Eipm Jru July 2016 Finals

MGT212 INVTY MGMT
1
EFFECTIVE INVENTORY PLANNING & MANAGEMENT
EFFECTIVE
INVENTORY MANAGEMENT
2
INVENTORY
In the context of our study, INVENTORY concerns
those services or materials that directly or indirectly
form part of the ongoing task of delivering the
services or making the products that an organization
provides or sells.
It comprises the inputs, services or materials used,
any part-finished items (services or products) and
those items that are complete and held awaiting their
sale.
Simply put, inventory is a stock of items kept by an
organization to meet internal and external customer
demands.
3
What is Inventory Management?
Involves planning, coordinating and controlling
the acquisition, storage, handling, movement,
distribution and possible sale of raw materials,
component parts, supplies , finished products
that are needed to meet customers needs.
4
Objectives of Inventory Management
Minimize cost
- working capital
- carrying costs
- scrap and rework
Highest level of customer service
Mismanagement of inventory will have an effect

on working capital and customer service
5
Why Plan..? We Need to?
Balance the need to SATISFY
CUSTOMERS on one hand and the need to
MINIMIZE INVENTORY HOLDINGS on
the other
Deal with uncertainties in demand and
supply lead times
Categorize stock items according to
importance to the firm so we can focus
properly.
6
Inventory Planning
Inventory planning answers two questions

How much to order of each item
whether they are ordered from outside
suppliers or production departments
within the company
When to order
7
Types of Inventory
8
Types of Inventory
Types of Inventory:
Raw Materials: purchased parts used in
manufacturing other items
Work-in-Process: parts that are in the
manufacturing process
Sub-assemblies: manufactured parts that
are partially completed and stocked in
inventory
9
Types of Inventory
Finished Goods: Items ready
for sale to a customer
Supplies and MRO: Maintenance, repair

and operating supplies.
10
Reasons for Holding Inventory
Demand forecast error
Unpredictable or late deliveries from suppliers
Minimum supplier order quantity
Supplier delivery interval
Stocking methodology
Reorder interval & quantity
Strategic stocking
Purchase price advantage
11
Reasons for Holding Inventory
Consignment stocking
Lead times offered to customers shorter
than suppliers lead times
Minimization of delivery costs
Pipeline inventory
Anticipation or precautionary stocks
12
Cost of Not Holding Enough
Inventory
Loss of sales from delay in supply
Loss of goodwill and delayed payment from
customers if orders are not delivered in full
Disruption of the production
process/operations
Inefficient production scheduling
13
Cost of Not Holding Enough Inventory
Higher transportation costs to fill rush
orders
Purchasing of small volume supplies at high
prices to meet shortages
Quality or specification differences due to
the need to call upon other sources
14
FUNCTIONS OF INVENTORIES
Normal pipeline inventories
maintained because of the need
TRANSIT to transport inventories from one
point to another when the transit
time is not instant
SAFETY/ Used as protection against stock-

BUFFER outs due to uncertainties in
demand and supply
This covers anticipated or

ANTICIPATION expected changes in demand
and/or supply
15
FUNCTIONS OF INVENTORIES
This covers the need to produce
in lot sizes where inventories are
CYCLE accumulated at certain stages in
the production process ready for
the succeeding stage
These are created by ordering or

ECONOMIES producing in quantities to obtain
OF SCALE the lowest unit costs possible
16
METHODS OF VALUATION
FIRST-IN
FIRST-OUT
The oldest goods in inventory
(FIFO) are issued
LAST-IN The last goods received are

FIRST-OUT issued first
(LIFO)
WEIGHTED Value of goods received + Value

AVERAGE of goods on hand = Cost per
COST item divided by total number of
units
17
Jan 5 purchase 100 pcs. at Php 100/pc or total of Php 10,000
Jan 20 purchase 100 pcs. at Php 120/pc or total of Php 12,000
Total purchase 200 pcs at Php 22,000 total or Php 110/pc
FIFO LIFO
Inventory 200 Inventory 200
Jan 27 issuance ( 50) Jan 27 issuance ( 50)
Jan end inventory 150 Jan end inventory 150
Inventory Value Inventory Value
Beginning Php 22,000 Beginning Php 22,000

Jan 27 at Php 100 (5,000) Jan 27 at Php 120 (6,000)
End Jan valuation Php 17,000 End Jan valuation Php 16,000
For Method Average, balance of 150pcs will be at Php

110/pc or End Jan Valuation of Php 16,500
18
EXERCISE: METHODS OF VALUATION
(1/2 Y)
Jan 5 purchase 1500 pcs. at Php 200/pc or total of __________
Jan 20 purchase 1000 pcs. at Php 220/pc or total of __________
Total purchase ____________________________________
FIFO LIFO
Inventory 2500 Inventory 2500
Jan 27 issuance (800) Jan 27 issuance (800)
Jan end inventory _______ Jan end inventory _______
Inventory Value Inventory Value
Beginning Php _______ Beginning Php _______

Jan 27 at Php ___ _______ Jan 27 at Php ___ _______
End Jan valuation Php _______ End Jan valuation Php _______
For Method Average, balance of ____pcs will be at Php

_____/pc or End Jan Valuation of Php _______
19
STANDARD Based on estimate before

COST the item is purchased
REPLACEMENT Based on estimated

COST replacement cost
20
INVENTORY COSTS
ORDERING/
SET-UP Carrying Cost Stock-Out Cost
COST
Cost incurred Cost of NOT

to place an Cost to STORE HAVING the
ORDER or to and MAINTAIN Proper ITEM
SET-UP PRODUCTION Inventory
of item when needed
Administrative Financing Extra Production

Transport Ownership Extra Transportation
Forms Risks Lost Sales
Communication Overhead Lost Customers
Labor
21
INVENTORY CARRYING COST
COMPONENTS
FINANCE COST
OVERHEAD COSTS
OWNERSHIP COSTS
RISKS COSTS
22
COMPONENTS
COST OF MONEY
FINANCE
COST
Interest Cost
Opportunity Cost
OWNERSHIP INSURANCE
COSTS TAXES
23
COMPONENTS
OBSOLESCENCE
RISKS THEFT
COSTS DAMAGE
SHRINKAGE
WAREHOUSE
OVERHEAD HANDLING
COSTS
CONTROL
24
Inventory Carrying or Holding Costs
(Approximate Ranges)
Category Cost as a
% of Inventory Value
Warehousing costs (building rent, depreciation, 6%
operating cost, taxes, insurance) (3 - 10%)
Material handling costs (equipment, lease or
depreciation, power, operating cost) 3%
(1 - 3.5%)
Labor cost from extra handling 3%
(3 - 5%)
Cost of money (borrowing costs, taxes, and
insurance on inventory) 10%
(6 - 24%)
Obsolescence, damages, pilferages and other risks
Overall carrying cost 3%
(2 - 5%)
25 %
25
TAKE HOME EXERCISE #1: Inventory Carrying Cost
GMR, INC. had maintained an average inventory of materials

and supplies amounting to Peso 100,000,000 during the previous
year. The General Manager felt that this level of inventory could
be improved with better management of inventories. He decided
to send his new Inventory Manager for further training. Having
listened attentively and understood the management strategies
discussed during the seminar, the Inventory Manager aggressively
applied some relevant techniques to his work at the Company
For the current year, the Inventory Manager successfully
reduced the Companys average inventory to Peso 80,000,000
without any adverse effect to the Companys operations.
As part of the Inventory Managers accomplishment report,
how much is the total amount of peso savings which resulted from
the inventory reduction assuming that the annual inventory
carrying cost is 16 %?
26
TAKE HOME EXERCISE #2: Inventory Carrying Cost
The Inventory Manager of GMR, Inc. issues a Purchase

Requisition to the Purchasing Department for 100K pieces of
Material A. This quantity would cover one (1) months
requirements.
After discussion with his supplier, the Purchasing Manager
asked the Inventory Manager if he could agree to increase his
requested quantity to 200K pieces since the supplier has offered
to give a 2 % discount from the quoted price of Peso 10.00/pc
at 100K piece order quantity provided that the entire quantity of
200K pieces are delivered at one time.
Assuming that the annual inventory cost is 12 %, should
the Inventory Manager agree to increase his requisition from
100K to 200K pieces? What would be the basis for his decision
in terms of net savings or additional cost for the Company?
27
RESPONSIBILITIES
Inventory Management
Policy
PLANNING Inventory Planning
Forecasting
Positive Order Action

ACQUISITION
Negative Order Action
28
RESPONSIBILITIES
Receiving
Physical Inventory Control
STOCKHANDLING Inventory Recording and
Accounting
Issuance/Delivery to the
Customer or Consumer/User
DISPOSITION
Disposal and Write-Off of
Inactive Inventory
29
INVENTORY
STRATEGIES
30
Product Positioning Strategy
Make finished products to stock (maintain
and sell from finished products inventory)
Assemble finished products to order
(maintain an inventory of components, sub-
assemblies, and options)
Custom design and make finished products
to order (maintain a stock of commonly
used materials)

Make-to-Stock
Immediate delivery of good quality,
reasonably priced, off-the-shelf, standard
items.
In this environment, a customer is not
willing to tolerate a delay in receiving the
product
In this strategy, management is required to
maintain a stock of finished goods.

Assemble to Order
The positioning strategy of assemble-to-
order is to supply a large variety of high
quality, competitively priced, final products
from standard components and sub-
assemblies within a short lead time.
The customer enjoys the benefit of some
customization, yet has a short wait for
delivery

Make- or Engineer-to-Order
Provide the technical ability to product
specialty products, such a machine tools.
The final product is usually a combination of
standard components and other components
custom designed for the customer.
The manufacturer often purchases materials
after the order is placed.
Customer must therefore be willing to
tolerate a long lead time.

Supply Chain
Consumer Purchase Information
Suppliers Factory Warehouse Customer Store Consumer
Product Flow
35
Supply chain functions re-defined .
Plant Purchasing Demand and
Replenishment, Customer
To manufacture quality To leverage regional and
products at the lowest Service & Logistics
global scale to source,
possible controllable cost Operations
negotiate and purchase
to deliver demand. materials and services To manage the supply chain
To ensure that the needed to deliver products function and link the market
highest levels of efficiency at the most competitive place, the distribution network,
are met, while maintaining the manufacturing process and
world-class Environment, price
the procurement activity to
Safety and Health ensure high customer service
standards Supplier Selection level at the lowest cost
Negotiation and Bidding Demand Planning and
Conversion Replenishment
Supplier Development
Production Logistics Optimization Logistics Operation (Physical
Quality Systems Network)
Supplier Relationship
Management Customer Service (order entry
Purchasing Strategy and fulfillment)
Cost Accounting and
Controllership Contract Administration Development of Sourcing
Supplier performance Strategy
36
Functional scope for Supply Management is based on four pillars.
Demand &
Replenishment
Purchasing
Logistics
Operations Customer
Service
37
Purchasing
Supplier Selection
Supplier Negotiation/Bidding
Supplier Development and Optimization
Supplier Relationship
Supplier Performance
Contract Administration
Co-Manufacturing
Demand and Replenishment (Manage the demand and
replenishment process)
Demand Forecasting
Inventory Management
Replenishment planning
Development of Sourcing Strategy
Production Planning
38
Logistics Operations (Manage physical network)

Inbound and outbound finished goods
Co-packing activities
Warehousing
Transportation and Delivery
Customer Service (Manage the order entry and
fulfillment complete and on time)
Order taking, processing and invoicing
Co-managed inventory
Client master files management
ECR supply initiatives
Customer relationship and initiatives
39
Logistics Operations
Logistics
Logistics
Warehousing Operations
Operations
Handling Customer
Customer
& storage Service
Service
Supply
Supply
Management
Management
Inventory
Demand
management Demand
And
And
Replenishment
Replenishment
Transportation
& delivery
Purchasing
Purchasing
40
Customer Service
Logistics
Logistics
Operations
Operations
Order Taking
Customer
Customer
Service
Service
Supply
Supply
Order Entry Management
Management
Demand
Demand
and
and
Replenishment
Replenishment
Purchasing
Purchasing
Order Processing
41
DEMAND AND REPLENISHMENT
Logistics
Logistics
Operations
Operations
Demand forecasting
Customer
Customer
Service
Service
Supply
Supply
Management
Management
Inventory management Demand
Demand
And
And
Replenishment
Replenishment
Purchasing
Purchasing
Replenishment
42
Procurement
Logistics
Logistics
Operations
Operations
Supplier Selection
Customer
Customer
Service
Service
Supply
Supply
Management
Management
Negotiation and Bidding
Demand
Demand
and
and
Replenishment
Replenishment
Purchasing
Purchasing
Contract Administration
43
Management Responsibility
Logistics
Logistics
Operations
Operations
Management
alignment
Customer
Customer
Service
Performance Service
Measurement Supply
Supply
Management
Management
Demand
Demand
Systems Capability and
and
Replenishment
Replenishment
Risk Management
Purchasing
Purchasing
44
Our Approach
Forecast Less, Not More
TECHNIQUES
MOVING AVERAGE https://
www.youtube.com/watch?v=Wo5YWXDRXv8
EXPONENTIAL SMOOTHING
https://www.youtube.com/watch?v=k_HN0wOKDd0

Moving Average

Exponential Smoothing

Topics
Forecast Error
Inventory Policy
Economic Order Quantity
Stock Control Warehouse Management, Inventory
Movements, Physical Inventory Taking, Disposal of Surplus and
Scrap
Inventory Mgmt Performance Measurement
Poor Inventory vs Effective Inventory Mgmt
Business Impact
58
Why Measure Forecast Accuracy?
To respond
To improve
To stimulate strategy review
More
More important
important than
than the
the accuracy
accuracy of
of the
the forecast
forecast
is
is the
the forecasting
forecasting process
process itself.
itself.
59
How To Improve Forecast Accuracy
Formal process
Using the right tool
Clear roles and responsibilities
Document and review assumptions
Adjust for abnormal demand
Distribution Resource Planning (DRP)
Customer connectivity
Performance measurement
Continuous improvement plan
60
Reducing Forecast Error

Inventory Policy

PARETO PRINCIPLE
WHERE THERE ARE A LARGE
NUMBER OF CONTRIBUTORS TO A
RESULT, THE MAJORITY OF THE
RESULT IS DUE TO A MINORITY
OF CONTRIBUTORS.
VILFREDO PARETO
ITALIAN ECONOMIST
(LATE 1800s)
63
THE ABC INVENTORY CLASSIFICATION
The ABC INVENTORY CLASSIFICATION system is a

selective management of inventories which involves
difference ordering, stocking levels, inventory review
and control policies for difference items of inventory.
This system aims to establish the best possible control

at least possible cost for each class item in inventory.
It places the investment control in the A & B class of
items where peso usage value is most important.
64
ABC ANALYSIS
The technique enables individual
minimum/maximum levels of inventory to
be easily determined by classifying
inventory into three categories
65
Class parts are the significant few
A
60-70% of your companies total
purchasing spend but only around
10-15% of the total number of items
in stock. Critical items that need
tight control
Valuable Class A parts are reviewed frequently

because inventory cover is low due to their
high individual part value
66
A-B-C revision
A Class parts will have the lowest level of inventory
cover
These tend to be important parts
Very tight controls need to be in place

A
Parts are reviewed very regularly
Ensure that potential stock-outs are avoided
For A class parts we maintain high service

levels by allocating more effort and better
systems, rather than high inventory levels
67
Class parts are the trivial many
10-15% of your companies total
C
purchasing spend but more than
60-70% of the total number of
items in stock. Higher volume
deliveries reduce administrative
costs. Often stock control is limited
to bin systems.
68
A-B-C revision
C Class parts are the opposite of A
Class parts
Trivial parts
High levels of inventory cover
Enables reductions to be made to the

time spent managing these parts C
Large delivery quantities
69
A Class B parts fall between A and
C class parts in terms of both
inventory levels and effort/systems
used to manage the parts. They
usually range from 20-30% of both
B
expenditure and the number of items
in stock.
C
70
A B C CLASSIFICATION
MATERIALS MATRIX
% ANNUAL % TOTAL REVIEW
ITEM STOCK DELIVERY
INVENTORY INVENTORY AND
GROUP LEVEL SCHEDULE
VALUE ITEMS CONTROL
MOST
MOST
A 60% - 70% 10% - 20% LOW TIGHT &
FREQUENT
FREQUENT
LESS
LESS
B 20% - 30% 20% - 30% MEDIUM TIGHT &
FREQUENT
FREQUENT
LEAST
LEAST
C 10% - 20% 60% - 70% HIGH TIGHT &
FREQUENT
FREQUENT
71
ESTABLISHING THE ABC CLASSIFICATION
MULTIPLY AVERAGE COST PER UNIT BY THE TWELVE
MONTH REQUIREMENTS TO ARRIVE AT THE TOTAL
ANNUAL PESO VALUE OR COSTS OF GOODS VALUE.
DETERMINE THE TOTAL UNIT REQUIREMENTS OF EACH

INVENTORY ITEM FOR A PERIOD OF TWELVE (12)
MONTHS BASED ON SALES VOLUME FORECAST. THIS
SHOULD ALSO INCLUDE SAMPLES AND PROMOTIONAL
REQUIREMENTS.
ARRANGE THE ITEMS BY VALUE IN DESCENDING ORDER

(HIGHEST TO LOWEST).
72
ESTABLISHING THE ABC CLASSIFICATION
GROUP THE ITEMS INTO THREE (3) MAJOR

CLASSIFICATIONS OF A, B & C. CONVERT THE SUM
OF THE VALUES WITHIN EACH GROUP INTO ITS
CORRESPONDING PERCENTAGE OF TOTAL VALUE AND
THE SUM OF THE NUMBER OF THE ITEMS WITHIN
EACH GROUP INTO ITS CORRESPONDING PERCENTAGE
OF TOTAL NUMBER OF ITEMS.
CLASSIFY THE ITEMS ACCORDING TO THE GENERAL

RULES OF ABC CLASSIFICATION.
73
ABC INVENTORY ANALYSIS
ANNUAL ANNUAL % TO TOTAL CUMULATIVE
ITEM CODE ITEM UNIT OF UNIT % TO TOTAL
QUANTITY PESO USAGE ANNUAL PESO
NUMBER NUMBER DESCRIPTION MEASURE COST
USAGE VALUE USAGE VALUE ANNUAL PESO
_________________________________________________________________________________________________________________
1 1001 MATERIAL A UNITS 80,000 125
2 1002 MATERIAL B UNITS 8,000_ 99
_________________________________________________________________________________________________________________
3 1003 MATERIAL C UNITS 20,000 44
4 1004 MATERIAL D UNITS 17,000_ 52
_________________________________________________________________________________________________________________
5 1005 MATERIAL E UNITS 15,000 58
6 1006 MATERIAL F UNITS 11,000_ 79
_________________________________________________________________________________________________________________
7 1007 MATERIAL G UNITS 7,000 126
8 1008 MATERIAL H UNITS 40,000_ 25
_________________________________________________________________________________________________________________
9 1009 MATERIAL I UNITS 26,000 29
10 1010 MATERIAL J UNITS 12,850_ 40
_________________________________________________________________________________________________________________
11 1011 MATERIAL K UNITS 70,000 400
12 1012 MATERIAL L UNITS 11,000_ 81
_________________________________________________________________________________________________________________
13 1013 MATERIAL M UNITS 19,000 47
14 1014 MATERIAL N UNITS 25,000_ 35
_________________________________________________________________________________________________________________
15 1015 MATERIAL O UNITS 100,000 320
16 1016 MATERIAL P UNITS 60,000_ 35
_________________________________________________________________________________________________________________
17 1017 MATERIAL Q UNITS 14,000 64
18 1018 MATERIAL R UNITS 50,000_ 90
_________________________________________________________________________________________________________________
19 1019 MATERIAL S UNITS 50,000 140
20 1020 MATERIAL T UNITS 40,000_ 135
_________________________________________________________________________________________________________________
TOTALS PESOS _ 100 % 100 %
_________________________________________________________________________________________________________________
_
_________________________________________________________________________________________________________________
74
EFFECTIVE_ INVENTORY PLANNING & MANAGEMENT
_________________________________________________________________________________________________________________
ANNUAL ANNUAL % TO TOTAL CUMMULATIVE
ITEM CODE ITEM UNIT OF UNIT
QUANTITY PESO USAGE ANNUAL PESO % TO TOTAL
NUMBER DESCRIPTION MEASURE COST
NUMBER
_________________________________________________________________________________________________________________
1 1015 MATERIAL O UNITS 100,000 320 32,000,000 32.0 % 32.0 %
2 1011 MATERIAL K UNITS 70,000
_ 400 28,000,000 28.0 % 60.0 %
_________________________________________________________________________________________________________________
3 1001 MATERIAL A UNITS 80,000 125 10,000,000 10.0 % 70.0 %
4 1019 MATERIAL S UNITS 50,000
_ 140 7,000,000 7.0 % 77.0 %
_________________________________________________________________________________________________________________
5 1020 MATERIAL T UNITS 40,000 135 5,400,000 5.4 % 82.4 %
6 1018 MATERIAL R UNITS 50,000
_ 90 4,500,000 4.5 % 86.9 %
_________________________________________________________________________________________________________________
7 1016 MATERIAL P UNITS 60,000 35 2,100,000 2.1 % 89.0 %
8 1008 MATERIAL H UNITS 40,000
_ 25 1,000,000 1.0 % 90.0 %
_________________________________________________________________________________________________________________
9 1017 MATERIAL Q UNITS 14,000 64 896,000 0.9 % 90.9 %
10 1013 MATERIAL M UNITS 19,000
_ 47 893,000 0.9 % 91.8 %
_________________________________________________________________________________________________________________
11 1012 MATERIAL L UNITS 11,000 81 891,000 0.9 % 92.7 %
12 1004 MATERIAL D UNITS 17,000
_ 52 884,000 0.9 % 93.6 %
_________________________________________________________________________________________________________________
13 1007 MATERIAL G UNITS 7,000 126 882,000 0.9 % 94.4 %
14 1003 MATERIAL C UNITS 20,000
_ 44 880,000 0.9 % 95.3 %
_________________________________________________________________________________________________________________
15 1014 MATERIAL N UNITS 25,000 35 875,000 0.9 % 96.2 %
16 1005 MATERIAL E UNITS 15,000
_ 58 870,000 0.9 % 97.1 %
_________________________________________________________________________________________________________________
17 1006 MATERIAL F UNITS 11,000 79 869,000 0.9 % 97.9 %
18 1002 MATERIAL B UNITS 8,000
_ 99 792,000 0.8 % 98.7 %
_________________________________________________________________________________________________________________
19 1009 MATERIAL I UNITS 26,000 29 754,000 0.8 % 99.5 %
20 1010 MATERIAL J UNITS 12,850
_ 40 514,000 0.5 % 100.0 %
_________________________________________________________________________________________________________________
TOTALS PESOS
_ 100,000,000 100.0 % 100.0 %
_________________________________________________________________________________________________________________
_
_________________________________________________________________________________________________________________
75
_________________________________________________________________________________________________________________
ANNUAL ANNUAL % TO TOTAL CUMULATIVE
ITEM CODE ITEM UNIT OF UNIT % TO TOTAL
QUANTITY PESO USAGE ANNUAL PESO
NUMBER NUMBER DESCRIPTION MEASURE COST
_________________________________________________________________________________________________________________
1 1001 MATERIAL A UNITS 30,000 15
2 1002 MATERIAL B UNITS 18,000_ 9
_________________________________________________________________________________________________________________
3 1003 MATERIAL C UNITS 120,000 14
4 1004 MATERIAL D UNITS 7,000_ 2
_________________________________________________________________________________________________________________
5 1005 MATERIAL E UNITS 65,000 258
6 1006 MATERIAL F UNITS 111,000_ 99
_________________________________________________________________________________________________________________
7 1007 MATERIAL G UNITS 24,000 120
8 1008 MATERIAL H UNITS 80,000_ 25
_________________________________________________________________________________________________________________
9 1009 MATERIAL I UNITS 2,000 300
10 1010 MATERIAL J UNITS 62,850_ 72
_________________________________________________________________________________________________________________
11 1011 MATERIAL K UNITS 50,350 130
12 1012 MATERIAL L UNITS 111,000_ 61
_________________________________________________________________________________________________________________
13 1013 MATERIAL M UNITS 89,000 7
14 1014 MATERIAL N UNITS 125,000_ 18
_________________________________________________________________________________________________________________
15 1015 MATERIAL O UNITS 120,000 42
16 1016 MATERIAL P UNITS 30,000_ 59
_________________________________________________________________________________________________________________
17 1017 MATERIAL Q UNITS 23,000 83
18 1018 MATERIAL R UNITS 46,000_ 90
_________________________________________________________________________________________________________________
19 1019 MATERIAL S UNITS 25,000 100
20 1020 MATERIAL T UNITS 30,000_ 35
_________________________________________________________________________________________________________________
TOTALS PESOS _ 100 % 100 %
_________________________________________________________________________________________________________________
_
_________________________________________________________________________________________________________________
76
_________________________________________________________________________________________________________________
Economic Order Quantity
(EOQ)
77
ECONOMIC ORDER QUANTITY
TOTAL INVENTORY COST = ORDERING COST + CARRYING
COST
ANNUAL
COST IN
PESOS
TOTAL COST INVENTORY

CARRYING COST
ORDERING COST
EOQ QUANTITY
78
ECONOMIC ORDER QUANTITY
FORMULA
2SD
EOQ = PC
Q = ECONOMIC ORDER QUANTITY IN NUMBER OF UNITS

S = ORDERING COST IN PESOS PER ORDER
D = ANNUAL REQUIREMENTS OR TOTAL YEARLY USAGE
P = PURCHASE COST PER UNIT IN PESOS
C = ANNUAL INVENTORY CARRYING COST EXPRESSED AS
AS A PERCENTAGE COST OF CARRYING A PESO
OF INVENTORY FOR ONE YEAR
79
SAMPLE EXERCISE: Economic Order Quantity
VARIABLES :
D = YEARLY REQUIREMENT = 12,000 UNITS
C*= INVENTORY CARRYING COST = 24 %
S = ORDERING COST = P 200.00 PER ORDER
P = UNIT COST = P 1.00 PER UNIT
* Refer to Slide no. 30

80
SAMPLE EXERCISE: Economic Order Quantity
2 x 200 x 12,000
EOQ =
0.24 x 1.00
= 4,800,000
0.24
= 4,472 UNITS
N = NUMBER OF ORDERS PER YEAR
12,000
=
4,472
= 2.683
81
STOCK CONTROL
82
WAREHOUSE MANAGEMENT
OBJECTIVES
HIGH CUSTOMER SERVICE LEVEL

MAXIMUM PLANT OPERATING EFFICIENCY
MINIMUM INVENTORY INVESTMENT
INVENTORY ACCURACY
EFFICIENT STOCK HANDLING, STORAGE
AND PROTECTION
MINIMUM OPERATING COSTS
83
WAREHOUSE MANAGEMENT
KEY ASPECTS
PHYSICAL
FACILITIES
SYSTEMS AND
CONTROLS
PEOPLE
MANAGEMENT
84
Inventory Coding Systems
The use of a code is the most efficient and effective

way of identifying materials, components, assemblies
and other items stocked by an organization
Without proper coding, problems in identifying and
locating goods in inventory are likely to arise
Inventory item identification codes should not be
confused with bar codes, although item codes can be
encoded into the bar-code format for automatic
identification
85
Two basic types of Coding Systems and
their characteristics
Simple sequential systems
Simples to allocate
Extendable
Index
brief
Structured coding systems
Use of part-codes
Ease of use
Error detection
Difficult to design
Longer than necessary
86
WAREHOUSING CYCLE
RECEIPT
VERIFICATION
ISSUANCE INSPECTION
PREPARATION PREPARATION
FOR ISSUANCE FOR STORAGE
ISSUANCE
STORAGE
VERIFICATION
87
Inventory Movements
Order
Receiving Storage processing
(pick, pack)
Checking,
identification,
sorting Despatching,
shipping
Dispatch to
storage
(putaway)
The use of an effective warehouse
management system helps in the
recording, monitoring and control of
inventory movements

Basic Warehousing Procedures
Receiving Function
Prompt and accurate processing of receipts
is basically one of the prime requisites of
effective warehousing. As the first operation,
receiving has an effect on subsequent
operations and often sets the pace and
continuity of flow.
89
Factors that facilitate prompt receipt of
goods:
Proper maintenance of DUE-IN information
Prompt and accurate checking and
recording of shipments received
Efficient handling and storage
90
Due-In Information
In the interest of advance planning for the handling of

future freight arrivals, the following practices are
recommended:
Determine approximate date of arrival of supplies,
type and quantity of supplies
Furnish delivery carrier complete unloading
instructions - location, gate number, warehouse
number, time and date of delivery desired, etc.
91
Due-In Information contd..
When conditions permit, the storage

location for large volume receipts
should be determined prior to arrival
Plan carefully the labor and
equipment required to expedite
unloading operations
92
Checking & Recording of Shipments
Received
In checking the receipt of materials, the receiving
personnel ascertains:
That the material being delivered was, in fact
ordered
That the quantities of items received are those
actually purchased
That the items are in acceptable conditions and are
not damaged
That what is delivered is in accordance with the
specifications stated in the purchase order
93
Physical Inventory Taking
Is the process of counting, weighing or

otherwise measuring all items in stock
and recording the results.
This allows discrepancies to be identified

between the actual count and the
recorded quantities
94
Purposes of Physical Inventory Taking
To verify the accuracy of stock records to

ensure that inventory replenishment
decisions are based on accurate stock data
To support the value of each stock shown in
the balance sheet by physical verification
To disclose the possibility of fraud, theft, etc.
To reveal any weakness in the system for the
custody and control of stock
To analyze the cause of discrepancies
95
Methods of Stocktaking
Periodic Stocktaking
Counting of stocks at the same point in time
(typically, at the end of each financial month or
year)
Continuous stocktaking (cycle counting)
Involves using the ABC classification method to
count items within each category over different
periods of cycles
Cycle counters are assigned to count a certain
number of A, B or C items per day, ensuring that
all items are counted according to the agreed
cycle
96
Can be undertaken on a non-working day to avoid
interfering with normal operations
It meets accounting needs by counting everything
Because of volume of items to be counted, use of
untrained staff to perform counting tasks can
result to inaccurate counts
Disruption caused by stock counting procedures
does not encourage frequent counting, thus,
discrepancies are not immediately identified
97
Continuous Stocktaking (Cycle Counting)
Continuous stocktaking (cycle counting)

Provides the advantage of counting A class items
more frequently
Enables regular assessments of the level of stock
accuracy, thus, allowing prompt detection of
inaccuracies in overall stock levels
No need to close plant or stores during the
conduct of the count
Normal posting of receipts and issuances can
continue without disruption
98
Conducting a Stock Count
Importance of cut-off periods

Proper identification of stocks and
location
Consider timing of updating of
inventory records
Availability of balances to be
compared with the physical count
99
Cycle-Counting Steps
Step 1
Select Cycle Count

Items Step 2
Step 6
Correct Generate Cycle
Inventory Count
Balances INVENTORY Documents
ACCURACY
GOAL
Eliminate 98.5%
Step 5 Cause of Errors Step 3
Conduct the
Cycle Counts
Perform Error
Analysis
Step 4
100
Inventory Records Accuracy
Inventory Records Accuracy (IRA) is the measure of
accuracy of inventory records
It is the comparison of the actual count vs. recorded
quantity
It allows certain level of tolerance for deviations
between the actual physical count and the records
which could result due to difficulty in getting accurate
measurements as in the case of items that are weighed
and/or measured by volume
Level of tolerance will vary depending on the item type.
Class A items will require tighter level of tolerance
than B and C items due to high value of A items.
101
Inventory Records Accuracy
Inventory Records Accuracy (IRA) =
No. of Items counted correctly

x 100
Total number of items counted
IRA should at least be at 98.5 %
102
Management and Disposal
of Surplus and Scrap
103
The disposal of a companys property
which is no longer economically useful in
its present condition or form, provides a
means for:
Increasing cash revenue
Reducing the cost of the companys

products;
Conserving raw materials
104
Types of Surplus and Scrap
Surplus - refers to equipment, materials and
supplies in usable conditions but are in excess of
current requirements.
Scrap - results from worn-out equipment, fixtures,
and the residue from normal operations
Obsolete materials/equipment - have been
rendered no longer usable due to obsolescence.
Waste - comes as a residue of manufacturing
processes and has no residual value and thus
treated as trash.
105
Basic Objectives of Disposal Program
To ensure that all scrap, waste, surplus

stocks and equipment are properly located,
collected and handled
To obtain maximum range and economic
value of such reclamation and salvage
materials
To assist in minimizing the generation of
surplus and scrap materials by observing
sources that give rise to these and by close
cooperation with other departments.
106
Typical Disposal Activities of the Warehouse:
Collection and supervising the collecting of surplus and

scrap materials from various areas in the plant and
taking them to a central location
Storing reclamation and salvage materials until they are
disposed of or refused
Sorting and preparing scrap, metals, and waste to
obtain maximum sale value
Reviewing all purchase requisition before they are
forwarded to purchase department to determine if
materials can be furnished from reclamation and
salvage material
107
Disposal Activities
Restoring reclaimable material to usable condition or

transferring such materials to other departments if
they are not being reconditioned by the reclamation
and salvage group.
Seeking out possible plant uses for reclamation and
salvage materials
Assisting in the sale of reclamation and salvage
materials
108
Disposal Options:
Use within the company

Return to suppliers
Sale to other companies
Sale to dealers (for re-cycling process)
Sale to employees
Donate to charitable/educational institutions
Use of a auction broker
Destroy
109
Obsolete materials disposal priority:
Sell back to suppliers

Transfer to another plant
Sell to outside entity
Donate
110
PERFORMANCE MEASUREMENT
111
INVENTORY TURN-OVER
COST OF ANNUAL
TURN-OVER SALES OR USAGE
=
RATIO AVERAGE ANNUAL
INVENTORY VALUE
112
INVENTORY LEVEL
B. BUDGET/PLANNED INVENTORY VS ACTUAL INVENTORY
IN TERMS OF : QUANTITY
VALUE
FORWARD COVERAGE
113
SYMPTOMS OF POOR INVENTORY
MANAGEMENT
Inability to meet delivery dates

High rate of order cancellations or backlog
Increasing/unbalance inventories
Uneven Production
Production Downtime due to raw material shortages
Periodic Lack of Storage Space
Large Non-moving stocks
Discrepancy in physical stocks vs. book balance
114
MAJOR SUCCESS FACTORS
Reliable Forecasts/Plans
Accurate and Updated Information
Reliable Suppliers/High Production Compliance
Reduced lead times and processes
Regular disposal of inactive/obsolete stocks
115
Business Impact

Cash Flow
Assets fluctuate over the production cycle

and change over time as sales volume
changes.

Cash Flow
Cash Flow in Peso 000s
GMR
Supply Chain Costs
2007
are part of total Cost
Sales Revenue Peso 9870 of Goods Sold
Expenses (6935)
Profit before tax/Int 2935 Supply Chain affects
Working Capital
Interest/Tax/Other 910
levels
Net Earnings 2025
Change in WC in Peso
Working Capital (105)
Accounts Receivable 1380
Cap. Ex. (700)
Inventory 600
Cash Flow* 1220
Accounts Payable 1875
* This commonly referred to as Discretionary cash flow . . .funds generated from business operations

Supply Chain Functions Are Key in
Delivering Positive Cash Flow ..
Business Investments
Profit INV AR AP
CAPEX
Change in Working Capital
How
Productivity Inventory Mgmt Terms Mgmt./ Terms Mgmt. Capital Spending
Collections
Who
Product Supply
MFG/ D&T Procurement Customer Service Procurement Engineering
Business Teams MFG
Procurement

Thank you for listening and
your active participation.
GOOD LUCK!
120

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MGT212 INVTY MGMT

Mismanagement of inventory will have an effect

Inventory planning answers two questions

Supplies and MRO: Maintenance, repair

SAFETY/ Used as protection against stock-

This covers anticipated or

These are created by ordering or

LAST-IN The last goods received are

WEIGHTED Value of goods received + Value

Inventory Value Inventory Value

Beginning Php 22,000 Beginning Php 22,000

For Method Average, balance of 150pcs will be at Php

Inventory Value Inventory Value

Beginning Php _______ Beginning Php _______

For Method Average, balance of ____pcs will be at Php

STANDARD Based on estimate before

REPLACEMENT Based on estimated

Cost incurred Cost of NOT

Administrative Financing Extra Production

GMR, INC. had maintained an average inventory of materials

The Inventory Manager of GMR, Inc. issues a Purchase

Positive Order Action

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

Suppliers Factory Warehouse Customer Store Consumer

Plant Purchasing Demand and

Logistics Operations (Manage physical network)

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

The ABC INVENTORY CLASSIFICATION system is a

This system aims to establish the best possible control

Valuable Class A parts are reviewed frequently

These tend to be important parts

Very tight controls need to be in place

For A class parts we maintain high service

High levels of inventory cover

Enables reductions to be made to the

DETERMINE THE TOTAL UNIT REQUIREMENTS OF EACH

ARRANGE THE ITEMS BY VALUE IN DESCENDING ORDER

GROUP THE ITEMS INTO THREE (3) MAJOR

CLASSIFY THE ITEMS ACCORDING TO THE GENERAL

TOTAL COST INVENTORY

Q = ECONOMIC ORDER QUANTITY IN NUMBER OF UNITS

* Refer to Slide no. 30

HIGH CUSTOMER SERVICE LEVEL

The use of a code is the most efficient and effective

EFFECTIVE INVENTORY PLANNING & MANAGEMENT

In the interest of advance planning for the handling of

When conditions permit, the storage

Is the process of counting, weighing or

This allows discrepancies to be identified

To verify the accuracy of stock records to

Continuous stocktaking (cycle counting)

Importance of cut-off periods

Select Cycle Count

Inventory Records Accuracy (IRA) =

No. of Items counted correctly

IRA should at least be at 98.5 %

Beginning Php _ Beginning Php _