ORDERING, STORING & UTILIZATION OF RAW MATERIALS

PREPARED BY: DHARVEN PANCHAL

FLOW OF PRESENTATION:

Raw material During Inbound logistics Work in progress during Operations Finished goods during Out Bound Logistics

RAW MATERIALS:

Basic Raw material Consumables Stores & spares Packing material

'INVENTORY TURNOVER RATIO'

A ratio showing how many times a company's inventory is sold and replaced over a period.

The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days.

Sr.no Name of the Company

1 2. Indian Oil Corporation Bharat Petroleum Corp. Ltd.

ITR -2000

ITR-2011

8.00 14.00

6.50 8.00

3.
4. 5. 6. 7. 8. 9.

HPCL
SAIL BHEL RIL

10.00
2.00 2.00 2.00

8.00
3.60 3.50 6.00

Tata motors Ltd.

Tata Steels Ltd. MUL

4.00
2.50 4.5

8.50
3.50 12

STEPS:
A bottom up approach to inventory management. 1) Classification of inventory based on the use or reason why the organization needs to carry inventory. 2) To identify the driver of each such category of inventory based on the reason which factor instill variation in the inventory 3) carry out an analytical study to determine the appropriate level of inventory required for each of the identified driver. 4) Then at last again make a decision at the product level regarding inventory size.. Here inventory is controlled through two decisions 1. How much to order 2. When to order

1st Cycle Stock : Because of the economies of scale involved in production and transportation it makes sense to produce and transport goods in batches. The is called as cycle stock. And order point problem as to size and order no. exist here. 2nd Safety stock : It is a safeguard against the uncertainties of demand and supply. 3rd Decoupling Stock: Since it is not possible to carry out supply chain operation with just one decision maker, the entire supply chain is usually divided into various decision making unit, the demarcation of decision making unit take place at both organizational and departmental boundaries, so it is not uncommon for organizational to hold large inventories at organizational as well as departmental level. This becomes decoupling inventories. So that flexibility at each level can be made.

1. 2.

4th Anticipation Stock : It consist of stock accumulated in advance of expected peak in sales or to take care of some special event that does not occur on regular basis. It is of two types Seasonal Stock Speculation Stock

5th Pipe line stock: Since production and transportation activities take certain finite time firms need to carry pipeline or in transit stock. Pipeline stock consist of good usually being worked upon (WIP) or being moved from one location to another in the chain( In transit Inventory).
6th Dead Stock: It refers to that part of the stock , that remain dormant or non moved over a long period of time . This stock is unlikely to be used in long run or in any part f supply chain.

So inventory management is focused at lowering down the Cost of capital Invested and blocked in the inventory by 1. Increasing inventory turnover ratio & operating cycle of the company 2. Increasing stock to sales ratio 3. Maintenance of optimum current asset ratio

Inventory Management Stage 1 Stage 2 Stage 3 Purchase Stores Issue Control Control Control

Inbound Logistics

Operation

Outbound Logistics

Lets Start with Stage 1 To understand this let's know the cost associated with the inventory 1. Ordering Cost: Is the cost of placing an order ( Called as per order cost) (Abv. as OC & o) This is the cost associated with the purchase of material and includes the following 1. Cost of paper work involved i.e. Order processing cost ,we mean Procurement order cost, intend, material requisition form, purchase order, receive note & various ledger entries etc. 2. Salary of the people involved in the above process 3. Depreciation, rent and opportunity cost of the offices & assets involved.

2. Carrying Cost ( Also called as Holding cost) Abbreviated as CC & c This is the cost associated with the Transport & Storage of material purchased and includes the following 1. Loading of material cost 2. Transport cost , octroi & levies 3. Unloading cost 4. Inspection cost 5. Material handling cost ( in house if any) 6. Storage cost ( In stores rental or depreciation) 7. Cost of damage , maintenance cost, cost of capital tied up in inventory It can be expressed in two ways: 1. Money spent in carrying a unit for duration in the ware house ( say a year , month or week) 2. Percentage of value of the average inventory during the given period of time

3. Cost of shortage or out of stock cost Abbreviated as G & k This is the cost associated with the stock out conditions of material and includes the following 1. Loss of potential profit 2. Loss of goodwill on the part of the customer Abbreviation OC = Total Ordering cost o= Ordering cost per order CC= Total carrying cost c= Carrying cost per unit per year ( Unit of time) G=Total shortage cost k= Shortage cost per unit

Let us understand that there are two methods of Managing inventory 1. Independent Demand Inventory management System 2. Dependent Demand Inventory Management System How are they different ? Suppose we are motor cycle manufacturer . For the next month demand forecast says 2000 motorbikes. In a motorbike two tyres, one speedometer, four side indicators are used. Therefore company orders 4000 tyres, 2000 speedometer & 8000 side indicators to its suppliers. Thus the demand of tyres, speedometer & side indicators id depended upon the demand of motorbikes Therefore inventory of these items is called , dependent demand inventory, and the inventory management system is aptly called as Dependent Demand IMS. On the other hand demand of motorbikes is determined directly by demand forecast and is not dependent upon the demand of any other item, Hence called as independent demand inventory and the system is called as independent demand IMS

Tools of IMS
For Dependent Demand IMS Three tools are available
1.

Material requirement Planning System

2.

Just in Time System Hybrid MRP-JIT System

3.

Tools of IMS
For Independent Demand IMS It has two Variables 1. For Manufacturers 2. For Retailers
For Manufacturers Tool is EOQ/EBQ ( Economic Ordered/Batch Quantity) For Manufacturer