Inventory Management

Unit III

What is Inventory Management

Inventory management is all about knowing what is on hand, where it is in use, and how much finished product results. Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy.

 Balancing the various tasks of inventory management means paying attention to three key aspects of any inventory. The first aspect has to do with time. In terms of materials acquired for inclusion in the total inventory, this means understanding how long it takes for a supplier to process an order and execute a delivery. (Lead Time) Calculating what is known as buffer stock is also key to effective inventory management. Essentially, buffer stock is additional units above and beyond the minimum number required to maintain production levels.(Buffer Stock) Goods or work in progress inventory, tracking materials as they are used to create finished goods also helps to identify the need to adjust ordering amounts before the raw materials inventory gets dangerously low or is inflated to an unfavorable level. (WIP)

Material Requirement Planning

MRP calculates and maintains an optimum manufacturing plan based on master production schedules, sales forecasts, inventory status, open orders and bills of material. If properly implemented, it will reduce cash flow and increase profitability. MRP will plan production so that the right materials are at the right place at the right time. MRP determines the latest possible time to product goods, buy materials and add manufacturing value.

Implementing or improving Material Requirements Planning can provide the following benefits for your company: Reduced Inventory Levels Reduced Component Shortages Improved Shipping Performance Improved Customer Service Improved Productivity Simplified and Accurate Scheduling Reduced Purchasing Cost Improve Production Schedules Reduced Manufacturing Cost Reduced Lead Times Less Scrap and Rework Higher Production Quality Improved Communication Improved Plant Efficiency Reduced Freight Cost Reduction in Excess Inventory Reduced Overtime

MRP uses the following elements to plan optimal inventory levels, purchases, production schedules and more: Master Production Schedule (MPS) Bill of Materials (BOM) Quantity on Hand (QOH) Part Lead Times Sales Order Quantities / Due Dates Purchase Order Quantities / Due Dates Lot Sizing policies for All Parts Safety Stock Requirements

Example of MRP for Raw Material (Nails item code 082)

Week 082 Nail (2 required) Lead time = 1, Lot Size =50

2
10

4
40

5
10

7
70

8
20

10

Gross Requirement Scheduled Receipts Projected Available I 4 Planned order release

50 54

44

44

4 50

44

44 50

24

Gross Requirement Plan

Week 1 A. B. C. E. F. D. G. Required date Order release date Required date Order release date Required date Order release date Required date Order release date Required date Order release date Required date Order release date Required date Order release date 300 600 300 2 weeks 200 200 300 300 2 3 4 5 6 7 50 100 8 Lead Time 50 1 week

100
150 150 300

2 weeks
1 week 2 weeks

300
600 200 200

3 weeks
1 week

Just In Time
Just in Time manufacturing is a systems approach to developing and operating a manufacturing system. It is based on the total elimination of waste. JIT is not a new concept. It has been part and parcel of the Japanese manufacturing industry adopted approach for quite some time. It requires that equipment, resources and labor are made available only in the amount required and at the time required to do the job. It is based on producing only the necessary units in the necessary quantities at the necessary time by bringing production rates exactly in line with market demand.

 The basic idea of JIT was originally developed by Toyota Motor Company in Japan. Sometimes also called as Lean Manufacturing system. Now used in most of the Japanese & Western firms. JIT system is not only applicable to high volume products but can also be used for low volume high variety products.

JIT Manufacturing
For firms to adopt JIT manufacturing 4 basic techniques have to be implemented: Factory layout revision (for better flow of material in the factory) Setup time reduction (during change of product type the time required has to be reduced) Pull System implementation (use of visual aids to convey the message example: Kanban System) Better Coordination with suppliers

The KANBAN System

Kanban is a Japanese word which means Signal The Kanban inventory system was originally founded by Toyota Motors. The basic idea is that Every component used in manufacturing has a Kanban card. These cards alert the manufacturing area that the assembly line is running low on components inventory & they have to be replenished.

Process Of KANBAN
When any worker uses any component or material he dispatches the Kanban card back to the store which indicates that the material has to be replenished before the next process starts. The store when receives the card dispatches the material to the assembly line. The store when dispatches the material it sends its Kanban card to the supplier so that the stock in inventory could be replenished.

ABC Analysis
100 Class B Class C

Percentage of dollar usage value

90 Class A 80 70 60 50 40 30 20

10
0 10 20 30 40 50 60 70 80 90 100

Percentage of items

Economic Order Quantity

TOTAL COST
Costs $ TOTAL ANNUAL HOLDING COSTS

TOTAL ANNUAL ORDER COSTS

EOQ

QUANTITY (UNITS)

VED Analysis
VED Analysis attempts to classify the items used into three broad categories, namely Vital, Essential, and Desirable. The analysis classifies items on the basis of their criticality for the industry or company. Vital: Vital category items are those items without which the production activities or any other activity of the company, would come to a halt, or at least be drastically affected. Essential: Essential items are those items whose stock out cost is very high for the company. Desirable: Desirable items are those items whose stock-out or shortage causes only a minor disruption for a short duration in the production schedule. The cost incurred is very nominal.

FSN Analysis
In F-S-N analysis, items are classified according to their rate of consumption. The items are classified broadly into three groups: F means Fast moving, S means Slow moving, N means Non-moving. FSN analysis helps a company in identification of the following a) The items to be considered to be active may be reviewed regularly on more frequent basis. b) Items whose stocks at hand are higher as compared to their rates of consumption. c) Non-moving items whose consumption is nil or almost in significant.