Industrial Engineering and

Management

INVENTORYME3L504

CONTROL
Course Instructor
Dr. Gaurav Bartarya
SMS, IIT Bhubaneswar
 Last lectures: Resource
Scheduling
■ 4 stages of resource scheduling
- Resource definition: Modelling of critical resources
- Resource allocation: Time phased allocation of critical resource to various
activities
- Resource aggregation: Requirement of resources for each time period
- Resource levelling: For levelling out the requirements as per availability of
resources for various time periods.
Further: smoothening is done to provide a solution with less fluctuation in
levelled requirement pattern

https://blog.pmsprout.com/resource-leveling-vs-resource-
Inventory Control
Content
■ Inventory
■ Inventory control
■ Classification
■ ABC analysis
■ Inventory Management
– Order point system
– Material Requirement Planning
Inventory
■ Detailed list of items needed
– to manufacture a product and
– to maintain equipment and machines in good working
condition
■ The quantity and value of each item in the list is shown.

Inventory control
-Maintaining size of the
inventory at some desired
level keeping in view some
best economic interest of the
organisation
Inventory Control
- It is a scientific method to find out optimum stock to
be maintained to meet production demand
- To provide right type of material
- at the right time
- in the right quantity
- at competitive price.

Needs optimum balance between two competing

objectives
a.To minimize inventory (due to investment cost)
b.To maximize service levels to the firm, customers
Inventory classification
1. Raw material inventories:
-Raw material,
-semi-finished items from other industry
2. In process inventories:
-Semi-finished items at various stages of manufacturing
3. Finished Inventories:
-Made to stock and waiting to be dispatched
4. Indirect inventories:
-Lubricants, other items (Spare parts)
 ABC analysis
It helps in following:
(i) Segregating items depending upon
value of item
(ii) its control in the interest of organisation
It require items to be categorized in three
classes (A, B and C) based on their presumed Category wise contribution to inventory
importance (value) cost and volume

Item % of % of Type of Control

categ total total inventory require
ory invento Invent d
ry (in ory
no.) Cost
A 5-25% 40- High value, Close
class (10%*) 80% limited in
(70%)* numbers
B 20-40% 15- Medium Modera
class (20%*) 40% valued, te
(20%)* medium in
numbers
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C 40-75%
* Generally 5-20%values
considered Low value, Not
class (70%*) (10%)* max. in critical Pareto chart for cumulative inventory cost
Inventory management
Order point system:
-Items are restocked when inventory level becomes low
-Lot size and reorder point needed to be calculated

Material Requirement Planning (MRP):

-Used to plan and control inventories to meet Master Prod. Schedule
(MPS)
- Converts MPS for end product into a detailed schedule for raw material
and components required
-MRP Outputs: Quantity of raw material and components, when to order
and when to be delivered

• For Raw mat. and In process inventories: Material Requirement

Planning
• For Finished Mat. and indirect inventories : Reorder point system
 Reorder Point
• System
Material is ordered in a particular lot
size

• Lot size depends upon total

requirement, procurement cost and
carrying cost.

High lot size: more resources required

Low lot size: frequent orders, service

level reduction

• Need to maintain a buffer (safety)

stock

• Material should be replenished latest Fig: Reorder point description taking

by inventories touching buffer (safety) constant consumption rate
level

• Replenishment ordered when

Reorder point system contd.

Procurement (replenishment) lead

time depends on time taken in
- Purchase requisition preparation by
user*
- delivering the purchase order to the
seller
- getting or preparing the order at
sellers
*Here userend
the factory/facility ordering material in
ordered lot
a- particular quantity
size to reach to the
user
Reorder line

Safety stock
Economic Order Quantity [EOQ]
analysis
Total inventory cost = Ordering cost+
Holding cost
Most Economic Order Quantity [EOQ]
EOQ Depends upon Inv. procurement
(ordering)
cost and carrying cost
Inventory procurement (ordering) cost
- Receiving quotation
- Processing purchase requisitions U= 100,
U= 100,
- Follow-ups and expediting purchase Q=10 Q=20
orders N0 of N0 of
orders =10 orders =5
- Receiving material and inspection cost
Procurement cost per period decreases with increase in order quantity
- Process seller’s invoice
(lot size)
EOQ contd. Annual cost
Holding cost

- Inventory Carrying (Holding)

cost
- Interest on capital investment
- Cost of storage facility, upkeep Reorder
of material, record keeping Fig: InventoryQuantity
Carrying cost
curve
-Cost involving deterioration
and obsolescence
- Cost of property, taxes,
insurance etc.
Inventory Carrying (Holding) cost per
period increase with increase in Order
quantity
Due to more average inventory to be carried in
facility per period Fig: Total cost
 EOQ Analysis
Let-
Q: economic lot size EOQ
 No. of purchase orders : U/Q
C: cost of one item
I: cost of carrying inventory in % of Procurement cost per year:(U/Q).P
cost per item per period (year), Average annual inventory : Q/2
This includes insurance obsolesce, Carrying cost per unit (Rs./unit/year): C.I
taxes etc.
Average inv. Carrying cost : (Q/2).C.I
P: procurement cost of one order
(Rs. per year)
U: total quantity used per period
(say annually) Total inv. cost = Procurement cost+ Avg. carrying
cost
Total inv. cost (Rs./year)
For most economic order size
=0 (EOQ)
Numerical Exercise
Annual Usage is 60 units, procurement cost is Rs. 15/order, cost of
piece is Rs. 100/- and cost of carrying inventory is 10% of the cost per
unit per year
(i) Calculate economic order quantity.
U=60 units
(ii) If procurement lead time is 30 days, calculate reorder
Solution point.
P=15 Rs./order
 (i) C=Rs. 100/unit
I = 10% of C per unit
There for no. of orders per year = 60/13.41 =4.47 per year
( let’s take it as 5)
Q=1
Hence modified EOQ= 60/5 = 12 units (rounded) 2
units
RO
(ii) Time to deplete stock =365/5 = 73 days
If lead time is 30 days
30
Reorder point quantity (RO) is (12x30)/73 = 4.93 73 days
(Say 5) days