Introduction Inventory Management Systems (models) Inventory Management seema kadam

Introduction An Inventory is the stock of idle resources in a firm for future use. Manufacturing organizations, typically, have inventories of raw materials, components, sub-assemblies (e.g., the headlight assembly for cars at Maruti Udyog Ltd. Is supplied by Lucas- TVS Ltd.), tools and equipment, semi-finished goods, finished goods). In service organizations, such as banks, financial institutions, hospitals, etc. the inventory consists of various items to be used in the various service operations. For example, hospitals have inventories of medical equipment such a s syringes, glucose bottles(drip), etc. For example in Banks, there are inventories of various types of forms,brochure,pamphlets etc. and bank also have inventories of currency notes and coins. seema kadam

Contd.. The inventory is maintained by organizations to avoid the stock out of an item. A stock out is undesirable for manufacturer because it halts the production process. For retailers, a stock out of any items results: 1. The loss of potential profit. 2. More importantly the loss of goodwill on part of customer. A low level inventory may result in shortages or stock outs. On the other hand a high level of inventory involves tying up of more capital. There are two questions to be answered by the material manager or by inventory management: 1. How much should the size of the order placed to the supplier be? 2. When should the order be placed? seema kadam

Inventory Anticipation invetory Seasonal inventory Pipeline or transit stock Cycle stock Safety stock or buffer stock To protect price increases and take advantage of quantity discount Uses of inventory

Contd… seema kadam Anticipation inventory-this is fundamental use of maintaining the inventory of an item. Enough inventories of items should exist t meet the expected or anticipated demand of customers. Cycle stock- the inventory manager has to determine the quantities of items to be stocked by using models like the economic order quantity (EOQ) model. Thus the stock of items stored as inventory to meet an inventory cycle determined by an inventory model is called the cycle stock. Safety or buffer stock- to protect against fluctuations of demand and abrupt increases in the time taken by the suppliers to supply the items, some stock known as the safety or buffer stock is maintained in excess of the anticipation inventory.

Contd… seema kadam Inventory for quantity discounts/future price increases- 1. Suppliers often offer discounts for bulk purchases. So organizations go for bulk purchases to get discounts. 2. In view of expected price increase organizations go for bulk purchases to reap the benefit of lower cost and, 3. The freight charges are discounted by truck operators if the quantity is enough to fill truck completely. Decoupling or work-in-process inventory- when operations take place in a sequence, inventories of semi- finished goods pile up near each machine. These inventories are at time desirable, as in the case of a machine breakdown; the remaining machine can continue their operations for some time during which the faulty machine can be corrected. Such inventories are called Decoupling or work-in-process inventory.

Contd.. seema kadam Seasonal inventory- Inventories of these items are stocked by firms before the start of the season. Hence this inventories are called seasonal inventories. 1. The deepawali season witnesses inventories of crackers being piled up by cracker manufacture, distributor. 2. Certain types of items are seasonal in nature, e.g. umbrellas, raincoats,airconditioners, air coolers, heater, blower, woolen garments. Pipeline or transit stock- When stocks are moved between the various elements of the supply chain,i.e., between suppliers, manufacturers,distributors,wholesalers, and the end customers, they are called pipeline or transit stock.

Role of other functional departments in inventory management seema kadam Material Department Finance department Human resources department Information systems department Marketing department

Types of costs related two inventories seema kadam 1. Ordering costs, and 2. Carrying or holding cost.

Ordering cost seema kadam Ordering cost (OC) per order is the cost of placing a single order. The purchase department of the organization is responsible for placing orders to the suppliers. The purchase department incurs the following costs every year: 1. Salary to the employees 2. Cost of miscellaneous office items such as stationary, postage,etc. and expenses such as telephone bills, electricity bills, internet expenses,etc. 3. Rent of office space, where the department is located (or the opportunity cost if the office space is owned,i.e., the space could be lent to any other company to earn rent) 4. Opportunity cost of furniture, computers, software, hardware,etc. As per marginal OC calculation: Total estimated OC= fixed OC + (variable OC per order) × (number of orders)

Carrying or holding cost. seema kadam Carrying cost (CC) is the cost of storing the inventory in the warehouse. It consist of: 1. The rent of the warehouse (or the opportunity cost of warehouse). 2. Cost of capital tied up in inventory (interest charges or the opportunity cost). 3. Maintenance cost of warehouse, such as electricity, air conditioning (if required for perishable items), security, etc. 4. Cost of damages 5. Cost of obsolescence (if during the storage period of items, the demand for these items in the market gets exhausted due to some better or substitute products introduced by the competitors.) CC can be expressed in two ways: 1. Money spent in carrying a unit item for unit duration 2. Percentage (monetary) value of the average inventory during a given period of time