A PROJECT REPORT ON INVENTORY MANAGEMENT AT

PRODUCTION IN OPERATION MANAGEMENT

Submitted in partial fulfilment of the requirements of Post Graduate Programme By ASHISH GAUR Batch: 2011-13 Roll No.- FT (IB)-11-311

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Inventory Management

Inventory : A stock or store of goods.

Firms typically stock many items in inventory.

Many of the items a rm carries in inventory relate to the kind of business it engages in.

Examples : 1. Manufacturing rms carry supplies of raw materials, purchased parts, nished items, spare parts, tools,.... 2. Department stores carry clothing, furniture, stationery, appliances,... 3. Hospitals stock drugs, surgical supplies, lifemonitoring equipment, sheets, pillow cases,... 4. Supermarkets stock fresh and canned foods, packaged and frozen foods, household supplies,...

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IBM Example : Approximately 1000 IBM products are currently in service, with installed units numbering in excess of ten of millions dollars. IBM has more than 200,000 part numbers to support these services. It is essential to maintain a service parts inventory system to support the product they sell and install. IBMs National Service Division (NSD) has developed an extensive and sophisticated parts inventory management system (PIMS) to provide prompt and reliable customer service. 2 central warehouses, 21 eld distribution centers... PIMS employed economic order quantity (EOQ) formulas to determine parts and replenishment batch sizes and to set service priority goals.

Inventory Management

Good inventory management is essential to the successful operation of most organizations for a number of reasons : 1. The amount of money inventory represents 2. The impact that inventories have on the daily operations of an organization. We focus on management of independent items : nished goods, purchased parts, raw materials, etc. We study : 1. Dierent functions of inventories 2. Requirements for eective inventory management. 3. Objectives of inventory control 4. Techniques of determining how much to order and when to order.
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Dependent Demand : Demand for items in inventory that are subassemblies or component parts to be used in the production of nished goods.

Independent demand : Demand for items that are nished items.

The Nature and important of inventories

Inventories are vital part of business They are necessary for operations They contribute to customer satisfaction. A typical rm probably has about 30 percent of its current capital assets and perhaps as much as 90 percent of its working capital invested in inventory.

Return on investment (ROI) : One widely used measure of managerial performance.

ROI =

Inventories may represent a signicant portion of total assets.

A reduction of inventories can result in a significant increase in ROI.

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Dierent type of inventories :

1. Raw materials and purchased parts 2. Partially completed goods WIP (Work-in-Process) 3. Finished-goods inventories (manufacturing rms) Merchandise (retail stores). 4. Replacement parts, tools, and supplies. 5. Goods-in-transit to warehouses or customers.

Function of Inventory

1. To meet anticipated demand. 2. To smooth production requirements. 3. To decouple components of the productiondistribution system. 4. To protect against stockouts. 5. To take advantage of order cycles. 6. To hedge against price increases or take advantage of quantity discounts. 7. To permit operations.

Objectives of Inventory Control :

Inadequate control of inventories can result in both under- and overstocking of items. Under stocking results in missed deliveries, lost sales, dissatised customers, and production bottlenecks.
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Over stocking : ties up funds that might be more productive elsewhere.

Inventory management has two main concerns: 1. Level of customers service. 2. Cost of ordering and carrying inventories.

The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds. This means, the manager tries to achieve a balance in stocking. Two fundamental decisions are to be made: 1. Timing of the order. 2. Size of the order.

Performance measures used to judge the eectiveness of inventory management : 1. Customer satisfaction : the number and quantity of backorders, customer complaints.

2. Inventory turnover

3. Days of inventory : the expected number of days of sales that can be supplied from existing inventory.

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Requirements for Eective Inventory Management

1. A system to keep track of the inventory on hand and on order. 2. A reliable forecast of demand that includes an indication of possible forecast error. 3. Knowledge of lead times and lead time variability. 4. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs. 5. A classication systems for inventory items.

Inventory Counting Systems

1. Periodic system 2. Continuous (perpetual) system 3. Two-bin system

Universal product code : Bar code printed on a label that has information about the items to which it is attached.

Demand Forecasts and Lead Time Information :

Inventories are used satisfy demand. Therfore, it is essential to have reliable estimates of the amount and timing of demand.

Lead time : Time interval between ordering and receiving the order.

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Cost Information
Holding (carrying) cost: Physically holding item in storage. interest insurance taxes depreciation obsolescence deterioration spoilage breakage warehouse costs (heat, light, rent, security) Holding cost also include opportunity costs having funds tied up in inventory.

Ordering cost: Cost ordering and receiving inventory. determine how much needed, typing up invoices. inspecting goods for quality and quantity. moving to storage. cost of machine setup

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Shortage costs : Opportunity cost for not making a sale. loss of customer goodwill. lateness charges. cost of loss production.

Classication Systems :
A-B-C approach : Classifying inventory according to some measure of importance, and allocating control eorts accordingly.

Cycle counting : A physical count of items in inventory.

How Much to Order :

Economic Order Quantity : The order size that minimizes total cost. Economic Order Quantity Models: 1. The economic order quantity model. 2. The economic order quantity model with no instantaneous delivery. 3. The quantity discount model.

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Basic Economic Order quantity Model EOQ Assumptions:

1. Only one product is involved. 2. Annual demand requirements are known. 3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant 4. Lead time does not vary. 5. Each order is received in a single delivery. 6. There are no quantity discounts.

Notations:
D = Demand, usually in units per year. S = Ordering cost. H = Holding (carrying) cost per unit per unit period (year). r = Holding (carrying) cost per dollar per unit period (year). P = Unit price (or cost C). H = rP .

T C = Total cost (per year) associated with carrying and ordering inventory when Q units are ordered. T C = Annual carrying cost + Annual ordering cost Annual carrying cost = H Annual ordering cost = S TC = H + S
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Optimal order quantity

Qo =

Length of order cycle =

The economic order quantity model with no ninstantaneous delivery D = Demand, usually in units per year. S = Ordering cost. H = Holding (carrying) cost per unit per unit period (year). p = Production or delivery rate. u = usage (demand) rate. Imax = Maximum inventory. T C = Total cost (per year) associated with carrying and setup cost when Q units are produced.

T C = Annual carrying cost + Annual setup cost

Annual carrying cost =

Annual setup cost = S

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TC =

I average =

Optimal run quantity

Qo =

Cycle time =

Run time =

Imax =

(p-u)

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The quantity discount model

T C = Total cost (per year) associated with carrying, ordering and purchasing cost.

T C = Annual carrying cost + Annual ordering cost +Purchasing cost

TC = H +

Reference Production/Operations Management by William J. Stevenson, Seventh Edition, Irwin/McGraw-Hill, 2002.

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