INVENTORY PLANNING AND CONTROL

INVENTORY Few examples for inventory that we see in everyday life – Napkin/Tissue getting replaced. A refrigerators at your house, where you store food and drink necessary for a period. Water Tank that stocks that water Look at all above situations and you will find out that Inventory means stocking. What is inventory ? Inventory is known as stock.

We do inventory for: 1.Rawmaterils 2.work-in-progress 3.finished goods For example Manufacturing company will have the stock of materials Tax company will have the stock information.

The role of inventory Follow the example of a refrigerator: 1.Increased the speed – if guest arrives, we can respond to the need quickly with the stored items. 2.Increase flexibility – helps to arrange different menu according to the stock and avoid last minute purchase. 3.Increases quality – often we purchase and stock, due to the great quality of items. 4.Cost- there is a system of discounts, when purchasing higher quantity 5. dependability – helps to avoid out of stock.

Advantages and disadvantages of inventory AdvantagesDisadvantages Provides securityIt is involving working capital Can manage high demandIt incurs storage costs Satisfy customers with dependabilityConsuming time Can be helpful for planning and controlInventory can be damaged or deteriorate Smoothens the supply and demand relationship Inventory uses the space Avoid shortagesInventory costs admin and insurance costs Avoid outdates itemsValue depreciation of inventory

The importance of inventory Inventory is used to balance relationship between the supply and demand. Proper inventory satisfies the customer. If supply is limited or less, the inventory is a must situation for smooth operation. When supply increases, the rate of demand and inventory increases. When demand increases, the rate of supply and decreases.

Types of inventory There five types of inventory 1.Buffer inventory – something that smoothens the demand and supply. For example supermarket, where demand cannot be predicted exactly. So keeping a minimum level of inventory is kept, to avoid the shortages. So the inventory that keeps a minimum level of inventory is know buffer inventory.

Cycle inventory Cycle inventory happens, because one or more stages in the process cannot supply all the items it produces at the same. For example ABC bakery making three types of bread and customers love it. However, the bakery cannot process three types of breads at the same time. Because it is a batch process.

De-coupling inventory It happens with process layout. Where transformed resources move between departments. This increases the speed of process. De-coupling inventory is used allow the work stations or processes to work independently.

Anticipation inventory it is used to adjust with demand variations or supply variations. Here, goods produced ahead of demand. It is used when demand changes are too high. Pipeline inventory This inventory exists because material cannot be transported immediately, once ordered. For example a supermarket ordering fixed amount of items from the suppliers and suppliers first allocate the same in their ware house, pack, load and send to the supermarket. So pipeline inventory is allocated amount. The moment it is allocated, it becomes the inventory of the supermarket.

What are the day-to-day inventory decisions  How much to order  When to order  How to control I.How much to order Refer the example of fridge, we order items as it is finished. So here the order quantity is basic concern. We take the decision of how much to order based on the cost factors: 1.Cost of purchase 2.Cost of stock

Inventory costs cost of placing orders- example clerical works, documentation, transactions arrangement of pay. Price-discount costs – large order brings big discounts and vice versa. Stock-out-cost- no stock will affect the customer satisfaction. working capital lost- we place order and pay money to the suppliers. So this money can be retrieved only when customer pays. Opportunity cost and interest to the bank for borrowing happens here.

Storage cost- for storing, renting, lighting, cooling, insurance Obsolescence cost – items may lost, damage or get old fashioned. Operating in-efficiency – high inventory hide operational problems.

There are two methods for taking the decision as how much to order: EOQ OR Economic Order Quantity formula EBQ – THE ECONOMIC BATCH QUANTITY 1.EOQ This is the formula to decide, how much of any particular item to be ordered. This is to balance the advantages and disadvantages of inventory. To do the EOQ we should find out the cost of stocking, cost of placing order.

Holding cost working capital cost Storage cost Obsolescence cost Order cost cost of placing the order Price discount cost

2. Economic Batch quantity or EBQ The amount of items to be produced by a machine or process that is supposed to minimize the cost is EBQ. II. When to place the order Re-order – point The point of time at which more items ordered, usually it is calculated to make sure that inventory doesn’t run out before the next batch of inventory items.

Lead-time-usage Having the safety stock to manage the shortages. Methods for fixing when to order: 1.Continuous review approach – review the stock continuous, order when the stock reaches the re-order point. 2.Periodic review Order for stock at fixed or regular times.

Two-bin and three-bin systems This is a system to track the inventory. Two bin – storing the reorder point quantity + the safety inventory in the second bin and using from the first bin. So when first bin empties the ordering happens. Three –bin Safety inventory + reorder point + items used

Inventory control There are 2 steps: 1.Find out the difference in value between different stocked items or prioritize 2.Invest in information processing system Inventory priority Many items are having different priorities, some items are more important than others. Some items value will be high, so high inventory will be expensive. Methods for prioritizing : Usage value – quantity of item used multiplied by price Pareto law- A 20% of something causing 80% of something else.

ABC inventory control Class A – High usage items Class B – Medium Usage items Class C- Low-usage items 2. Inventory information systems More inventories are happening by computerized systems. For example bar code reading, point-of-sale recording e.t.c

1. Updating the stock records Any time the transaction happens the position, status, value of stock is changes this is to be recorded. 2. Generating order Deciding how much to order and when to order by computer systems. 3. Generating inventory reports Inventory control systems can generate regular reports of stock value or different items stored. 4.Forecasting The inventory control systems can compare actual demand against the forecast.