklog

Tip of the Iceberg Analogy

Goals of Inventory Management

• Maximize customer service (this requires carrying substantial inventory).

• Minimize inventory investment (this requires carrying little inventory).

• Customer service takes absolute precedence. – Customer service must be a strategic issue.

– Leading edge discussion now centers on types of customer service

• Shortened delivery time

• Speed to market

• Design flexibility

Types of Inventories

• Raw materials• Components• Work-in-process• Finished goods • Vendor inventories• Non-moving/slow moving stock• Safety stock• In-transit inventories• Service parts/Consumables

Inventory Costs

• Holding cost

• Ordering cost

• Setup cost

• Shortage costs

Holding Cost

• Cost of storage facilities• Handling cost• Taxes• Insurance• Deterioration• Obsolescence• Shrinkage• Cost of capital

Ordering Costs

• Preparation of purchase requisition/order• Mail• Expediting, including fax, telephone• Transportation• Receiving• Put away• Updating inventory records• Paying invoice

Setup Costs

• Order preparation• Stock picking• Setup• Inspection• Waiting/Queue-time• Order close out• Updating inventory records

Inventory Control Systems

• How often should the assessment of stock on hand be made?

• When should a replenishment order be placed?

• What should be the size of the replenishment order?

Inventory Counting Systems• Periodic System

Physical count of items made at periodic intervals

• Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item

Inventory Control Systems•Fixed order quantity model (continuous review)

•Fixed time period model (periodic review)

•Visual system

Two-bin system

Single bin system

•ABC classification system

The Inventory Order Cycle

Demand rate

0 TimeLead time

Lead time

Order Placed

Order Placed

Order Received

Order Received

Inve

nto

ry L

eve

l

Reorder point, R

Order qty, Q

EOQ Model Cost Curves

Slope = 0

Total Cost

Ordering Cost = (D/Q)S

Order Quantity, Q

Annualcost (Rs)

Minimumtotal cost

Optimal order Qopt

Carrying Cost = (Q/2)H

Notation

• D = annual demand• C = per-unit cost• h = inventory holding rate (%)• S = order cost• Q = order quantity• R = reorder point• SS = safety stock• LT = lead time

EOQ Model

• Balance holding cost against ordering costs

• Calculate the optimal EOQ:

•No of orders per year = D/Q*•Time between orders = Q*/D

Fixed Order Quantity Model

Reorder = Expected demand + Safetypoint during lead time stock

Fixed Order Quantity Model

Reorderpoint, R

Q

0

Inve

ntor

y le

vel

L LTime

Safety stock

Fixed Time Period Model

• Reviewed at fixed specified time interval.• Place an order for a quantity that, when added

to the quantity on hand, will equal a predetermined maximum level.

• Independent demand is the usual situation.• Difficult to record withdrawals and additions

from stock.• Groups of items are purchased from a common

supplier.• Items that have limited shelf life.


• Small tools, manufacturing supplies.

• Common commercial parts such as nuts, bolts, washers.

• Office supplies.

• Perishable items such as dairy products, fruits and vegetables.

• Chemicals, solvents used in the manufacturing process.


0

Inve

ntor

y le

vel

L LTime

Safety stock

Review Time

Two-Bin System

• Special case of fixed order quantity model.

• Amount of stock equivalent to the order point is physically segregated into a second bin and is then sealed.

• When all the open stock has been used up, the sealed bin is opened and a new order is placed.

• Practical method for keeping control of low-value items.

• Without adequate training this system can be abused.

• Quantity in the second bin should be reviewed from time to time.

Single-Bin System

• Stock is periodically checked and each item is ordered to a pre-established stock level.

• Works well on floor stocks located near the point of use, like large grocery stores.

ABC Classification System

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

AA - very important

BB - mod. important

CC - least important

Annual Rs volume of items

AA

BB

CC

High

Low

Few ManyNumber of Items

ABC Analysis

• Pareto noted that many situations are dominated by a relatively few vital elements.

• Controlling the relatively vital few will go a long way toward controlling the situation.

• Applying the ABC principle to inventory management involves:– Classifying the inventory items on the basis of relative

importance.

– Establishing different controls for different classifications with the degree of control being commensurate with the ranked importance of each classification.

Inventory Turnover and Service Levels

Inventory turnover is the measure of how well the business is managing its inventory. It shows how many times a year the inventory is turning(or moving) through the organisation. The higher the turnover,the better.However there is a larger probability

That stock may not be available when the customer needs it.

Inventory Turnover …..

• Inventory turnover in a Retail business

Total sales/Actual inventory

• Inventory turnover in a Manufacturing business

Cost of Goods sold/Actual inventory

Simple physical techniques may provide more economical

control of inventories.

inventory mgmt

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