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Unit 2 - Inventory

This document discusses various types of inventory including cycle stock, safety stock, anticipation inventory, and pipeline inventory. It also discusses the differences between dependent and independent demand. The objectives and models of inventory control are outlined, including ABC analysis which categorizes inventory into A, B, and C categories based on annual consumption value. VED classification and FSN analysis are also inventory control models discussed. The purpose of inventory control is to match supply and demand in the most cost effective way.

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Subham Chakraborty
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96 views

Unit 2 - Inventory

This document discusses various types of inventory including cycle stock, safety stock, anticipation inventory, and pipeline inventory. It also discusses the differences between dependent and independent demand. The objectives and models of inventory control are outlined, including ABC analysis which categorizes inventory into A, B, and C categories based on annual consumption value. VED classification and FSN analysis are also inventory control models discussed. The purpose of inventory control is to match supply and demand in the most cost effective way.

Uploaded by

Subham Chakraborty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Inventory Control

 Inventory is the raw materials, component parts, work-in-


process, or finished products that are held at a location in the
supply chain.
Types of Inventory

Cycle Stock – inventory for immediate use – typically produced in


batches (production cycle).
Safety Stock – extra inventory carried for uncertainties in supply
and demand – also called buffer stock.
Anticipation Inventory – inventory carried in anticipation of
events – smooth out the flow of products in supply chain – also
called seasonal or hedge inventory.
Pipeline Inventory – inventory in transit – exists because points of
supply and demand are not the same – also called transportation
inventory.
Maintenance, Repair and Operating Items (MRO) – inventories
not directly related to product creation
Dependent vs Independent Demand

 Independent demand – finished goods, items that are ready to be sold


 E.g. a computer

 Dependent demand – components of finished products


 E.g. parts that make up the computer

 The dependency is vertical if the demand for one product is derived from
the demand for another product. E.g. demand for engine block is derived
from demand for cars.
 The dependency is horizontal if the demand for one item is not directly
related, but related in another manner. E.g. demand for C.I. ingots
horizontally depend on automobile product of company.
 Only independent demand items need forecasting because that of
dependent items can be derived from de derived from demand for
independent items i.e. Independent demand is uncertain, Dependent demand is
certain.
Why do we require Inventory ?

 Hedge against uncertain demand

 Hedge against uncertain supply


 Economize on ordering costs
 To help hedge against price increases
 To take advantage of quantity discounts
 Smoothing

To summarize, we build and keep inventory in order to match


supply and demand in the most cost effective way.
Inventory Control

Inventory Control is the process by which inventory


is measured and regulated according to
predetermined norms such as economic lot size for
order or production, safety stock, minimum level,
maximum level, order level etc.

Inventory control pertains primarily to the


administration of established policies, systems &
procedures in order to reduce the inventory cost.
OBJECTIVES OF INVENTORY CONTROL

 To meet unforeseen future demand due to variation


in forecast figures and actual figures.
 To average out demand fluctuations due to seasonal
or cyclic variations.
 To meet the customer requirement timely,
effectively, efficiently, smoothly and satisfactorily.
 To smoothen the production process.
 To facilitate intermittent production of several
products on the same facility.
 To gain economy of production or purchase in lots.
 To reduce loss due to changes in prices of inventory items.
 To meet the time lag for transportation of goods.
 To meet the technological constraints of production/process.
 To balance various costs of inventory such as order cost or
set up cost and inventory carrying cost.
 To balance the stock out cost/opportunity cost due to loss of
sales against the costs of inventory.
 To minimize losses due to deterioration, obsolescence,
damage, pilferage etc.
 To stabilize employment and improve lab our relations by
inventory of human resources and machine efforts.
Inventory Control Models

ABC Analysis
VED Analysis
FSN Analysis
ALWAYS BETTER CONTROL (ABC) ANALYSIS

 This technique divides inventory into three categories


A, B & C based on their annual consumption value.
 It is also known as Selective Inventory Control
Method (SIM)

 This method is a means of categorizing inventory


items according to the potential amount to be
controlled.

 ABC analysis has universal application for fields


requiring selective control.
PROCEDURE FOR ABC ANALYSIS

Make the list of all items of inventory.

Determine the annual volume of usage & money value of each item.

Multiply each item’s annual volume by its rupee value.

Compute each item’s percentage of the total inventory in terms of


annual usage in rupees.
Select the top 10% of all items which have the highest rupee
percentages & classify them as “A” items.
Select the next 20% of all items with the next highest rupee
percentages & designate them “B” items.
The next 70% of all items with the lowest rupee percentages are “C”
items.
ADVANTAGES OF ABC ANALYSIS

Helps to exercise selective control.

Gives rewarding results quickly.

Helps to point out obsolete stocks easily.

In case of “A” items careful attention can be paid at every step such
as estimate of requirements, purchase, safety stock, receipts,
inspections, issues, etc. & close control is maintained.
In case of “C” items, recording & follow up, etc. may be dispensed
with or combined.
Helps better planning of inventory control.

Provides sound basis for allocation of funds & human resources.


DISADVANTAGES OF ABC ANALYSIS

Proper standardization & codification of inventory items


needed.

Considers only money value of items & neglects the importance


of items for the production process or assembly or functioning.

Periodic review becomes difficult if only ABC analysis is


recalled.

When other important factors make it obligatory to concentrate


on “C” items more, the purpose of ABC analysis is defeated.
VED CLASSIFICATION

VED: Vital, Essential & Desirable classification

VED classification is based on the criticality of the inventories.


Vital items – Its shortage may cause havoc & stop the work in
organization. They are stocked adequately to ensure smooth operation.

Essential items - Here, reasonable risk can be taken. If not available, the
plant does not stop; but the efficiency of operations is adversely affected
due to expediting expenses. They should be sufficiently stocked to ensure
regular flow of work.

Desirable items – Its non availability does not stop the work because they
can be easily purchased from the market as & when needed. They may be
stocked very low or not stocked.
It is useful in capital intensive industries, transport
industries, etc.
VED analysis can be better used with ABC analysis
in the following pattern:
Category “V” items “E” items “D” Items
“A” items Constant control & Moderate Nil stocks
regular follow Up stocks
“B” items Moderate stocks Moderate Low stocks
stocks
“C” items High stocks Moderate Very low
stocks stocks
FSN ANALYSIS

 FSN: Fast moving, slow moving & non moving

 Classification is based on the pattern of issues from stores & is


useful in controlling obsolescence.

 Date of receipt or last date of issue, whichever is later, is taken to


determine the no. of months which have lapsed since the last
transaction.

 The items are usually grouped in periods of 12 months.

 It helps to avoid investments in non moving or slow items. It is


also useful in facilitating timely control.
For analysis, the issues of items in past two or three years are
considered.

If there are no issues of an item during the period, it is “N” item.

Then up to certain limit, say 10-15 issues in the period, the item is
“S” item

The items exceeding such limit of no. of issues during the period
are “F” items.

The period of consideration & the limiting number of issues vary


from organization to organization.
Vendor Managed Inventory (VMI)

VMI arrangements have the vendor responsible for


managing the inventory located at a customer’s
facility
The vendor:
– stocks inventory
– places replenishment orders
– arranges the display
– typically owns inventory until purchased
– is required to work closely with customer

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