Scribd
Upload
3 views

8 - Inventory-Introduction

Management 1

Uploaded by

YERRAMSETTY CHAITANYA
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
3 views

8 - Inventory-Introduction

Management 1

Uploaded by

YERRAMSETTY CHAITANYA
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 7

ME3102D Management of Production Systems

INVENTORY CONTROL
Definition of Inventory
Inventory is an idle resource of any kind, which has
some economic value
or
Inventory is the material held in an idle or incomplete
state awaiting future sale, use, or transformation
Types of Inventory
• Production Inventories
• MRO Inventories
• In-process Inventories
• Finished Goods Inventories
Functions of Inventory
➢ The existence of inventory in a business can be best
explained by four functional factors of inventory
- time, discontinuity (decoupling), uncertainty
and economy
Time factor
❑ Enables an organisation to reduce the lead time

in meeting demand
Discontinuity Factor
❑ Allows the treatment of various dependent
operations in independent and economical
manner

Introduction – inventory 1 Oct 2024


Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

Uncertainty Factor
❑ Concerns unforeseen events that modify the

original plans of the organisation


Economy Factor
❑ Enables the organisation to purchase or produce

items in economic quantities


Note
❖Inventory is a necessary part of doing business
❖The functional factors explain the existence of
inventory; this does not mean that attempts at its
reduction should not be pursued
❖Inventory can hide operational problems or make
problems easier to live with
Many times, extra inventory is maintained to
protect against defective units that is produced in
the system. E.g.: when units of an item are
processed through operations in a production
system, the output of the process may be defective
and on completion of the process, the item becomes
a component which is used for assembling an end
product. Usually, additional units of the item than
normally required for the production is maintained
and thus uncertainty due to defective unit
production can be managed. The extra units of the
item help to make the desired quantity of the
components, without much care on the production
process. This management practice is an example

Introduction – inventory 2 Oct 2024


Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

of “Inventory can hide operational problems or


make problems easier to live with”.
❖It is more desirable to eliminate problems than to
cover them up with excess inventory
INVENTORY PROBLEM CLASSIFICATION
1) Repetitiveness
a) Single order
b) Repeat order
2) Supply Source
a) Outside supply
b) Inside supply
3) Knowledge of Demand
a) 1) Constant demand
2) Variable demand
b) 1) Independent demand
2) Dependent demand
4) Knowledge of Lead Time
a) Constant lead time
b) Variable lead time
5) Inventory System
a) Perpetual
b) Periodic
c) Material requirements planning
d) Distribution requirement planning
Introduction – inventory 3 Oct 2024
Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

e) Single order quantity

INVENTORY COSTS
1. Purchase cost
2. Order/setup cost
3. Holding cost or Carrying cost
4. Stockout cost – stockout may lead to Goodwill
Loss
In the inventory analysis, relevant costs are
considered
Relevant cost in inventory control: The inventory
decision of how much to order and when to order
depends on certain costs and such costs are called
relevant cost.
E.g.: Annual requirement of an item is 1200 units.
Cost of this item is Rs 200/- Annual purchase cost –
240000/- Three orders or 4 orders, ….
If 4 orders are placed – Order qty. – 300 units,
average inventory – 150 units
Average value of inventory carried = 150×200 =
30000, carrying cost fraction – 15%
Carrying cost per unit, H = P×F = 200×0.15 = 30 Rs
per unit per year
Annual carrying cost = 30×150 = 4500
Order cost = 200 per order
Annual order cost = 4×200 = 800
It can be noted that annual carrying cost and annual
order cost vary based on inventory decision of how
Introduction – inventory 4 Oct 2024
Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

much to order. Hence, annual carrying and annual


order cost are relevant cost in this decision-making
situation. It is to be noted in this decision-making
case, annual purchase cost is not a relevant cost as
annual purchase cost is not varying with respect to
your decision.

Purchase Cost
• Unit purchase price – If the item is purchased from
an external source
• Unit production cost – produced internally
• Unit production cost includes direct labour, direct
material, and factory overhead
Order/Setup Cost
• Expense of issuing a purchase order to an outside
supplier or from internal production – setup costs
• Vary directly with number of orders or setups
• Order cost includes transportation cost, and cost for
requisition, analysing vendors, writing purchase
orders, transportation cost to transport the order
quantity, receiving materials, inspecting materials,
following up orders and doing the process
necessary to complete the transaction
Holding Cost or Carrying Cost
• Cost associated with investing in inventory and
maintaining the physical investment in storage

Introduction – inventory 5 Oct 2024


Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

• Contains capital costs, taxes, insurance, handling,


storage, shrinkage, obsolescence, and deterioration
Stockout Costs
• Economic consequence of an external or an internal
shortage
• External shortage – when customer’s order is not
filled
• Internal Shortage – When an order of a group or
department is not filled
• External shortages can incur backorder cost,
present profit loss, future profit loss and loss of
goodwill
• Internal shortage can result in lost production and
delay in completion date
Inventory turnover and weeks of inventory
• A performance measure for inventory control
• It is the velocity with which materials move
through the organisation
• It is the ratio of the annual cost of goods sold to the
average or current inventory investment
• For a company, these values can be obtained from
financial statements
o Cost of goods sold from income statement
o Inventory investment from balance sheet –
average of opening balance and closing
balance
Introduction – inventory 6 Oct 2024
Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

• This ratio computes the number of times the


inventory has turned over during a year
• WI =
52
INVT

Where, WI – Weeks of inventory


INVT – Inventory turnover
Inventory turnover and weeks of inventory of a
company are as follows: INVT = 7.31 times the annual
cost goods sold, and WI = 7.11. This data can be
interpreted as follows:
INVT – larger the better; INVT = 7.31 means ‘annual
cost of goods sold’ is 7.31 times the average inventory.
This value larger means inventory held in hand is
quickly converted to cash.
WI = 7.11 means inventory of the company sat with it
for about 7.11 weeks. That is, to convert inventory into
cash 7.11 weeks was required for the company.
******

Introduction – inventory 7 Oct 2024


Compiled by Dr. VMP, MED, NITC

You might also like