Session: M1-3 Slide No.1/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Inventory Management Session: M1-3

Slide No.2/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Inventory Management Inventories (building materials, office supplies, chemicals etc) are among the largest nonwage expense of many PEs and Agencies Sound inventory management saves money by purchasing as inexpensively as possible the optimal number of needed items so that they are always readily available, but in an amount that minimizes storage & holding costs

Session: M1-3 Slide No.3/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Management Issues  Preparing specifications, obtaining competitive Tenders, negotiating, & receiving items  Purchasing specific items  Monitoring the deterioration, obsolescence, storing, issuing, theft, handling, interest, & insurance of items  Overseeing the storage & holding-costs of items Inventory management requires:

Session: M1-3 Slide No.4/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop  Stocking too many items  Stocking items which are seldom needed  Failing to balance purchasing cost and storage costs  Failing to consider the full cost of holding inventories The most common mistakes made in inventory management are:

Session: M1-3 Slide No.5/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Importance  on the technical/operational aspect for smooth running of activities  on the economical/financial aspect for containing expenses Inventory management is important:

Session: M1-3 Slide No.6/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Inventory related costs  Issuing orders  Keeping stock  Being “out of stock” OSC The main components The order/re-order times and lot sizes is critical & impacts upon the cost.

Session: M1-3 Slide No.7/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Inventory Management Review  rationalising stock expenses to eliminate disruptions & wastefulness  integrating inventory management with procurement planning & logistics Review inventory management with the aim of:

Session: M1-3 Slide No.8/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Review systems Key decisions in managing stock are:  Periodic Review System  Perpetual Review System then when to order ? how much to order ? Two common systems for reviewing inventory management are:

Session: M1-3 Slide No.9/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Periodic Review System The system refers to regular time intervals (called reorder period, e.g. 3 days, two weeks, etc.), the inventory level, I, is reviewed & brought back to the restocking level, R. This means that each time some amount, Q, is added to bring the inventory level back to R: 0Day 3 Day 6 Day 9 7 R Q = 13 Q = 17 Q = 9

Session: M1-3 Slide No.10/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Restocking level Where: average quantity required during the reorder period, RP, plus the replenishment lead time, L, (if there is a delay in getting the goods) safety stock, that is a “cushion” of inventory held to mitigate the uncertainties of consumption/use and lead times The Periodic Review System relates to the determination of the restocking level, R, namely (see example):

Session: M1-3 Slide No.11/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop An example of Restocking level Solution:  In a hospital centre every week (7 days) the inventory level of roller bandages (rb.) is checked  It takes about 2 more days to get the new order in  Consumption per day is about 10 rb., but can vary  The hospital would like to keep a safety stock of about 20 rb. to protect against stock-outs, just in case consumption or lead times are greater than expected

Session: M1-3 Slide No.12/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Perpetual Review System The Perpetual Review System is more complex to implement, since it requires the determination of the order quantity, Q, the safety stock, SS, and the reorder point, RP. On the other hand it is a more precise and effective system in managing inventory. RP L = lead time to get a new order Q The system refers to constant monitoring of inventory level & a new order is issued when a pre-established reorder point, RP,is met.

Session: M1-3 Slide No.13/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Determining Order Quantity (Q) TIC has a minimum at Q*, which can be calculated applying the following formula  (see example) Q*

Session: M1-3 Slide No.14/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop An example of Order Quantity Solution:  A PE has an annual consumption of cobs equal to 1.5 million  The annual cost of keeping one cob is 0.27 Tk & the cost of issuing an order is Tk 2,000/00  What is the optimal order quantity according to the EOQ Model?

Session: M1-3 Slide No.15/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Safety stock  tells us how much to order ?  but not when to order ? When both lead time and consumption are constant, you know exactly what the reorder point is…that is equal to the consumption during lead time: where c = consumption per time period L = lead time The EOQ Model

Session: M1-3 Slide No.16/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Safety stock What happens when either consumption or lead times varies? Variances are caused by changes in consumption rates and lead times Additional inventory beyond amount needed to meet average consumption during lead time, i.e. a safety stock, SS, which: Protect against uncertainties in consumption or lead time Balance the costs of stocking out against the cost of holding extra inventory

Session: M1-3 Slide No.17/17 CPTU-IMED (PPRP II) Three-Week Training on Procurement of Goods, Works & Services Fineurop Summary  Inventory serves a useful purpose in the supply chain & its management is crucial in procurement planning  Two common systems for managing inventory are:  Periodic Review System  Perpetual Review System  The EOQ Model gives us the order quantity that minimizes total holding & ordering costs for the year  The reorder point formula allows us to determine the safety stock needed to achieve a certain protection against the risk of stocking out