Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK :PILES ON THE SHOP FLOOR AND THE WARE-HOUSE AND MORE IN THE DOCK. :SOME OF IT ANICIENT, SOME OF IT NEW :ALAS AND TOMORROW ANOTHER LOT IS DUE…. -- UNKNOWN AUTHOR

Functions of Inventory Decouple components of the operations and distribution Uncertainties/variations in demand Flexibility in production smoothing Economies of scale in purchase and mfg To help hedge against price increases

Departmental Orientation Towards Inventory Marketing –Sell the product –Good customer service –Large inventory

Departmental Orientation Towards Inventory Production –Make the product –Efficient lot sizes –Large inventory

Departmental Orientation Towards Inventory Purchasing –Buy the required materials –Low cost per unit –Large inventory

Departmental Orientation Towards Inventory Finance –Provide working capital –Efficient use of capital –Low inventory

Goals of Inventory Management Maximize customer service (this requires carrying substantial inventory). Minimize inventory investment (this requires carrying little inventory). –Customer service must be a strategic issue.

Types of Inventories Raw materials Components Work-in-process Finished goods Vendor inventories Non-moving/slow moving stock Safety stock In-transit inventories Service parts/Consumables

Inventory Costs Carrying cost or Holding cost Ordering cost Shortage costs

Carrying cost Cost of storage facilities Handling cost Taxes Insurance Deterioration Obsolescence Shrinkage Cost of capital

Ordering Costs Preparation of purchase requisition/order Mail Expediting, including fax, telephone Transportation Receiving Put away Updating inventory records Paying invoice

S HORTAGE C OST  Costs arising out of pushing the order back and rescheduling the production system to accommodate these changes  Rush purchases, uneven utilisation of available resources and lower capacity utilisation  Missed delivery schedules leading to customer dissatisfaction and loss of good will  The effects of shortage are vastly intangible, it is indeed difficult to accurately estimate

Inventory Control Systems How often should the assessment of stock on hand be made? When should a replenishment order be placed? What should be the size of the replenishment order?

The Inventory Order Cycle Demand rate 0Time Lead time Lead time Order Placed Order Placed Order Received Order Received Inventory LevelReorder point, R Order qty, Q

Total cost of carrying Total cost of ordering Sum of the two costs Minimum Cost Economic Order Qty. Level of Inventory Cost of Inventory EOQ M ODEL A GRAPHICAL REPRESENTATION

EOQ Model Balance holding cost against ordering costs Calculate the optimal EOQ: No of orders per year = D/Q*

Inventory Control Systems Continuous Review System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item Periodic Review System Physical count of items made at periodic intervals

Inventory Control Systems Continuous review -Fixed order quantity model - Two-bin system -Less responsive to change in demand -Difficulty of ordering of multiple items from same supplier Periodic Review - Fixed time period model

ROP SS Q L Inventory Level Time Safety Stock Mean Demand during LT Inventory Position Physical Inventory C ONTINUOUS R EVIEW (Q) S YSTEM A N ILLUSTRATION

Fixed Order Quantity Model Reorder = Expected demand + Safety point during lead time stock

Fixed Time Period Model Reviewed at fixed specified time interval. Place an order for a quantity that, when added to the quantity on hand, will equal a predetermined maximum level. Independent demand is the usual situation. Difficult to record withdrawals and additions from stock. Groups of items are purchased from a common supplier. Items that have limited shelf life.

SS L Inventory Level Time Safety Stock Inventory Position Physical Inventory R2R 3R QRQR Q 2R Q 3R Order Up to Level S P ERIODIC R EVIEW (P) S YSTEM A N ILLUSTRATION

Fixed Time Period Model Small tools, manufacturing supplies. Common commercial parts such as nuts, bolts, washers. Office supplies. Perishable items such as dairy products, fruits and vegetables. Chemicals, solvents used in the manufacturing process.

Two-Bin System Special case of fixed order quantity model. Amount of stock equivalent to the order point is physically segregated into a second bin and is then sealed. When all the open stock has been used up, the sealed bin is opened and a new order is placed. Practical method for keeping control of low-value items. Without adequate training this system can be abused. Quantity in the second bin should be reviewed from time to time.

Single-Bin System Special case of fixed time period model. Stock is periodically checked and each item is ordered to a pre-established stock level. Works well on floor stocks located near the point of use, like large grocery stores.

ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A A - very important B B - mod. important C C - least important Annual Rs volume of items A B C High Low Few Many Number of Items

ABC Analysis Pareto noted that many situations are dominated by a relatively few vital elements. Controlling the relatively vital few will go a long way toward controlling the situation. Applying the ABC principle to inventory management involves: –Classifying the inventory items on the basis of relative importance. –Establishing different controls for different classifications with the degree of control being commensurate with the ranked importance of each classification.

A LTERNATIVE C LASSIFICATION S CHEMES  ABC Classification (on the basis of consumption value)  XYZ Classification (on the basis of unit cost of the item)  High Unit cost - Medium Unit cost - Low unit cost  FSN Classification (on the basis of movement of inventory)  Fast Moving - Slow Moving - Non-moving  VED Classification (on the basis of criticality of items)  Vital - Essential - Desirable  On the basis of sources of supply  Imported - Indigenous (National Suppliers)- Indigenous (Local Suppliers)

Inventory turnover is the measure of how well the business is managing its inventory. It shows how many times a year the inventory is turning(or moving) through the organisation. The higher the turnover the better. However there is a larger probability that stock may not be available when the customer needs it. I NVENTORY T URNOVER AND S ERVICE L EVELS

Simple physical techniques may provide more economical control of inventories.