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Inventory management.
Inventory Stock of goods, commodities or other economic resources that are held by firms at a particular time for their future production requirements and for meeting future demands. Inventory Management It assists organizations in minimizing their inventory cost without compromising on their ability to respond quickly to customer demand.
Manufacturing organizations , typically have inventories of raw materials, components, sub-assemblies, tools equipments, semifinished goods, finished goods etc.
E.g., Headlight assembly for cars at Maruti Udyog Ltd is supplied by Lucas-TVS Ltd
In service organizations the inventory consists of various items to be used in various service operations.
E.g., In Banks there are inventories of different types of forms for various banking operations, brochures , pamphlets , currency notes and coins etc.
In retailing warehouses & distribution centers have important place in overall operations
E.g., Wal- Mart tied up with Fingerhut Business services for the Internet based store Wal-Mart.com. Under this kind of arrangement, suppliers are paid only after an item is sold. As a result, the inventory is managed & controlled by suppliers & manufacturers.
To avoid the stock out of an item which halts the production process. Balances supply and demand Provides protection from uncertainties in demand and order cycle Acts as a cushion between critical interfaces within the supply chain Can enhance customer service levels
Functions of Inventory
To To
To
To To To To To
decouple operations
protect against stock-outs take advantage of order cycles help hedge against price increases permit operations take advantage of quantity discounts
Types of Inventories
Production
Inventories
Inventories
Maintenance, repair & operating supplies which are consumed in the production but not become the part of the product
Work
in Progress-
Types of Inventory
Smooth Production:
E.g., Sales of air conditioners is more during summers but an organization may not be capable of manufacturing entire units during summer. So it maintain constant production rate and finished goods inventory. It is used to cover the deficiency in manufacturing capacity during high demand period.
Buffer stock for smooth production flow Allowing longer production runs & quantity discounts
Demand forecast of finished goods so that raw materials can be procured accordingly
Marketing department
Information regarding changes made in the materials quality to enhance the quality of finished goods
Feedback regarding quality requirements of finished goods and thus the materials used
Materials Department Training of employees in the materials department regarding use of ERP and other software Information systems department
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Inventory cost
Purchase cost: The cost of purchasing a unit of item is called purchase cost. Carrying cost: It is cost incurred when the inventories are stored in warehouses or stores. 1. Cost directly linked with materials
Obsolescence, Deterioration, Pilferage 2. Financial Costs Taxes, Insurance, Storage & Interest
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Ordering cost:
1. Cost of placing & order with a vendor of materials Preparing purchase order, Processing payments, Receiving & inspecting the material
Capacity Costs:
1. Overtime payments when capacity is too small 2. Lay-off & idle time when capacity is too large.
A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of
Inventory system
The series of activities involved in maintaining adequate levels of inventory is referred to as inventory cycle. When a company places an order ,it should be based upon the inventory system. Inventory system is of two types: 1. Fixed Order Quantity system 2. Fixed Order Period system.
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Disadvantages1. It compels periodic review of all items. 2. Higher level of safety stocks
Both systems have their strengths & weaknesses. So, operations managers adopt a combination of both of these systems.
Economic Order Quantity Model (EOQ) Always Better Control Classification (ABC) Vital, Essential Desirable Classification (VED) Scarce, Difficult & Easy to obtain (SDE) High Medium & Low Classifications (HML) Fast moving, Slow moving & Non-moving (FSN) Max-Min System
EOQ Model
Assumptions Price for unit of product is constant. Demand for the product is constant & uniform throughout the period. Lead time is constant. Ordering cost is constant. Holding cost is based on average Inventory. All demands for the product will be satisfied & no back orders are allowed. Reorder Point(RP)RP= Lead Time(LT) X Average Daily Demand(D)
Lower
A n n u al C o st
Minimum Total Annual Stocking Costs Total Annual Stocking Costs Annual Carrying Costs Annual Ordering Costs Smaller EOQ Larger
Order Quantity
EOQ
Annual carrying cost = (average inventory level) x (carrying cost) = (Q/2)Cc Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q) Co Annual Purchase Cost= Annual Demand (D) x Purchase Price/Unit (P) Total annual Inventory Cost (TC) = annual carrying cost + annual ordering cost + annual purchase cost= (Q/2)Cc + (D/Q) Co+ DxP
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Economical Order Quantity (EOQ) D = 12,000 units/year . Cc = .20(50) = Rs10/unit/year . Co = Rs100/order . (a) Economic Order Quantity (EOQ)= Q= 490 units per order .
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Number of Orders Per Year = D/Q = 12,000/490 = 24.49 orders/year Time Between Orders = Q/D = 490/12000 = 0.04 years . = 0.48 months .
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ABC Analysis
Inventory Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Annual use in 1000Rupees 3 40 2 10 5 400 7 9 8 300 1 50 15 20 90 8 7 11 9 5 1000 % of total Inventory usage 0.3 4 0.2 1 0.5 40 0.7 0.9 0.8 30 0.1 5 1.5 2 9 0.8 0.7 1.1 0.9 0.5 100
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