INVENTORY:

CUSHION between DEMAND & SUPPLY If DEMAND = SUPPLY Need NO INVENTORY

Supply Excess Quantity

Demand

Definition: from OPERATIONS: Definition from FINANCE:

AMOUNT OF STOCK MAINTAINED for OPERATIONAL CONVENIENCE AMOUNT OF MONEY LOCKED IN IDLE RESOURCES

HENCE CONFLICTING INTERESTS

AIM OF INV. MANAGER : TO PROVIDE OPERATIONAL CONVENIENCE WITH MINIMUM POSSIBLE INVESTMENT IN INVENTORY : EXERCISING A SELECTIVE INVENTORY CONTROL METHOD APPLICATIONS OF INV. CONTROL TECHNIQUES (ABC, VED )

HOW?

R.M

M/C 1

M/C 2

F.G

R.M Bin

WIP BIN Traditional Approach

F.G BIN

R.M

M/C 1

M/C 2

F.G

Just In Time (JIT)

BUILD-UP OF INVENTORY
1. RAW MATERIAL INVENTORY

PURPOSE:

TO UNCOUPLE PRODUCTION FROM PURCHASE INT. LEAD TIME OF PURCHASE ORDERING, SUPPLIER LEAD TIME,

SIZE

VENDOR RELATIONSHIP, AVAILABILITY OF VENDORS R.M

2. W.I.P. INV.

PURPOSE:

TO UNCOUPLE SUCCESSIVE MANUFACTURING OPERATIONS PRODUCTION LEAD TIME,

SIZE

LINE BALANCING, MAKE OR BUY POLICIES

REASONS PRODUCTION CAPACITY CONSTRAINTS, MACHINERY BREAKDOWN, ABSENTEEISM, STAGE REJECTIONS

3. FIN. GOODS INV.

PURPOSE:

TO ASSURE FREE FLOWING SUPPLY TO CONSUMERS MARKETING ABILITY TO PUSH PRODUCT,

SIZE

COMMITMENT TO CUSTOMERS, WAREHOUSING CAPACITY, SHELF LIFE

Inventory Costs
1.

Ordering cost ( Co)

Paper Work, Typing, Dispatch, Follow-Up, Telephone, Visit, Salaries To Staff, Receiving, Inspection, Handling ( Fixed In Nature And Independent Of Order Quantity)

2. Carrying Cost/ Holding Cost( Cc Or Ch )

Interest, Insurance, Pilferage, Spoilage, Obsolescence, Storage, Warehouse Rental, Taxes

3. Stock - Out Cost

Plant Shutdown, Damage Of Goodwill, Extra Paperwork, Special Handling Of The Late Material

ABC Analysis:
Telco 1988-89 Purchase Analysis Nos. Of Suppliers 40 10% 80 280 400 20% 70% 100% Purchase Value Category 470 Cr 134 Cr 68 Cr 672 Cr 70% 20% 10% 100% A B C

Top 1-40 Suppliers Middle 41-120 Suppliers Lower 121- 400 Suppliers Total ABC Steps:

1. For each item, find the issue/consumption value ( not purchase return). 2. sort this item in descending sequence. 3. Starting from top, compute running total of consumption value. Normally, it shows: 5% to 10% of top items account for 70% of total consumption. Next 15% to 20% items, 20% of consumption. Remaining 70% to 80% items only 10% of consumption value.

Cumulative value %

100 90 70

10

30

100

Cumulative No of

ABC Analysis as a Tool for Inv. Control

A items 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. High consumption value Very strict control Nil Safety Stock Daily Deliveries Max. No. of Orders Monitoring weekly Maximum Follow-up Multi-sources Accurate forecasts Exact planning Central storage Central purchasing Max. Cost control B items Moderate value Medium control Low safety stocks Weekly/ Monthly Staggered delivery Monthly control Periodic follow up Few sources Estimates Med. planning Storage in each plant Combination Purch. Minimum efforts C items Low value Loose control High safety st. Bulk/ Quarterly Min. orders Quarterly Exceptional Max.- 2 reliable sources Guestimmates Rough planning Site/shed storage Decentralized Pur. No efforts for.

Practical Inventory Management Step 1 Guidelines are given by the top management such asMaximum permissible inventory in terms of a) Rupees value b) Inventory/turnover ratio Step 2 Inventory levels are fixed based on 1) Consumption Pattern 2) Procurement Lead Time a) Order Processing b) Managing Lead Time For Suppliers c) Delivery Time 3) Shelf Life 4) Criticality Nature of the items

Inventory Control Methods- Ref. Book-Lee/Dobler(Pg. 194 Onwards)

1) Cyclical Ordering (Time Based)

Inventory position is reviewed at a fixed interval say 25th of every month. 2) Fixed Order System (Quantity Based) Continuous review inventory system operates with a constant order qty. placed, when the stock level drops to the reorder point. - Two Bin - Three Bin 3) MRP System BOM Prepared Master Production Schedule Individual Item Schedule Computerized- MRP I, MRP II Cut Them In The

Inventory Sheets for a Fan Manufacturing Company

DAILY PRODUCTION INVENTORY NORMS
ITEM CODE DESC. NOS. OF BOM STD. RATE Rs/PC MIN. INV QTY (DAYS) MAX. INV. QTY (DAYS)

100 Fans Per Day A 4 6 Days B 10 -15 Days C 20 - 30 Days

STOCK VALUE RS. +VE VAR. Qty. RS. -VE VAR. Qty. RS. REASONS

ACTUAL QTY

M101 B143 O432 C673 R950

MOTOR (A) BLADE (C) OUTER BODY (B) CAPS (C) ROD (C)

1 3 1 2 1

100 10 50 5 10

400 (4) 6000 (20) 1000 (10) 4000 (20) 2000 (20)

600 (6) 9000 (30) 1500 (15) 6000 (30) 3000 (30)

500 4000 1700 4100 3100

5000 40000 85000 20500 31000 Actual Inv. 226500

200 10000 2000 20000 Trptn Pro

100 1000 Excess Shortage Inv. Inv. +11,000 20,000

EOQ Problem
An item is consumed @ 10,000 pieces per year. (M) The other details are ----- Unit Price: Re 1 (s) Inventory Carrying Costs (Cc) = 30% per year Ordering Cost (Co) = Rs 60 per order. 1. Considering various possibilities of order quantities at a time (e.g. 10000, 5000, 2000, 1000, 500), please work out Ordering charges, Inv. Carrying Charges and Total Cost. 2. On a graph paper, plot graphs of Ordering charges, Inv. Carrying cost and Total cost against each other. 3. Find out EOQ from the graph. 4. Find EOQ from formulae and tally with No. 3 above.
Order Qunatity 10000 5000 4000 2000 1000 500 No of Orders per Yr. 1 2 2.5 5 10 20 Ordering Charges 60 120 150 300 600 1200 Average Inventory 5000 2500 2000 1000 500 250 Carrying Charges 1500 750 600 300 150 75 Total Cost 1560 870 750 600 750 1275

Continuous Review Inv. System

Petromax Enterprises proposes to use a continuous review inventory system for one of its items. The firm operates 50 weeks in a year. The other data is : Annual Demand = 50,000 units Ordering cost per order = $35 Inv. carrying cost per unit per year = $2 Lead time per order = 1 weeks Std. Devn. of weekly demand = 125 units Fix up appropriate values of Safety stock, ROP, EOQ, if the firm is desirous of a 90 % service level.

Solution
Continuous review inventory system operates with a constant order quantity placed when the stock level drops to the ROP The constant order quantity is the EOQ

EOQ = Q

2 K x Avg. ------------Q

= =

SQRT

(2 * 50,000* 35 / 2)

1323 units

Continuous / Everyday Review Policy

Q Q R L x Avg S S S

L TIME

Demand during Lead Time = L weeks X Avg. Reqt./ week = 1 Wks X 1000 Safety Stock = = = Z x STD x = 1000 units L

(Safety factor ) x Std Devn. x SqRt. (Lead Time) 1.28 X 125 X Sq Rt 1 = 160 units

Lowest Inv. = Safety Stock = Z x STD x Sq. Rt (L) = 160 Nos. Reorder Point Qty = (Safety Stock) = (Z x STD x Sq. Rt. L) = 160 = 1160 units = + + + ( Lead Time demand) (L x AVG) 1000

Max Inv.

Safety Stock + EOQ = 160 + 1323 = 1483 Lowest + Max ----------------2 = (160 + 1483) / 2 = 822

Average Inventory =