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Inventory Management
Binoy Bose
S7 Information TechnologySchool of Engineering, CUSAT
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Inventories in the Supply
Chain
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Types of Inventory
!o" Inventory is Use#Anticipation or seasonal inventorySafety stoc$ %u&er #eman# 'uctuations(ot)si*e or cycle stoc$ ta$e a#vantage of +uantity#iscounts or purchasing e ciencies-ipeline or transportation inventorySpeculative or he#ge inventory protects againstsome future event, e.g. la%or stri$e
Maintenance, repair, an# operating /M012inventories-sychic stoc$ 0etail #isplay inventory carrie# tostimulate #eman#
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1%3ectives of Inventory
Management-rovi#e accepta%le level ofcustomer service /on)time#elivery2Allo" cost)e cient operationsMinimi*e inventory investment
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0elevant Inventory CostsItem Cost Cost per item plus any other direct
costs associated with getting the itemto the plant
HoldingCosts
Capital, storage, and risk cost typicallystated as a % of the unit value,e.g. 15- 5%
!rderingCost"setupcost#
$i ed, constant dollar amount incurredfor each order placed
&hortage 'oss of customer goodwill, (ack order
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In#epen#ent vs.
4epen#ent 4eman#In#epen#ent #eman# items are5nishe# goo#s or other items sol#to someone outsi#e the company4epen#ent #eman# items arematerials or component parts use#in the pro#uction of another item/e.g., 5nishe# pro#uct2
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4etermining 1r#er 6uantity)conomic !rder *uantity ")!* or *&ystem#
An optimi*ing metho# use# for #eterminingor#er +uantity an# reor#er points-art of continuous review system "hichtrac$s on)han# inventory each time a "ith#ra"al
is ma#e
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Economic 1r#er 6uantity)!* +ssumptions
4eman# is $no"n constant) no safety stoc$ is re+uire#
(ea# time is $no"n constant8o +uantity #iscounts areavaila%le1r#ering /or setup2 costs areconstantAll #eman# is satis5e# /noshortages2
The or#er +uantity arrives ina single shipment
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E16 Total Costs Total annual costs 9 annual or#ering costs : annual
hol#ing costs
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E16 Total Cost E+uation
costsetupororderingcostholdingannual ordered beoquantity t
demandannualcostannualtotal
2
===
==
+
=
S H Q
DTC Where
H Q
S Q D
TC EOQ
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The E16 ;ormulaMinimi*e the TC %y or#ering the
E16
H DS
EOQ2=
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E16 E=ample?@ units8o. of "ee$s per year 9 >1r#ering cost 9 @Unit cost 9
Annual carrying charge 9 >@D(ea# time 9 > "ee$s
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E16 E=ample Solution year units D /480,1224052 == year per unit per H 3152!0 ==
units H DS
Q "45#8!"443
50480,1222===
unitsdL R
H Q
S Q
DTC
4802240
1,#34!#45!#"$44!#"$
32
"4550
"45
480,12
2
===
=+=
+
=
+
=
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ABC Inventory
Classi5cation+ C classi cation is a metho# for #etermininglevel of control an# fre+uency of revie" ofinventory items
A -areto analysis can %e #one to segment itemsinto value categories #epen#ing on annual #ollarvolume+ Items typically >@D of the items accounting for
@D of the inventory value
Items typically an a##itional F@D of the itemsaccounting for D of the inventory valueC Items Typically the remaining @D of the itemsaccounting for only D of the inventory value
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ABC Analysis4ivi#es on)han# inventory into F classes
A class, B class, C class
Basis is usually annual volume volume 9 Annual #eman# = Unit cost
-olicies %ase# on ABC analysis
4evelop class A suppliers moreGive tighter physical control of A items;orecast A items more carefully
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Classifying Itemsas ABC
% of Inventory Items% of Inventory Items
% Annual $ Usage% Annual $ Usage
AA
BB CC
Class % $ Vol % ItemsA 80 15B 15 30C 5 55
Class % $ Vol % ItemsA 80 15B 15 30C 5 55
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ABC Classi5cationE=ample
Classify the following items as A B or C!Classify the following items as A B or C!
"to# Annual Volume &Units' Unit Cost
(0) () 000 $ 3)105 (00 )0001* ( 000 551++ (0 000 +(0, , 000 10
"to# Annual Volume &Units' Unit Cost
(0) () 000 $ 3)105 (00 )0001* ( 000 551++ (0 000 +(0, , 000 10
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ABC Classi5cation Solution
"to# Vol! Cost $ Vol! % ABC
(0) () 000 $ 3)105 (00 )0001* ( 000 551++ (0 000 +(0, , 000 10
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