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Lecture 13 14 Inventry Eoq Abc Analysis 2 Lectures

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16 views

Lecture 13 14 Inventry Eoq Abc Analysis 2 Lectures

Uploaded by

ankush.p
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© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK


:PILES ON THE SHOP FLOOR AND THE
WARE-HOUSE AND MORE IN THE
DOCK.

:SOME OF IT ANICIENT, SOME OF IT NEW


:ALAS AND TOMORROW ANOTHER LOT IS
DUE….

-- UNKNOWN AUTHOR
Functions of Inventory

• Decouple components of the


operations and distribution
• Uncertainties/variations in demand
• Flexibility in production smoothing
• Economies of scale in purchase and
mfg
• To help hedge against price increases
Departmental Orientation
Towards Inventory

• Marketing
– Sell the product
– Good customer service
– Large inventory
Departmental Orientation
Towards Inventory

• Production
– Make the product
– Efficient lot sizes
– Large inventory
Departmental Orientation Towards
Inventory

• Purchasing
– Buy the required materials
– Low cost per unit
– Large inventory
Departmental Orientation
Towards Inventory

• Finance
– Provide working capital
– Efficient use of capital
– Low inventory
Goals of Inventory Management

• Maximize customer service (this requires carrying


substantial inventory).

• Minimize inventory investment (this requires


carrying little inventory).

– Customer service must be a strategic issue.


Types of Inventories

• Raw materials
• Components
• Work-in-process
• Finished goods
• Vendor inventories
• Non-moving/slow moving stock
• Safety stock
• In-transit inventories
• Service parts/Consumables
Inventory Costs

• Carrying cost or Holding cost


• Ordering cost
• Shortage costs
Carrying cost

• Cost of storage facilities


• Handling cost
• Taxes
• Insurance
• Deterioration
• Obsolescence
• Shrinkage
• Cost of capital
Ordering Costs

• Preparation of purchase
requisition/order
• Mail
• Expediting, including fax, telephone
• Transportation
• Receiving
• Put away
• Updating inventory records
• Paying invoice
SHORTAGE
COST
 Costs arising out of pushing the order back
and rescheduling the production system to
accommodate these changes
 Rush purchases, uneven utilisation of
available resources and lower capacity
utilisation
 Missed delivery schedules leading to
customer dissatisfaction and loss of good
will
 The effects of shortage are vastly intangible,
it is indeed difficult to accurately estimate
Inventory Control Systems

• How often should the assessment of stock


on hand be made?
• When should a replenishment order be
placed?
• What should be the size of the
replenishment order?
The Inventory Order Cycle
Demand
Inventory Level
Order qty, Q rate

Reorder point, R

0 Lead Lead Time


time time
Order Order Order Order
Placed Received Placed Received
EOQ MODEL
A GRAPHICAL
REPRESENTATION
Sum of the two costs
Cost of Inventory

Total cost of carrying

Minimum Cost

Total cost of ordering

Economic Level of Inventory


Order Qty.
EOQ Model

• Balance holding cost against ordering


costs
• Calculate the optimal EOQ:

*2DS
Q =
Ch
•No of orders per year = D/Q*
Inventory Control Systems

Continuous Review System


System that keeps track of removals from
inventory
continuously, thus monitoring current levels of
each item
Periodic Review System
Physical count of items made at periodic intervals
Inventory Control Systems

•Continuous review -Fixed order quantity model -


Two-bin system
-Less responsive to change in demand
-Difficulty of ordering of multiple items from same
supplier

Periodic Review - Fixed time period model


CONTINUOUS REVIEW
(Q) SYSTEM
AN ILLUSTRATION
Inventory Position
Q Physical Inventory
Inventory Level

ROP

Mean Demand during LT


SS

Safety Stock

L Time
Fixed Order Quantity Model

Reorder = Expected demand + Safety


point during lead time stock
Fixed Time Period Model
• Reviewed at fixed specified time interval.
• Place an order for a quantity that, when added
to the quantity on hand, will equal a
predetermined maximum level.
• Independent demand is the usual situation.
• Difficult to record withdrawals and additions
from stock.
• Groups of items are purchased from a common
supplier.
• Items that have limited shelf life.
PERIODIC REVIEW (P)
SYSTEM
AN ILLUSTRATION Inventory Position
Physical Inventory

QR Q2R Q3R
Order Up to Level
S
Inventory Level

SS

Safety Stock

R 2R 3R
L

Time
Fixed Time Period Model
• Small tools, manufacturing supplies.
• Common commercial parts such as nuts,
bolts, washers.
• Office supplies.
• Perishable items such as dairy products,
fruits and vegetables.
• Chemicals, solvents used in the
manufacturing process.
Two-Bin System

• Special case of fixed order quantity model.


• Amount of stock equivalent to the order point is
physically segregated into a second bin and is then
sealed.
• When all the open stock has been used up, the sealed
bin is opened and a new order is placed.
• Practical method for keeping control of low-value
items.
• Without adequate training this system can be abused.
• Quantity in the second bin should be reviewed from time
to time.
Single-Bin System

• Special case of fixed time period model.


• Stock is periodically checked and each item is
ordered to a pre-established stock level.
• Works well on floor stocks located near the
point of use, like large grocery stores.
ABC Classification System

Classifying inventory according to


some measure of importance and
allocating control efforts accordingly.
A - very important High
A
Annual
B - mod. important Rs volume B
of items
C - least important Low C
Few Many
Number of Items
ABC Analysis

• Pareto noted that many situations are dominated


by a relatively few vital elements.
• Controlling the relatively vital few will go a long
way toward controlling the situation.
• Applying the ABC principle to inventory
management involves:
– Classifying the inventory items on the basis of relative
importance.
– Establishing different controls for different
classifications with the degree of control being
commensurate with the ranked importance of each
classification.
ALTERNATIVE CLASSIFICATION
SCHEMES

 ABC Classification (on the basis of consumption value)


 XYZ Classification (on the basis of unit cost of the item)
 High Unit cost - Medium Unit cost - Low unit cost
 FSN Classification (on the basis of movement of inventory)
 Fast Moving - Slow Moving - Non-moving
 VED Classification (on the basis of criticality of items)
 Vital - Essential - Desirable
 On the basis of sources of supply
 Imported - Indigenous (National Suppliers)- Indigenous
(Local Suppliers)
INVENTORY TURNOVER AND
SERVICE LEVELS
Simple physical techniques may
provide more economical
control of inventories.

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