INVENTORY MANAGEMENT. Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories,

INVENTORY INVENTORY MANAGEMENTMANAGEMENT

Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.


Definition of Inventory management It is the sum of value of raw materials, fuels and

lubricants, spare parts, maintenance consumables, semi processed and finished goods.

Inventories1.Production Inventories

2.MRO Inventories

3.In-Process inventories

4.Finished goods inventories.

Inventory Analysis Inventory planning and subsequent control of an

inventory is accomplished on the basis of knowledge about each of the individual items and the finished products of which each is a part.

Inventory Catalogue1.it serves as a medium of communication

2. an inventory catalogue accrues to the inventory control operation it self.

Functions of inventories.

It makes possible smooth and efficient operation of a manufacturing organization by decoupling individual segments of total operation.

1.Purchased part inventories

2.Inventories of parts and components

3.Finished goods inventories



Inventory Management in India

Inventory may be defined as sum of value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semi possessed materials & finished goods at any given point of time.

These resources are called idle resources since they are idle they are kept in the stores.

These resources are maintained for operational smoothness.

The size of inventory depends on internal lead time, suppliers lead time, vendors relation and availability of raw materials.

Finished goods inventory are maintained to ensure free flowing supply of goods to customers.

Two factors which affect inventories are:-

1. Accuracy & detail of final forecast.

2. Availability of storage space.

Norms for inventory

1. The department set up monetary limits for investment in inventories.

2. They have to allocate the investments to various items and ensure smooth operations of the company.

3. While setting the norms involvement of people making the norms is desirable.

4. Departments like finance, production are included.

Peculiarities in India

It operates in sellers market for purchase of goods.

Indian industry tends to stress a lot on machine utilization.

In India, inventory control technique do not run under “ free availability” of goods



Classification of Inventories

Production InventoryMRO Inventory (Maintenance Repair

Operating Supplies)In-process InventoryFinished Goods Inventory

Forces Creating Various Types of Inventory

Creating Forces Type of Inventory

Uncertainties

Batch / Lot Size Economics

Time Transportation

Time-processing

Seasonality

Varying activity rates

Safety Stocks

Cycle Stocks

In-transit

Work in Process

Seasonal Stocks

Decoupling Stocks

Three Components of Inventory Management

Forecasting: How much do we need?

when will we need it?

Replenishment: How much should we order? When should we order?

Inventory control: How much do we have on hand? How much do we have on order? How much have we sold?

Dependent and Independent Demand

Costs relevant for Inventory Decision

• Holding Costs : Capital costs, inventory service costs, storage space and risk costs.

• Shortage Costs: Penalty for not having inventory available when required.

• Acquisition Costs: Cost to order and acquire inventory.

• Control System Costs: Cost of administrating systems needed to manage inventory levels.



COSTS ASSOCIATED WITH INVENTORIES

CARRYING COSTS

ACQUISITION COSTS

CARRYING COSTS

• Carrying material in inventory is expensive.

• The annual cost of carrying a production inventory averaged approximately 25% of the value of the inventory.

CARRYING COSTS

1 Opportunity cost of invested funds 12 – 20 %

2 Insurance costs 2 – 4 %

3 Property taxes 1 – 3 %

4 Storage costs 1 - 3 %

5 Obsolescence and deterioration 4 – 10 %

Total carrying costs 20 – 40 %

0

AC

CC

Annual cos t s

Inventory level (or order/delivery quantity)

Relationship of inventory-related costs to inventory level (AC = acquisition costs; CC = carrying costs)

(carrying cost / year) = (average inventory value) x (inv. Carrying cost as a % of inv. value)

(carrying cost / year) = (average inventory in units) x (material unit cost) x (inv. Carrying cost as a % of inv. value)

CC = Q x C x I2

Where CC = carrying cost/yr for the material in question Q = order or delivery quantity for the material, in units C = delivery unit cost of the material I = inventory carrying cost for the material, expressed as a % of the inventory value

Acquisition costsAcquisition costs

1. A certain portion of wages and operating expenses of such departments as purchase and supply, production control, receiving etc.

2. The cost of supplies such as engineering drawings, envelopes, stationery, and forms of purchasing etc.

3. The cost of services such as computer time, telephone, fax etc.

It can be calculated as follows:(acquisition cost/year) = (no of orders

placed/yr) x (acquisition cost per order)

AC = U/Q x A

Where, AC = acquisition cost /year for the material in question U = expected annual usage of the material Q = order or delivery quantity for the material A = acquisition cost/order or per delivery for the material.



Sr No. Type of Control Criteria Application

1) ABC analysis Annual Consumption value of To control inventory

the item of raw material

& WIP inventory

2) XYZ analysis Inventory value of items in To review the

stores actual inventories

their uses, etc. at

scheduled intervals.

3) VED analysis Criticality of the item To determine the

stocking level of

spare parts for

machines &

equipments.4) FSN analysis Consumption pattern of the To control

items obsolescence.

Sr No. Type of Control Criteria Application

5) HML analysis Unit price of the item To control the

purchases & to

develop vendors.

6) SDE analysis Purchasing problem Lead time analysis

in regard to availability & purchasing

strategies.7) SOS analysis Nature of supplies & Procurement &

seasonality holding stratergy

for seasonal term.8) GOLF analysis Source of supply of Procurement

material strategy.

Advantages of selective control system

Helps the material manager to exercise selective control and focus attention only on few vital items.

Able to control inventories and thereby achieve management objectives.

Results in proper inventory analysis & obsolete stocks are pinpointed.

Results in reduced administrative costs & improve inventory turnover.

Powerful approach in the direction of cost reduction as it is helps to control items with selective approach.



ABC AnalysisABC Analysis

What is ABC analysis? ABC analysis is a basic analytical management

tool which enables top management to place the effort where the results will be greatest.

The techniques tries to analyze the distribution of any characteristic by money value of importance in order to determine it’s priority.

ADVANTAGES OF ABC ANALYSIS

This approach helps the material manager to exercise selective control and focus his attention only on few items when he is confronted with lakhs of stores items.

By concentrating on ‘A’ class items, the material manager is able to control inventories and is able to show ‘Visible’ results in a short span of life.

By controlling the ‘A’ items, and doing a proper inventory analysis, obsolete stocks are automatically pinpointed.

MECHANICS OF ABCABC ANALYSIS

The mechanics of classifying the items into ‘A’, ‘B’ and ‘C’ categories is described here:

1. CALCULATE

2. SORT

3. PREPARE A LIST

4. COMPUTE A RUNNING TOTAL

5. COMPUTE AND PRINT

100

90

75

010 30 100

Cumulative % number

CCuummuullaat t iivve e

%% vvaalluuee

A B C

Basic principles of ABC analysis are:

1. The analysis does not depend upon the unit cost of the items but only on its annual consumption value.

2. It does not depend on the importance of the item.

3. The limits of ABC categorization are not uniform but will depend upon the size of the undertaking, its inventory as well as the number of items controlled.

PURPOSE OF ABC ABC ANALYSIS

A A items: High consumption value1. Very strict control

2. No safety stocks

3. Frequent ordering or weekly deliveries

4. Weekly control statements

5. Maximum follow-up and expediting

6. Rigorous value analysis

7. As many sources as possible for each item

8. Accurate forecasts in material planning

9. Minimisation of waste, obsolete and surplus

10. Individual postings

11. Central purchasing and storage

12. Maximum efforts to reduce lead time

13. Must be handled by senior officers

BB items: moderate value1. Moderate control

2. Low safety stocks

3. Once in three months

4. Monthly control report

5. Periodic follow-up

6. Moderate value analysis

7. Two or more reliable sources

8. Estimates based on past data on present plans

9. Quarterly control over surplus and obsolete items

10. Small group postings

11. Combination purchasing

12. Moderate

13. Can be handled by middle management

C C items : low consumption value1. Loose control

2. High safety stock

3. Bulk ordering once in six months

4. Quarterly control reports

5. Follow-up and expediting in exceptional cases

6. Minimum value analysis

7. Two reliable sources for each other item

8. Rough estimates for planning

9. Annual review over surplus and obsolete material

10. Group positioning

11. Decentralized purchasing

12. Minimum clerical efforts

13. Can be fully delegated

Objectives of ABCABC analysis

Item noItem no Annual consumption Annual consumption value (Rs)value (Rs)

No of ordersNo of orders Value per Value per orderorder

Average Average inventoryinventory

11

22

33

60,00060,000

4,0004,000

1,0001,000

44

44

44

15,00015,000

1,0001,000

250250

7,5007,500

500500

125125

Total inventoryTotal inventory Rs 8,125Rs 8,125

Exhibit 1Exhibit 1

Exhibit 2Exhibit 2

Item noItem no Annual consumption Annual consumption value (Rs)value (Rs)

No of ordersNo of orders Value per Value per orderorder

Average Average inventoryinventory

11

22

33

60,00060,000

4,0004,000

1,0001,000

88

33

11

75007500

133133

10001000

37503750

667667

500500

Total inventoryTotal inventory Rs 4,917Rs 4,917

Limitations of ABC analysis

ABC analysis is based on grading the items according to the importance of the performance of an item, that is V.E.D.- Vital Essential and Desirable- analysis. Some times, through negligible in monetary value, may be vital for running the plant, and constant attention is needed.

Music – 3D Analysis

Consumption ValueDelivery TimeCriticality

High Level Consumption

Low Level Consumption

Long Lead Time

HLC&LLT

critical

HLC&LLT

non-critical

LLC&LLT

critical

LLC&LLT

non-critical

Short Lead Time

HLC&SLT

critical

HLC&SLT

non-critical

LLC&SLT

critical

LLC&SLT

non-critical



ECONOMIC ORDERING QUANTITY(EOQ)

INTRODUCTION

• EOQ can be defined as that quantity which should be ordered during the lead time so that it becomes economic to order and the inventory carrying cost becomes minimum.• When ordering quantity is less than EOQ, ordering cost will increase.• When ordering quantity is more than EOQ, inventory carrying cost will increase • Thus, EOQ refers to the quantity in which the ordering cost is equal to the holding cost (Inventory carrying cost)

GRAPHICAL DERIVATION OF EOQ

Y TC

HERE: EOQ = Economic ordering quantity

TC = Total Cost

COST ICC ICC = Inventory Carrying Cost

OC = Ordering Cost

OC

O EOQ X

ORDER QUANTITY

DERIVATION OF EOQ FORMULAE Annual Ordering Cost = Annual Inventory Carrying Cost A x Co = 0 + Q x i x Cc Q 2

Solving for ‘Q’

Q x Q = 2 x A x Co i x Cc

Q = 2 x A x Co i x Cc

HERE : A = Annual Demand ; Co = Cost of ordering ; Q = EOQ ; i = Cost per unit ; Cc = Cost of carrying or ICC

PROBLEMS ON EOQ

1. Annual Demand = 20,000 units

Ordering Cost = Rs. 100

ICC = 20 %

Unit Price = Rs. 20

A. EOQ = 2 x A x Co

I x Cc

EOQ = 2 x 20,000 x 100

20 x 0.20

EOQ = 1,000 units

2. In a leading biscuit manufacturing organization, the annual demand for corrugated boxes is 20,000. The cost of placing an order is Rs. 100 and the inventory carrying cost is 20 per cent. The price per box is Rs. 10. The supplier offers 1 per cent discount if 4,000 corrugated boxes or more are purchased and 3.5% discount if 10,000 units or more are purchased. What should be the ordering quantity and would you accept the discount?

A. EOQ = 2 x A x Co

I x Cc

EOQ = 2 x 20,000 x 100

10 x 0.20

EOQ = 1,414 units

Number of orders placed in the year = 20,000

1414 = 14.14 orders1 ) 1% for 4,000 Savings - Inventory Carrying Cost (ICC) Savings = Discount + Cost of ordering Discount = 1 x 20,000 x 10 100 = Rs. 2,000 Cost of ordering = [14.14 – (20,000/4,000)] x 100 = Rs. 914 Savings = Rs. (2,000 + 914) = Rs. 2,914 Inventory Carrying Cost (ICC) = ( 4,000- 1,414/2) x 10 x0.20 = Rs. 2,586 Rs. (2,914 - 2,586) = Rs. 328 Accept the offer

2) 3.5% for 10,000

Savings - Inventory Carrying Cost (ICC)

Savings = Discount + Cost of ordering

Discount = 3.5 x 20,000 x 10

100

= Rs. 8,000

Cost of ordering = [14.14 – (20,000/10,000)] x 100

= Rs. 1214

Savings = Rs. (7,000 + 1214)

= Rs. 8,214

Inventory Carrying Cost (ICC) = ( 10,000- 1,414/2) x 10 x0.20

= Rs. 8,586

Rs. (8,214 - 8,586) = - (Rs. 372)

Reject the offer

LIMITATIONS OF EOQ

Not suitable when annual demand fluctuates widely.

Not suitable when cost per unit fluctuates widely.



Materials Requirement Planning (MRP)

MRP is a computer based control system that determines how much of each material, any inventory item with a unique part / number, should be purchased or produced in each time period to support the master production schedule (MPS)

- ( Newman, 1994)

MRP is, by necessity, a computer based system which is designed to:

1. Release production and purchase orders.

2. Ensure availability of materials, components and products.

3. Maintain minimum levels.

Major objectives of MRP are:

1. Improve customer service.

2. Reduce inventory costs.

3. Enhancing operating efficiency.

Elements of MRPElements of MRP

Orders/ forecast of service parts

Inventory status file

MasterProduction

schedule

Bill ofMaterial

file

MRPsystem

Inventory Transaction

data

Changes to planOrders

Planned orderschedule

Planning reports

Performance reports

Exception reportsMRP computer programme

inputs outputs

Primary outputs

Secondary outputs



P - SYSTEM

• Fixed Order Period System• Not Suitable for ‘A’ Class Items• Extremely Useful for ‘B’ & ‘C’ Class Items• Desired Inventory Level = Buffer stock +

Safety stock + Reserve stock

Q- SYSTEM

• Fixed Order Quantity System• Re-order point determined by Buffer stock,

Reserve stock & Safety stock • Suitable for ‘A’ Class Items• Requires continuous review of inventory

Buffer Stock: Average demand during average lead-time

Reserve Stock: Variations in demand during average lead time are known as reserve stock depend on service level

Safety Stock: Average demand obtained through multiplying average demand for maximum delay & probability of delay

Annual demand = 20,000 units; Standard deviation of demand per week = 50 units; Price

per unit = Rs.10; Ordering cost = Rs.100; Inventory carrying cost = 20%; Average lead time = 4 weeks; Maximum delay =3 weeks; Probability of delay = 0.31; Service level =

95%(1.64)

Solution: ‘Q’ System

Order quantity = EOQ

s*Cc = 2 * 20,000 *100 10 * 0.20 = 1414 units

Re-order point = Buffer Stock + Reserve Stock + Safety StockBuffer Stock = 20000 * 4 = 1540 units 52Reserve Stock = 4*50*100 = 164 units

2*M*Co

Safety Stock = 20,000 *3 *0.31 52 = 358 units

Re-order point = 1540+164+358 = 2062 units

Solution: ‘P’ SystemReview period = EOQ *52 weeks M = 1414 * 52 weeks 20000 = 3.7 weeks

Buffer Stock = 20,000 * 8 = 3080 units 52

Reserve Stock = 8 *50 *1.64 = 230 units

Safety Stock = 20,000 *3 * 0.31 = 358 units 52

Desired Inventory Level = 3080 + 230 + 358 = 3668 units


INVENTORY MANAGEMENT. Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories,

Documents

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