OM :SESSION - 29 & 30

MATERIALS MANAGEMENT -
INVENTORY
 Inventory
• Inventory can be broadly defined as the stock of
goods, commodities or other economic resources that
are stored or reserved at any given period for future
production or for meeting future demand.
• It exists because there is a difference in the timing or
rate of supply & demand i.e. cushion between supply
& demand.
• Supply – can be one time (static),
- continuously repetitive (dynamic);
• Demand – totally known (certain),
- known over a range of probable values
(risk),
- totally unknown (uncertain).
 Inventory Management
• Scope : The function of directing the movement of
goods through the entire manufacturing cycle from the
requisitioning of raw materials to the inventory of
finished goods, in orderly manner, to meet the
objectives of maximum customer service with minimum
investment and efficient plant operation.
• Nature : The various forms in which inventory exists
are :
Production inventory – RMs, parts & components
which enter the firm’s products;
 MRO inventory – Maintenance, Repair & Operating
supplies, used in the production process, but are not
part of product;
 Work-In-progress (WIP) inventory – semi finished at
various stages;
 Finished goods inventory – completed product, ready
for shipment.
 Objectives of Inventory

• To minimize the final investment in

inventories ;
• To ensure that the value of material
consumed is minimum ;
• To provide a safeguard for variations in raw
material delivery time or lead time ;
• To allow flexibility in production scheduling ;
• To reduce surplus stock.
 Inventory Management

An effective inventory management should :

 ensure a continuous supply of materials to
facilitate uninterrupted production;
 maintain sufficient stocks of raw materials in
periods of short supply and anticipated price
changes;
 maintain sufficient finished goods inventory for
smooth sales operation & efficient customer
service;
 minimize the carrying cost & time;
 control investment in inventories & keep it at
optimum level.
 Inventory decisions

Problems need to be tackled :

quantity to be ordered ;
determination of level of inventory for
placing order ;
 amount of delay in supplies (Lead time) ;
 amount of variations in demand.
 Inventory Control Systems

Generally four types :

a) Fixed order quantity model or ‘Q’ system (also
known as ‘Perpetual inventory system’, ‘Re-order
point inventory system’, or ‘Two-bin system’.
b) Fixed time period system or ‘P’ model ( also
known as ‘Fixed-order interval system’,
‘Replenishment inventory system’, or ‘Order cycle
system’.
c) Materials Requirement Planning System ( known
as ‘ MRP’)
d) Just–In-Time ( known as ‘JIT’).
 Fixed Order Quantity Model -EOQ

 An optimum level of inventory should be

determined on the basis of the trade-off between
costs & benefits associated with the levels of
inventory;
 Economic Order Quantity (EOQ) refers to the level
of inventory at which total cost of inventory
comprising of ‘Ordering costs (or set-up costs)’ and
‘Inventory holding or carrying costs’ is minimum and
also at EOQ, both the costs are also equal.
 Certain terms used in inventory control :
• Demand – number of items required over a
particular unit of time;
Fixed Order Quantity Model –EOQ (contd.)

• Lead time – the time between ordering a

replenishment of an item & actually receiving the
item;
• Re-order level or Re-order point (ROP) – a point
fixed between maximum & minimum stock levels
at which time it is essential to initiate purchase
requisition;
• Safety stock – an additional stock needed to
allow for delay in delivery (lead time) or for
higher than expected demand or both;
• Re-order Quantity (ROQ) – the quantity of order
to be placed at ROP;
Fixed Order Quantity Model –EOQ (contd.)

• Ordering costs – include purchase

administration costs, inspection costs, transport
costs, accounting costs, etc.;
• Inventory carrying costs – include storage
costs, handling costs, stores operation costs,
taxes, depreciation, insurance, spoilage,
breakage, pilferage, evaporation costs,
preservation costs, etc.
 Developing EOQ Model

 Basic assumptions are :

• Demand rate is deterministic i.e. known with

certainty & is constant over time ,
• Inventory is replenished immediately as the
stock-level reaches exactly equal to ‘zero’,
• Lead-time is known & fixed and is equal to or
greater than ‘zero’,
• Ordering cost is linearly related to the number
of orders per year,
• Purchase price or cost per unit is constant.
 Developing EOQ Model

 Limitations of EOQ model :

• Demand is neither known with certainty, nor
is uniform in practice;
• The ordering cost is difficult to measure & also
not linearly related;
• In many situations, demand can not be
predicted, neither it is uniform always;
• One of the assumptions of EOQ model is that
replenishment time is ‘zero’; this is seldom so,
unless vendor is nearby.
 EOQ Model (Explained)