Inventory control What is inventory: Stock of items kept to meet future demand. Inventory, in production context, is an idle resource.

Resource is idle does not mean it is serving no purpose. It is available when needed. It serves as an insurance policy against the unexpected breakdowns, delays, and other disturbances that could disrupt ongoing production.
Types of Inventory: Raw materials & purchased parts: materials and components required for making a product. Partially completed goods called work in progress product (WIP): materials and components that have begun their transformation to finished goods. Finished-goods inventories: goods ready for sale to customers. i.e, Items being transported and stored in ware houses. Tools and equipments. What are the reasons for holding stock?

To balance against uncertainty (safety): when demand is uncertain, when we can not forecast the demand. To smooth production requirements. Material buffers are used to cushion the production process from the uncertainty in material deliveries (Material buffers are used to avoid uncertainty in material deliveries) To meet time varying demand or supply patterns. (to meet seasonal demand) To ensure a high level of customer service Economies of scale in production or purchasing To take advantage of quantity discounts

Costs associated with inventory 1. Holding (carrying) costs: cost to carry an item in inventory for a length of time. Holding cost increase as the order size increases because larger orders mean higher inventory levels. Holding cost = Storage cost + Handling cost + Depreciation cost + Insurance + Taxes. Storage cost: i.e., cost for storage facilities. Buildings have to be owned or leased to store the inventory. Handling cost: the cost of moving items within storage includes damages, wages, and equipment expense. Depreciation cost: the change in value of an item during storage. 2. Ordering cost: (Also known as set up cost) costs of ordering and receiving inventory. These would include the cost to enter the purchase order and/or requisition, any approval steps, the cost to process the receipt, incoming inspection, invoice processing and vendor payment.

Inventory models: inventory models quantify the relationship to identify the order size that minimized total cost. Economic order quantity model (EOQ): EOQ is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory. Economic production quantity model (EPQ) Quantity discount model

EOQ Model:
Assumptions of EOQ Model are: Annual demand is known Demand is even throughout the year, rate of demand is constant. Order is received in a single delivery Ordering costs are same regardless of order size. Lead time does not vary There are no quantity discounts

Economic production quantity model (EPQ)

An inventory system in which an order is received gradually, as inventory is simultaneously being depleted. Assumptions of EPQ are similar to EOQ except orders are received incrementally during production or during order period.

The inventory pattern for EPQ system:

Quantity Discounts model:

Price discounts are often offered by suppliers to encourage large orders. Benefits for the purchaser from bigger orders include the reduction in unit price, lower shipping and handling costs, and reduction in ordering costs owing to fewer orders. These benefits have to be measured against the incremental increase in carrying costs.
The price of the product is not considered in the EOQ and EPQ models. If we consider the price of the product than the Total cost or total annual stocking cost (ASC) is as follows. .

TC=ASC= annual carrying cost or Holding cost+ annual ordering cost + Purchasing cost ASC= Ch* Q/2 + Co * D/Q + PD, where P is unit price of the product, D is annual demand, q is ordering quantity, Ch is holding cost/unit/year, and Co is ordering cost.

Total annual stocking cost curve

Order quantity 1 to 44 45 to 69 70 or more

Unit Price $2.00 1.70 1.40