What Is Inventory?

:
What Is Inventory? Stock of items kept to meet future demand Purpose of inventory management how many units to order when to order

Inventory :
Inventory Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Raw Materials Works-in-Process Finished Goods Maintenance, Repair and Operating (MRO)

Types of Inventory :
12-4 Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment

Inventory and Quality Management :

Inventory and Quality Management Customers usually perceive quality service as availability of goods they want when they want them Inventory must be sufficient to provide high-quality customer service in TQM

Inventory Costs :
Inventory Costs Carrying cost - Capital (opportunity) costs - Inventory risk costs - Space costs - Inventory service costs Ordering cost - Order processing costs -Shipping costs Handling costs Shortage cost - temporary or permanent loss of sales when demand cannot be met

Importance of Inventory control :

Importance of Inventory control Improve customer service Economies of purchasing Economies of production Transportation savings Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) To maintain independence of supply chain

Objectives of Inventory Control :

Objectives of Inventory Control 1) Maximize the level of customer service by avoiding understocking. 2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.

Factor affecting level of inventory :

Factor affecting level of inventory Nature of Business Inventory Turnover Nature and Type of product Economies of production Inventory cost Financial position Position of operating cycle Attitute of management

Slide 10:
TECHNIQUES OF INVENTORY CONTROL Modern Techniques Traditional Techniques Economic order quantity( EOQ) Reorder period (ROP) Fixing stock levels Selective inventory controls JIT ABC Analysis VED Analysis SDE Analysis FSN Analysis Inventory Control Analysis Two-Bin System Perpetual Inventory system Periodic Order System

Economic Order Quantity (EOQ) :

Economic Order Quantity (EOQ) EOQ optimal order quantity that will minimize total inventory costs EOQ- ECONOMIC ORDER QUANTITY R= ANNUAL REQUIERMENT OR CONSUMPTION IN UNIT O= ORDERING COST PER ORDER C= CARRYING COST PER UNIT PER YEAR NO OF ORDER= R / EOQ

Slide 12:
EOQ Example (1) Problem Data Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Given the information below, what are the EOQ and reorder point? 17-12 Lead time = 7 days Cost per unit = $15

Reorder Point :
Reorder Point Level of inventory at which a new order is placed R = dL where d = demand rate per period L = lead time

Reorder Point: Example :

Reorder Point: Example Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 yards/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 yards

FIXING STOCK LEVELS :

FIXING STOCK LEVELS A Stock level is level or quantitative limit which is something standard that does not permit to exceed the limits. Maximum level Minimum level Re-order level Average Stock level

maximum level :
maximum level maximum level indicates the maximum quantity of an item of inventory which can be held in store at any time. Maximum level= (Re-order level + Re-order quantity) minimum consumption rate * minimum Re-order period)

MINIMUM LEVEL :
MINIMUM LEVEL Minimum level indicates the quantitative balance of an item of inventory which must be maintained in hand at all times. Minimum level= Re-order level (normal usage rate * normal Re-order Period)

RE-ORDER LEVEL :
RE-ORDER LEVEL Re-order level is that level where the stock level reaches a stage indicating the replenishment of the stock as there is always a gap between placing an order and actually getting the stock . Re- order level= maximum usage rate * maximum re-order period .

Average stock level :

Average stock level There are basically two stock 1- minimum stock 2- mraximum or reorder quantity has to be considered Average stock level= maximum level+ minimum level 2 .

Question of fixing stock levels :

Question of fixing stock levels Shriram enterprises manufactures a special product ZED . The following particulars collected for the year 2010: Monthly demand of ZED 1000 UNITS Cost of placing an order rs. 100 annual carrying cost per unit rs. 15 Normal usages 50 units per week Maximum usage 75 units per week Minimum usage 25 units per week Reorder period 4 to 6 weeks compute from the above 1- Re order quantity 2- Re-order level 3. Minimum level 4- Maximum level 5- average stock level

solution :
solution 1. Re order quantity Annual demand = 1000*12 = 12000 units EOQ = = 400 UNITS 2. Re- order level= maximum usage * maximum ROP = 75 * 6 = 450 UNITS 3. MINIMUM LEVEL= ROL- (Normal usage * average ROP) = 450 (50*5) = 450-250= 200 UNITS 4- MAXIMUM LEVEL= (ROL + ROQ) (Minimum usage * mini. ROP) = (450+400) (25*4) =850-100= 750 UNITS 5- AVERAGE STOCK LEVEL= MINI+MAXI/2 = 200+750/2= 475 UNITS

ABC Classification :
ABC Classification Class A 5 15 % of units 70 80 % of value Class B 30 % of units 15 % of value Class C 50 60 % of units 5 10 % of value Selective inventory controls

ABC Classification: Example :

ABC Classification: Example

ABC Classification: Example (cont.) :

ABC Classification: Example (cont.) Example 10.1

VED analysis :
VED analysis According to this analysis inventory items are grouped into vital, essential, and desirable. 1-vital- items constitute such items of inventory whose in adequate supply may substantially damage the productive activities

Slide 26:
2. Essential- items are the items whose non-availability can not be tolerated for few hours or one day and the cost of production lost is high. 3. Desirable- items do not have any immediate impact on production , hence these may or may not be maintained.

Slide 27:
Thus , VED analysis does not consider the utility of the inventory items on the basis of value but on their impact on the production. 12-27

SDE ANALYSIS :
SDE ANALYSIS 1- Scarce item are those items which are in short supply and mostly such items constitute important items 2- Difficult Items refer to such items which can not be procured easily 3- Easy- items are the items which are easily available in the market.

FSN ANALYSIS :
FSN ANALYSIS 1- Fast moving items are stored in large quantities and a close watch on the movement of such items is kept. 2- slow moving items are not frequently required by the production department 3 Non moving items are rarely required by the production department .

JUST IN TIME (JIT) INVENTORY SYSTEM :

JUST IN TIME (JIT) INVENTORY SYSTEM just-in-time (JIT) is an inventory strategy that strives to improve a business's return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals between different points in the process, which tell production when to make the next part. are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. Implemented correctly, JIT can improve a manufacturing organization's return on investment, quality, and efficiency.

Slide 31:
Quick notice that stock depletion requires personnel to order new stock is critical to the inventory reduction at the center of JIT. This saves warehouse space and costs. However, the complete mechanism for making this work is often misunderstood. For instance, its effective application cannot be independent of other key components of a lean manufacturing system or it can "...end up with the opposite of the desired result."[1]. In recent years manufacturers have continued to try to hone forecasting methods (such as applying a trailing 13 week average as a better predictor for JIT planning)[2], however some research demonstrates that basing JIT on the presumption of stability is inherently flawed.[3]

INVENTORY CONTROL RATIOS :

INVENTORY CONTROL RATIOS There are two basic ratios. 1.no. of days stock on handstock cost of sales for the year/365 days Stock turnover = cost of sales of the year average stock on hand

TWO BIN SYSTEM :

TWO BIN SYSTEM Under this system , all inventory items are stored in two separate bins. In the first bins , a sufficient supply is kept to meet the current requirements over a designated period of time, in the second bin , a safety stock is maintained for use during lead time. When the stock of first bin is used , an order for further stock is immediately placed , the material in second bin is then consumed to meet stock need until the new product is received . On receipt of new order , second bin is restored and the balance is put in the first bin.

PERPETUAL INVENTORY SYSTEM :

PERPETUAL INVENTORY SYSTEM Perpetual inventory system is defined as the method of recording stores balance after each receipt and issue to facilitate regular checking and obiviate closing down for stock taking.

PERIODIC ORDER SYSTEM :

PERIODIC ORDER SYSTEM Under this system , all stocks levels are reviewed after every fixed time intervals like weekly, monthly, quarterly etc. depending upon the criticality of the item.