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Materials Management (Inventory Control... )

This document discusses inventory control and management. It defines inventory and provides reasons for keeping inventories such as stabilizing production and meeting demand. Inventory control aims to determine optimal order levels and quantities to minimize costs while avoiding stockouts. Techniques for inventory control include ABC analysis, HML analysis, and VED analysis which classify inventory items. The economic order quantity model is presented as a way to determine the order quantity that minimizes total inventory costs, including carrying and ordering costs. Formulas for calculating EOQ using analytical and tabulation methods are also provided.

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Mary Rose Fabrero
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50 views13 pages

Materials Management (Inventory Control... )

This document discusses inventory control and management. It defines inventory and provides reasons for keeping inventories such as stabilizing production and meeting demand. Inventory control aims to determine optimal order levels and quantities to minimize costs while avoiding stockouts. Techniques for inventory control include ABC analysis, HML analysis, and VED analysis which classify inventory items. The economic order quantity model is presented as a way to determine the order quantity that minimizes total inventory costs, including carrying and ordering costs. Formulas for calculating EOQ using analytical and tabulation methods are also provided.

Uploaded by

Mary Rose Fabrero
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© © All Rights Reserved
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CH4.

MATERIALS
MANAGEMENT
PRODUCTION AND OPERATIONS MANAGEMENT (POM)

Prepared by Mary Rose Fabrero


4.6. INVENTORY CONTROL OR MANAGEMENT

INVENTORY

 Inventories represent those items

which are either stocked for


sale or they are in the process
of manufacturing or they are in
the form of materials, which
are yet to be utilized.
4.6. INVENTORY CONTROL OR MANAGEMENT
REASONS FOR KEEPING INVENTORIES

 1. To stabilize production  5. To keep pace with changing market


conditions

 2. To take advantage of price discounts


 6. To stock materials in lieu of suppliers
minimum quantity condition, seasonal
 3. To meet the demand during the availability, or sudden price increase
replenishment period

 4. To prevent loss of orders (sales)


4.6. INVENTORY CONTROL OR MANAGEMENT

INVENTORY CONTROL

 Inventory control is a planned approach Two Basic Problems Asked:


of determining what to order,  1. When should an order be placed?
(Order Level)
when to order and how much to order
and how much to stock so  2. How much should be ordered?
(Order Quantity)
that costs associated with buying
and storing are optimal without
interrupting production and sales.
4.6. INVENTORY CONTROL OR MANAGEMENT
OBJECTIVES OF INVENTORY CONTROL

 1. To ensure adequate supply of products to  4. To maintain timely record of inventories


customer and avoid shortages as far as of all the items and to maintain the stock
possible. within the desired limits.

 2. To make sure that the financial investment  5. To ensure timely action for replenishment.
in inventories is minimum (i.e., to see that
the working capital is blocked to the
minimum possible extent).  6. To provide a reserve stock for variations
in lead times of delivery of materials.

 3. To efficiently purchase, store, consume


and account the materials  7. To provide a scientific base for both short-
term and long-term planning of materials.
4.6. INVENTORY CONTROL OR MANAGEMENT

BENEFITS OF INVENTORY CONTROL


 3. Efficient utilization of working
capital.
Helps in minimizing loss due to deterioration,
1. Improvement in customer’s relationship obsolescence (outdated and not used)
because of the timely delivery of goods and damage and pilferage (stealing things of
service. little value).

2. Smooth and uninterrupted production and,  4. Economy in purchasing.


hence, no stock out.

 5. Eliminates the possibility of duplicate


ordering.
4.6. INVENTORY CONTROL OR MANAGEMENT
TECHNIQUES OF INVENTORY CONTROL

(1) ABC analysis  (4) FSN analysis

(2) HML analysis  (5) SDE analysis

(3)VED analysis  (6) GOLF analysis

 (7) SOS analysis


4.6. INVENTORY CONTROL OR MANAGEMENT

TECHNIQUES OF INVENTORY CONTROL

1. ABC analysis: Based on annual consumption  3. VED analysis: Based on criticality of


and the annual value of the items. the items. They are classified as vital,
essential and desirable items. It is mainly
used in spare parts inventory.
2. HML analysis: Based on unit price of the
items, and are classified as high price,
medium price and low cost items.  4. FSN analysis: Based consumption of the
items. They are classified as fast moving,
slow moving and non- moving items.
4.6. INVENTORY CONTROL OR MANAGEMENT
TECHNIQUES OF INVENTORY CONTROL

 5. SDE analysis: Based on the items.

 6. GOLF analysis: Based sources of the items.  7. SOS analysis: Based nature of supply
They are classified as - of items. They are classified as
seasonal and off- seasonal items.
Government supply,
ordinarily available,
local availability and
foreign source of supply items.
4.6. INVENTORY CONTROL OR MANAGEMENT
The data calculated in a tabular column can be plotted
INVENTORY MODEL showing the nature of total cost, inventory cost and
ordering cost curve against the quantity ordered as in
Figure 4.6
1. ECONOMIC ORDER QUANTITY (EOQ)
It is the size of order which minimizes total
costs of carrying and cost of ordering.
Ex: Minimum Total Cost occurs when –
Inventory Carrying Cost = Ordering Cost

EOQ can be determined by two methods:


1. Tabulation method.
2. Algebraic method.
Tabulation Method
4.6. INVENTORY CONTROL OR MANAGEMENT
1. Determination of EOQ by Tabulation (Trial
& Error) Method

3. Determine the total ordering cost


for the orders placed.
1. Select the number of possible lot
sizes to purchase.
4. Determine the total cost for each lot
size chosen which is the summation of
2. Determine average inventory inventory carrying cost and
carrying cost for the lot purchased. ordering cost.

5. Select the ordering quantity,


which minimizes the total cost.
4.6. INVENTORY CONTROL OR MANAGEMENT

2. Determination of EOQ by Analytical


Method

5. Lead-time is zero.
1. Demand is known and uniform.

6. Set-up cost per production run or


2. Let D denotes the total number of procurement cost is C3..
units purchased, produced and Q denotes the lot
size in each production run.
7. Inventory carrying cost is C1 = CI,
where C is the unit cost and I is called
3. Shortages are not permitted. inventory carrying cost expressed as a
percentage of the value of the average
inventory.
4. Production or supply of commodity is
instantaneous.
4.6. INVENTORY CONTROL OR MANAGEMENT

Determination of EOQ by Analytical


Method

This fundamental situation can be shown on an


inventory-time diagram, (Fig. 4.7) with Q on the
vertical axis and the time on the horizontal axis. This
total time period (one year) is divided into n parts.

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