Inventory Management

Inventory Management
J.M.Pant
Management Consultant, Trainer and Visiting Professor jm.pant@gmail.com, +919811030273 www.jemsconsultancy.com
Inventory Management
Why Inventory Management?

To meet random demand variations, seasonal demand. Maintain smooth production flow Decouple operations- create buffer Prevent stockouts (missed delivery, lost sales, dissatisfied customer, production loss) Prevent overstock (blocked capital, opportunity loss) Take benefit of bulk purchase, and economic lot sizes (for both production and purchase) Take advantage against price increase Better service to customers, provide more variety
J.M.Pant, Management Consultant, Trainer and Visiting Professor. Email: jm.pant@gmail.com Tel: 9811030273
Inventory Control
Inventory Model
Inventory
Q
Consumption
Time
Production
Re-order Point
Average Usage
Max Demand Usage

Reorder level
Q
Safety Stock
Lead Time Reorder point depends on: Usage during lead time Safety stock
R=Annual demand or Requirement, c = unit cost in Rs, I= annual inventory carrying cost in percentage of total cost, Co = cost per order
EOQ = SQRT(2RCo/Ic) Total minimum cost = (EOQ/2)*I*c + (R/EOQ)*Co + c*R
Total Cost Cost

Ordering Cost=(R/Q) * Co
EOQ
Inventory Carrying Cost= (Q/2) *I *c
Quantity Q
Inventory Control

Ordering cost Co comprises of: Purchasing department expenses, receiving expenses, billing expenses, inspection expenses, follow up, secretarial etc. Find the total of such expenses, divide by the number of orders handled during a year and get the value of Co. Carrying cost (I) comprises of: Stores management expenses, interest on blocked capital, insurance, obsolescence, pilferage, material handling, stores rentals etc. Find the total of such expenses, divide by the average inventory during the year and get the value of i as a percentage of average inventory investment.
Exercise: Inventory Control
Problem 1 Item A annual consumption: 730 units Ordering cost Rs 150 Carrying cost: 30% of average inventory investment Unit cost: Rs 120 Delivery lead time: 5 days Find the optimal ordering quantity and reorder point. In case a discount of 5% is offered if the order quantity is 150 units or more, what will be your purchase quantity decision? (Take 365 days in a year for calculations.)
Problem 2 Item A annual demand: 200 units Cost of placing order Rs 240 Inventory Carrying charge: 20% Price upto 49 units: Rs 290 Price 50 to 99 units: Rs 285 Price 100 or more units: Rs 280 Determine the optimal ordering quantity and total cost.
Problem 3 Item A annual consumption: 25000 units Ordering cost $10 Carrying cost: 20% of average inventory investment Unit cost: $10 Ordering is done on basis of EOQ. In case a discount of 2% is offered by supplier on orders of $10,000 or more, should the offer be accepted?
Problem 4 Item A annual demand: 5 lakh units Cost of placing order Rs 2000 Inventory Carrying charge: 60% Price upto 10000 units: Rs 40 Price 10K to 20K units: Rs 38 Price 20K or more units: Rs 35 Determine the optimal ordering quantity and total cost.
Selective Inventory Control
1.
2.
3.
4.
Prioritising items; separating the vital few from the trivial many, using the Pareto principle.Few items (about20%) responsible for about 80% of the problems. ABC Analysis:based on annual consumption value in money terms. VED Analysis: for maintenance spares and other similar items classified according to their importance ranked as Vital, Essential and Desirable. SDE Analysis: from procurement angle. Ranking items as Scarce, Difficult and Easy to obtain. FSN or FSD Analysis: based on material movement/rate of consumption. Priritised as fast, Slow and Non Moving items or Dead items. Used to clear inventory of deadwood.
Selective Inventory Control
ABC Analysis
Cumulative Consumption Value in Percentage
B A
20 40
100
Cumulative Percentage of Items
Benefit Of Inventory Cost Reduction

Sales 14400 crores Material : 8640 crores A items: 6000 crores 6 m inventory 30%=900 crores Profit =1440 crores

Sales 14400 crores Material : 8640 crores A items: 6000 crores 1 m inventory 30%=150 crores Profit =1440 crores + 750 crores

Sales = 1200 crores Material cost= 720 crores A items= 500 crores 6m inventory= 250 crores 30% Cost of holding inventory=75 crores Profit @10%=120 crores

Sales = 1200 crores Material cost= 720 crores A items= 500 crores 1m inventory= 40 crores 30% Cost of holding inventory=12 crores Profit @10%=120 crores + 63 crores
. Calculate ordering cost and inventory carrying cost :

Purchasing department expenses
Stores personnel expenses Obsolescence
Rs 200,000
Rs 200,000 Rs 60,000
Spoilage
Hire charges of warehouse Material handling in stores Cost of collecting material Cost of receiving material Cost of bill payment Insurance charges
Rs 15,000
Rs 140,000 Rs 160,000 Rs 40,000 Rs 35,000 Rs 100,000 1%
Interest charges
Orders placed per year Average total inventory
18%
5000 Rs 200 lakhs
Ordering cost
Cost per order
5000 orders
200000 35000 40000 100000 375000 75
Purchasing deptt Receiving cost Cost of collecting Bill payment Total
Carrying cost
200000 60000 15000 140000 160000 575000 2.875 18 1 21.875
stores personnel obsolescence spoilage hire charges material handling Total % (above expenses) % interest % insurance % carrying cost
The annual demand for component A is 900 units. Cost of placing order is Rs 100. Inventory carrying charge is 20%. The procurement price of component A depends upon the quantity ordered as the supplier is willing to offer price breaks as under:
Price of component Aif order quantity upto 75 units unit Price of component A if order quantity Between 75 to 150 units unit Price of component A if order quantity Greater than 150 units unit
-----
Rs 200 per
------
Rs 180 per
-----
Rs 160 per
Determine the optimal order quantity for component A and the total cost to be incurred per year.
ABC ANALYSIS
Managerial Intervention
A Items
Strict physical control Very low stock levels including safety stock (1 day to a week) Very frequent ordering (daily/ weekly) Strong MIS-daily/ weekly control reports. Hourly control, follow up and expediting Vendor development critical
B Items
Moderate control Low stocks ( 1 to 3 months) Maybe once in one to three months Monthly reports. Periodic follow up.
C Items
Loose control High stocks: > 3 months More than three months Quarterly reports. Follow up in exceptional cases. Not critical
Moderate
Management control by senior executives
Middle level
Lower level

Inventory Management

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Inventory Management

Uploaded by

Copyright:

Available Formats

Inventory Management

Why Inventory Management?

Max Demand Usage

Total Cost Cost

Inventory Carrying Cost= (Q/2) *I *c

Exercise: Inventory Control

Exercise: Inventory Control

Exercise: Inventory Control

Exercise: Inventory Control

Selective Inventory Control

Selective Inventory Control

Cumulative Consumption Value in Percentage

Cumulative Percentage of Items

Benefit Of Inventory Cost Reduction

Benefit Of Inventory Cost Reduction

Benefit Of Inventory Cost Reduction

Benefit Of Inventory Cost Reduction

. Calculate ordering cost and inventory carrying cost :

Cost per order

200000 35000 40000 100000 375000 75

Purchasing deptt Receiving cost Cost of collecting Bill payment Total

200000 60000 15000 140000 160000 575000 2.875 18 1 21.875

Management control by senior executives

You might also like

Inventory Carrying Cost= (Q/2) I c