Transcript Inventory controlx

INVENTORY
MANAGEMENT
Inventory Management
It is the most important constituent of a
supply chain network of an organisation.
Inventory Management supervises the flow
of goods from manufacturers to warehouses
and from these facilities to point of sale.
The act or manner of
managing, handling, directing
or controlling the flow of
inventory.
Definition
• According to Donald Waters "Stock consists of all
the goods and materials that are stored by an
organization. It is a store of items that is kept for
future use. An inventory is a list of the items held
in stock".
• According to Gordon Carson ”Inventory control is
the process whereby the investment in materials
and parts carried in stocks is regulated, within predetermined limits set in accordance with the
inventory policy established by the management .”
Motives of Holding Inventory
1. Transaction Motive
2. Precautionary Motives
3. Speculation Motives
1. Transaction Motive
a. To meet Unpredictable demand of the
Customer
b. To achieve Economies of Scale
c. Seasonal Availability
d. Favorable Market Conditions
2. Precautionary Motives
a. Hedge for uncertainty
b. To maintain safety stock
c. To cover for Errors
3. Speculation Motives
a. It is defined as an attempt to generate profit by
trading in inventory without processing it.
b. When raw material are available at favorable
market conditions, an organization buys more
than its requirement.
c. The surplus material so purchased is kept as
stock to be further sold when prices rise in
future.
Objectives of Inventory Control
1. Reduction in cost
• By ensuring smooth and uninterrupted flow of
production
• Guaranties economies of scale
• Help in taking benefits of quantity discount
2. Ensure investment of optimum capital
• Ensures that stock is kept only of required
minimum quantity
• Helps in increasing inventory turnover leading to
minimum investment in inventory.
3. Classification of Inventory
• Helps inventory manager to concentrate on
the stock that constitutes highest proportion
of total cost
4. Smoothen the Production Process
• Continuous supply of raw material is
required
• In absence of it, the production may stop
which will lead to escalation of cost.
5. Help Reduce losses
• Helps in proper maintenance of
inventory an avoid losses due to
obsolescence, deterioration, leakage
and evaporation
6. Systematic Record
• Helps top management to make proper
plan for its best usage and maintenance
Components of Inventories
1. Raw material and purchased parts
- Raw materials are used by manufacturer to
convert them into components, sub assemblies
and finished goods.
2. Work in Progress
- The raw material in the incomplete production
process
- It includes the full cost of raw material that has
been partially converted and cost of labour and
overhead directly apportioned in it.
3. Finished Goods
The finished Goods are the product that
are the result of production process. The
stock of finished goods is maintained at the
following two levels:
• a. By Producer
• b. By Retailers
4. Maintenance, Repair and Operating
Equipment's (MRO)
a. MRO items are used in the production
process but does not become part of the
Finished goods.
b. They are required to keep machines and
plant in the working order.
Types of Inventory
1. Buffer Inventory
2. Seasonal Inventory
3. Cycle Inventory
4. De-Coupling Inventory
5. Pipeline Inventory
1. Buffer Inventory
• Buffer Inventories are held to protect
against uncertainties of demand and
supply.
• It is defined as a supply of inputs held as
a reserve in case there are future demand
and supply fluctuations.
• Hence, It is a minimum level of
inventory maintained by the
organizations to meet unforeseen
demand.
• It is also known as Buffer Stock or Safety
Stock.
2. Seasonal Inventory
• Seasonality in demand is
absorbed using inventory.
• These inventories are carried
to compensate for differences
in the timing of supply and
demand, and to smooth out
the flow of products
throughout the supply chain.
3. Cycle Inventory
• When the same production process is used to
produce more than one category of products,
then an organisation has to manufacture or
decide a batch size that is sufficient to meet
the demand till the time production of that
product happens again in system.
4. De-Coupling Inventory
• De-Couples means reducing the dependence
of one machine on the other in a sequential
production process.
• Complexity of production control is reduced
by splitting manufacturing into stages and
maintaining inventory between these stages.
5. Pipeline Inventory
• Inventories that are still in transit that have
yet to reach their ultimate destination.
• The goods that are in transit means that are
travelling from production plant to
distributor’s location are not available for sale.
• Formula to calculate Goods in Transit are :
Goods in Transit (in units) = Transit Time (in days)
X Demand per day
Types of Inventory Costs
1. Purchase Price of Material
or Components
2. Carrying Cost
3. Ordering Cost
4. Shortage Cost
1. Purchase Price of Material or
Components
• The first cost involved in inventory is price
paid for the raw material or Components
purchased from outside.
• The purchase price includes the cost of
freight, insurance and taxes.
• In case of technical nature, it includes cost of
testing, certification and inspection.
2. Carrying Cost
It is the cost of holding the inventory in the
store. It includes:
• Opportunity cost of money locked up in
inventory
• Cost of handling material
• Cost of storage
• Cost of obsolescence, theft, breakage and
shrinkage
• Depreciation of warehouse and equipments
3. Ordering cost
It is the cost of placing a new order. Every time
when material reaches the reorder level, a new order
of the same is to be placed with suppliers. This cost
includes:
• Cost of Preparing order
• Cost of Communication
• Cost of Indentifying the supplier
• Cost of Transportation and unloading at the store
• Cost of documentation, receiving, testing and
certification
4. Shortage Cost
Sometimes demand exceeds supply and company is
not in a position to immediately fulfill the demand.
This is known as shortage situation. It involves:
• Higher cost of Transportation
• Loss of customer/ profits
• Loss of Brand and Goodwill
• Higher prices for additional supplies
• Penalty depending upon the urgency of the
goods or requirements
Inventory Management Fundamentals
Inventory Management system is the process
of monitoring and controlling that right material
in right form at right costs, reaches the right
customers at the right time and place.
Inventory Management System
Comprises
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•
•
•
•
•
•
•
Economic Order Quantity (EOQ)
Quantity Discount
Price Break Method
Maintenance of Stock Level in the Organization
Knowledge of Lead time
Just in Time Inventory (JIT) System
EOQ when shortages are allowed
Inventory Classification System
EOQ ( Economic Order Quantity)
EOQ is a number of units that an organization
should order each time a requisition of
material is to be made to the supplier.
EOQ is that amt. of quantity ,if ordered will
result in minimization of total cost keeping in
view certain assumptions.
Assumptions…
• Annual demand is uniform , constant and continous.
• The lead time is constant and known.
• There is no constraint about how many times an
order is made.
• There is no constraint about the holding the
purchased inventory in the stock.
• The cost of order is constant and is not dependent
on the size of order.
• No quantity discount is available.
• As soon as the quantity reaches reorder level, an
EOQ order is placed.
a)Carrying or Holding Cost :
• It refers to the cost of holding the inventory
in store.
• Calculated as a %age of purchase price
• Higher the quantity ordered, higher will be
the carrying cost .
Total Carrying Cost : EOQ
2
Carrying cost per unit
b) Ordering Cost:
• cost associated with placing an order
• Cost remain same regardless of the magnitude
of the order.
Total ordering cost = D
EOQ
Ordering cost per order
EOQ MODEL
QUANTITY
DISCOUNT
Discount offered by the supplier on buying a specific
quantity of material, is Quantity discount.

If discount is offered, it becomes important to
compare the cost with discount, without discount and
with EOQ cost.
Objective of enterprise is to buy Quantity Of
Material that minimizes Total Cost.
NUMERICAL
PROBLEMS
QUES.1
A Factory manufacturing Hard Disk
buys microchips at rs.1000 per unit from the
supplier. On Jan1, 2016, the factory received
an offer of 20% discount on order of 300 or
more units. The Annuals Sales of Hard Disk
is 600 units, the Ordering Cost per order is
rs.900 and the Avg. Holding Cost per unit
per annum is estimated to be rs.108 per
unit. Should offer of Discount be accepted ?
QUES.2
A Company uses 8000 units of product as Raw Material,
costing rs.10 per unit. The Administrative Cost per
purchase is rs.40. The Holding Costs are 28% of Avg.
Inventory. The Company is following an Optimal
Purchase Policy and places orders according to EOQ. It
has been offered a Qty. Discount of 1% if it purchases
its entire requirements only four times a year. Should
the Company accept the offer of Qty. Discount of 1% ?
PRICE BREAK
METHOD
 When Quantity Discount offers are available, then
while making an appropriate decision as to whether
the discount offer should be accepted or not, Price
Break Method is used.
PRICE BREAKS
(discount available)
(a)
One Price Break
(single discount
offer available)
(b)
Multiple Price Break
(more than one
discount offer
available)
ONE PRICE BREAK
METHOD
• Compute EOQ for each discount price, starting from
STEP1 the least cost price offer.
• Now calculate EOQ using the next least cost price offer
available (if EOQ < minimum quantity eligible for
STEP2 discount, in step1)
• Compare the cost in EOQ at Step2 with cost at Step1.
The quantity corresponding to the minimum Total
STEP3 Cost will be the Optimal Quantity to order.
QUES.1
Find EOQ for a product for which the price break is
given as:
Qty.
0 =< q < 400
400 =< q
Unit Cost (Rs.)
10
9.25
MULTIPLE PRICE BREAK
METHOD
• STEP1: Compute EOQ for each discount price,
starting from the least cost price offer.
# EOQ falls within quantity available for
discount , we will choose that and stop here.
# EOQ< Minimum qty. eligible for discount, then we
will move to next step.
• STEP2: Now calculate EOQ using the next least cost
price offer available ( at which max. discount offer is
available ).
• STEP3: Compare the cost of feasible EOQ (which falls
within the eligible qty. available for discount ) with
the cost of all adjusted EOQs.
The qty. corresponding to the min. total cost will be
the Optimal Qty. to Order.
NUMERICAL
PROBLEMS
QUES.1
Find the Optimal Order Qty. ( EOQ ) for a product where
Annual Demand is 500 units, Cost of Storage per unit per year
is 10% of cost of a unit and Ordering Cost is rs.180. The units
costs are:
QTY.
UNIT COST (Rs.)
0 =< q < 500
25
500 =< q < 1500
24.80
1500 =< q < 3000
24.60
3000 =< q
24.40
QUES.2
Find EOQ for a product for which following data is
given:
• Annual Demand = 100 units per week
• Ordering Cost = Rs. 300 per order
• Carrying Cost = 10% per
Qty. (units)
q < 500
500 =< q < 1000
1000 =< q
Unit Cost (Rs.)
1
0.95
0.90
Maintenance of Stock Level in the Organisation
(a)Maximum Level
(b)Reorder Level
(c)Safety Stock Level
(d)Average Stock Level
(a)Maximum Level
It is the maximum quantity of stock that an
organization should keep. The following points
should be kept in mind while fixing maximum level.
 Reorder Level
 Economic Order Quantity
 The rate of consumption of material
 Lead time
 Carrying cost of inventory
 Market Environment
 Availability of financial Resources
 Risk of evaporation, Deterioration or Obsolescence
 Stability or non stability of prizes of raw material
Maximum Level = (Reorder Level + Reorder Quantity)-(Minimum Consumption ×
Minimum Reorder Period)
OR
Maximum Level = Safety Stock+ Reorder Quantity
(b)Reorder Level or Reorder Point
Reorder Level is a point at which fresh order for the
supply of the material should be placed. Reorder
level is always set above minimum level.
It is affected by factors: Rate of consumption of material
 Lead Time
 Minimum Level
Reorder Level = Maximum Consumption × Maximum Reorder Period)
Or
Reorder Level = Safety Stock + (Average Consumption per day × Average Lead Time)
(c)Safety Stock Level
It is the level below which the stock of an
organisation should not go. It must be present
with the organisation.
 Relationship with suppliers
 Minimum order size fixed by the suppliers
 Consumption rate of materials
 Time to get deliveries
Formulae for calculating safety stock level are:•In case of Variation in demand
Safety Stock Level = (Maximum consumption Rate –Average consumption Rate) ×
Lead Time
Or
•In case of Variation in lead time
Safety Stock Level = (Maximum Lead Time-Average Lead Time)×
Average Consumption Rate
Or
•In case of variation in both demand and lead time
Safety Stock Level = (Maximum consumption Rate × Maximum
Lead Time) – (Average consumption Rate × Average Lead Time)
Types of Lead Time
Raw Material Lead Time
Pre Ordering Processing by Post Order
Process
Raw Material Processing by
Supplier
Manufacturer
Finished Goods head Time
Preproduction Production
Postprocess
Process Production
Process
A. Raw Material Lead Time
It is the total time taken by the supplier to deliver raw material and
components to the manufacturer.
(a) Pre Ordering ProcessIt is the time taken by the manufacturer to order the goods to the
suppliers . It includes:•
Receiving requisition
•
Preparing details and receiving invoice from customers
•
Making a contract
(b) Processing by raw material supplierAfter receiving the order, supplier will perform the following function•
Preparing a Purchase order
•
Order Entry in the system
•
Production and Fabrication
•
Packaging
•
Transportation
(c) Post order processing by Manufacturer•
•
•
•
Receiving the Goods
Unloading
Inspection and Testing
Stacking in the Store
Raw Material Lead Time = Pre Ordering Process + Processing + Post Order
Processing
B. Finished Goods Lead Time
It is the total time taken by the manufacturer to
deliver the finished goods to the retailer/customer.
(a) Pre Production ProcessIt is the time taken by manufacturer after receiving
the order but before the start of the production.
(b) Production ProcessIt is the time taken by the production process to
convert the raw materials into finished products.
(c) Post Production ProcessIt includes the packing, transportation and
receiving of the finished goods by the warehouse.
Finished Goods Lead Time = Pre Production Process+ Production + Post Production
Process
Just in Time Inventory (JIT) System
1.
Just in time is a philosophy that concentrates on
supplying product of best quality in exact quantity
at a right time and place.
1. It ensures supply of goods and material in such a way that
total cost is minimized.
2. JIT is an inventory philosophy in which materials are bought
and processed at the demand of the customer.
3. The philosophy is different from traditional system as
traditionally a buffer or inventory is created between all the
stages of supply chain.
4. In JIT inventory model, goods and raw material are issued
on request and no stock is maintained in between.
5. JIT reduces the need of keeping inventory to a great extent.
Traditional Inventory Model
Supplier
Storage
Raw
Material
Plant
Storage
Finished
goods
Wholesaler
Storage
Finished
goods
Retailer
Customer
JIT Inventory Model
JIT
Suppliers
JIT
Plant
JIT
Wholesaler
JIT
Retailer
Customers
Elements of JIT
1. Pull Effect•
•
In JIT the goods are transferred from one stage to another
on the basis of demand raised by it.
The whole supply chain network should work backward ,
this means customer to retailer to wholesaler to
manufacturer to suppliers.
2. Kanban•
It is a card that is used to communicate message to the
upper work station to transfer a standardized quantity of a
specific unit mentioned on it to the next work station.
• No kanban means no supplies.
• Kanban’s are mainly of main typesa) Withdrawal kanban’s
b) Production kanban’s
3. Eliminates wastesJIT system has identified Inventory waste, Transportation
waste, Waste of waiting time, Waste from overproduction,
Waste of motion, Processing waste, Waste from product
defects.
4. The Uniform Plant Loading or Levelled SchedulingTraditional production schedule plant is producing different
products each day but uniform plant loading has resulted in
the uniform production schedule for a planned time period.
5.Short Set up Time• In JIT various equipments, methods and machines should be
tried to reduce the setup time as much as possible.
• Set up times include cleaning, oiling, changing and repairing
the machines.
6. Small Production Lots• It reduces the lead time and ensures prompt delivery of
goods to customers.
• Immediate feedback reduces the chances of defectives and
reduce losses.
7. Plant Layout• In this layout, the machines that produce homogenous
products are divided into various groups and separate section
or cells are assigned to each group.
• It reduces the work in progress and increases machine
utilization.
8. Respect for peopleWorkers work in teams and are trained to operate various
machines. They are made aware that it is not about
performing a task but it is about making a world class product
at a lowest possible cost.
Advantages of JIT
1.
2.
3.
4.
5.
6.
Less chances of obsolescenes
Reduction in lead time
Less requirement of working capital
Less carrying cost
Less storage space
Early detection of errors
Limitations of JIT
1.
2.
3.
4.
Complicate system
Difficulty to handle big order
High dependence on suppliers
Employees attitude
Inventory Classification
System…
1. ABC Classification…
Invented by : Pareto
According to him, a small fractions of items
accounts for a significant portion of total
inventory cost and a large proportion of
inventory constitutes a very small part of the
total cost . Hence inventory should be
classified on the basis of its usage value .
• `A’ category items – 10% to 20% of the items
accounts for 70% to 80% of the annual
consumption value of the items.
• ‘B’ category items – 25% to 35% of the items
accounts for 25% to 35% of the annual
consumption value of the items.
• ‘C’ category items - 50% to 60% of the items
accounts for 5% to 15% of the annual
consumption value of the items.
Advantages :
 It ensures control by exception.
 It helps in releasing money stuck in inventory .
 Leads to less requirement of manpower.
Limitations :
 It takes into account only usage or monetary
value of stock into account.
 It may lead to huge losses.
 It is not easy to categorize all the inventory
items in terms of their value.
2.HML Classification…
In HML classification goods are classified on the
basis of their unit value. They are classified
into three categories :
a) H= High value items.
b) M= Medium value items.
c) L= Low value items.
3.VED Analysis…
VED classify material on the basis of their
importance for the operation . This analysis is
done for spares and other goods critical for
continuous flow of operations . These are
divided into three categories :
a) V= Vital
b) E= Essential
c) D= Desirable
• V –Vital:
Vital are those components without which
production cannot even run for a second.
• E- Essential:
Essential are those spares without which
function can run for few hours .
• D- Desirable:
Desirable are those whose non supply even
for few days will not result in stoppage of
production .
4.SDE Analysis…
SDE analysis is relevant when the organization is
facing a problem of procurement.
a) S- Scarce: The material that are scarce and
available for short span of time .
b) D-Difficult: The goods which are produced by
few suppliers that too are located at distant
place.
c) E-Easy: The goods that are easily available in
the market place.
5.GOLF Analysis….
GOLF stands for
G= Government supplies
O= Open market supplies
L= Local supplies
F= Foreign supplies
6.FNSD Analysis…
In FNSD analysis inventory is classified on the
basis of consumption as follows:
a) F- Fast moving stock : its consumption rate is
very high.
b) N- Normal moving stock : It is consumed
normally within the year .
c) S- Slow moving stock: It is consumed within
two years.
d) D- Dead moving stock: It is that stock which is
lying in store but is not being used.
7.S-OS Classification…
In this items are classified on the basis of
season :
a) S-Seasonal items
b) OS-Off seasonal items (items available
throughout the year)