INVENTORY CONTROL

(INDEPENDENT DEMAND)
 Inventory is the store of goods and stock

Inventory control is the activity that

maintains stocks at desired level
 OBJECTIVES OF INVENTORY

•To maintain overall investment at the

lowest

•To supply items to users at right time and

right place

•To keep waste and surplus at minimum

•To minimize shortage and handling cost

•To maximize efficiency of production

FUNCTIONS OF INVENTORY

•Return on investment
•Buffer stock
•Decoupling
•Production smoothing
•Reduce material handling
•Bulk purchasing
TYPES OF MANUFACTURING INVENTORIES

•Raw material
•Work in process
•Finished goods
•Spares and consumables
•Miscellaneous
PRESSURES FOR LOW INVENTORY

•Interest
•Opportunity cost
•Storage and handling cost
•Taxes / insurance
•shrinkage
PRESSURES FOR HIGH INVENTORY

•Customer service
•Ordering cost
•Setup cost
•Transportation cost
•Quantity discounts
 MULTISTAGE INVENTORY

Items stocked at more than one point in sequential

production process

MULTIECHELON INVENTORY

Inventory of finished products at various levels in

distribution system
FACTORS AFFECTING INVENTORY
•Economic parameters
•Price
•Procurement cost
•Carrying cost
•Shortage cost
•Demand
•Ordering cycle
•Lead time
•Number of supply echelons
•Number of stages of inventory
•Availability of items
•Government policy
 INVENTORY COST

•Cost of items
•Procurement cost
•Carrying cost
•Stock out cost
•System cost
 Total cost

TC* Holding cost

Annual cost

Ordering cost

Q* Order quantity
 OPERATING DOCTRINE

HOW MUCH TO ORDER Q

WHEN TO ORDER R
 INVENTORY CONTROL SYSTEMS

FIXED ORDER QUANTITY SYSTEM (QR SYSTEM)

•Order quantity remains fixed
•Demand may be constant or variable

FIXED ORDER TIME SYSTEM (PERIODIC SYSTEM)

•Time of order is fixed
•Demand is variable
 FIXED ORDER QUANTITY SYSTEM
(CONSTANT DEMAND)

. Q
Inventory level

R
T1 T2 time

T1 = T2
Q = Q max
 FIXED ORDER QUANTITY SYSTEM
Inventory level
(VARIABLE DEMAND)

L1 L2 time
 FIXED ORDER TIME SYSTEM
(VARIABLE DEMAND)

.
Inventory level

T1 T2 T3 time

T1 = T2 = T3
Q max is fixed
 NOATATIONS
D total annual demand
Q order quantity
Q* optimal order quantity
R reorder point
R* optimal reorder point
L lead time
S setup / procurement cost per order
C cost per unit
I carrying cost per unit per year
P production rate
dL demand per unit time during lead time
DL total demand during lead time
TC total annual cost
TC* minimum total annual cost
 ECONOMIC ORDER QUANTITY
D is constant
L is constant
C is constant
No stock out is allowed

No. of orders = D / Q Average inventory = Q / 2

Order cost = SD / Q Holding cost = ICQ / 2

Total inventory cost = CD + SD /Q + ICQ / 2

dTC / dQ = -SD / Q2 + IC / 2

Total cost is minimum when dTC / dQ = 0

R = 0 if L = 0
Q* = 2SD / IC
R = LdL if L = 0
 SENSITIVITY ANALYSIS FOR EOQ MODEL

TC 1 q Q
= +
TC* 2 Q q

Total ordering and holding costs are relatively stable

around the EOQ. A firm is better served by ordering a
convenient lot size close to EOQ rather than the
precise EOQ
 GRADUAL REPLACEMENT MODEL
ECONOMIC BATCH SIZE

Qmax
Inventory level

-d
p -d

Tp
Qmax = (p-d) Q / p
Tp = Q / p = p–d Q
p
 GRADUAL REPLACEMENT MODEL
ECONOMIC BATCH SIZE
Average inventory = Q p-d
2 p
TC = CQ + SD / Q + ICQ/2 p-d
p

Total cost is minimum when dTC / dQ = 0

dTC / dQ = -SD / Q + IC / 2 ( p-d / p )
Q* = 2DS p
IC p-d

2DS P
IC P-D
 QUANTITY DISCOUNT
Price range

EOQ at lowest price

range

feasible Not feasible

EOQ at next
Compute total cost
lowest price

Total cost at lowest

Q for each price

Choose minimum
total cost
INVENTORY DECISIONS OF PERISHABLE PRODUCTS
Cu = cost of shortage
Co = cost of overstock
Critical fractile = Cu
Cu + Co

Inventory order = minimum demand +

CF ( maximum demand – minimum demand )
INVENTORY CONTROL UNDER UNCERTAIN DEMAND

Safety stock is required to face uncertainty in demand

if daily demand standard deviation is s,

The standard deviation б during lead time of n days
2 2
= s1 + s22+ s3 + sn2

R = LdL + zб
Z = number of standard deviations equivalent
to confidence level
Reorder Point

Service level
Risk of
a stock out
Probability of
no stock out

ROP Quantity
Expected
demand Safety
stock
0 z z-scale
INVENTORY CLASSIFICATION

By cost ABC analysis

By importance VED analysis
By frequency of use FSN analysis
 VED analysis

V ( vital ) items which are absolutely essential to the

operations
E ( essential ) items, absence of which adversely affects
productivity or quality or both
D ( desirable ) items required for smooth operations
although not essential
 FSN analysis

F fast moving items

S slow moving items
N non moving items
 ABC analysis

Based on Pareto law

•10% of items account for 70% of cost

•20% items account for 20% of cost
•70% of items account for 10% of cost
 ABC analysis

.. . . . . . C class items 100

. B class items
90

. 70
frequency

A class items %

items