1. Module 2: Supply Chain & Logistics Management
Chapter 6: Inventory Management-2

2. Learning Objectives By the end of this session you will be able to:
Understand the importance of Inventory
Identify the components of Inventory
Classify items for inventory management
Set up inventory norms using basic models
Apply inventory review policies to various categories of items
Trainer’s Talk:
Trainer Instructions:
Additional details: 2

3. Inventory Modeling and Optimization
Inventory : How much to Order?
Inventory Modeling and Optimization
Cost
Economic Order Quantity
Holding Cost
Ordering Cost
Quantity

4. Holding (or Carrying) Costs Ordering (or Setup) Costs
Definitions
Lead Time
Time between placing an order and receiving the order
Holding (or Carrying) Costs
Costs associated with keeping goods in storage (normally the interest cost on the money invested in the inventory)
Ordering (or Setup) Costs
Costs of ordering and receiving goods
Shortage Costs
Costs of not having something in inventory when it is needed
Stock-outs
Occur when the desired good is not available

5. Exercise 1: Inventory Holding Cost
Refer to the handout for the exercise.
Write the answers in the space provided in the handout.
Objective of the exercise:
To calculate the Inventory Holding Cost

6. Exercise 1: Inventory Holding Cost (Solution)
Average Inventory Value: Rs. 6 million
Inventory Carrying Cost 10%: Rs. 0.6 million
Insurance cost 1%: Rs million
Annual Warehouse Rent : Rs. 0.2 million
Annual Handling Cost: Rs. 2*6000*12 = Rs million
Annual Admin Expenses : Rs. 0.8 million
Shrinkage Cost 1%: Rs million
Total Annual Holding Cost : Rs million
Inventory Holding Cost per pc is Rs. 310 per annum

7. Cost Optimization Model

8. Cost Optimization Model

9. Cost Optimization Model

10. EOQ Model Cost Curves Minimum Total Cost Annual cost ($) Total Cost
Holding Cost
Ordering Cost
Optimal
Order Quantity
Order
Quantity, Q

11. EOQ Example Annual Demand D = 200 Units
Ordering Cost o = Rs. 100 per order
Cost per Unit C = Rs. 4000
Rate of interest H = 10%
Holding Cost h = HC = 4000 x 10% = 400

12. EOQ Model Insights
As holding costs increase, the optimal order quantity decreases. (Order smaller amounts more often because inventory is expensive to hold.)
As ordering costs increase, the optimal order quantity increases. (Order larger amounts less often because it is expensive to order.)

13. Exercise 2: EOQ Calculation
Refer to the handout for the exercise.
Write the answers in the space provided in the handout.
Objective of the exercise:
To calculate EOQ & other parameters

14. Exercise 2: EOQ Calculation (Solution)
EOQ* =  (2DS/hC}
Product
Annual Demand D
10000
Cost per Pc C
290
Ordering + Transportation Cost S
5100
Carrying Cost h
10%
EOQ* =  (2 x x 5100/0.1 x 290) = 1875

15. Continuous Review (Fixed Quantity) Policy
Place order for the fixed quantity Q, as the stock level touches Reorder Point.
Period
Quantity
Max Stock = 900 Q
800
ROP
500
Lead Time
2 weeks
100
Safety Stock
Reorder Point (ROP):
Average Daily Demand x Lead Time + Safety stock
Reorder Point (ROP):
200 * = 500

16. Continuous Review :Fixed Order Quantity (Q)
Stock level
Order Lot Size (Q)
Safety Stock
Time
Suitable for Shipments in multiple of Containers, Pallets or Truck Loads

17. Exercise 3: ROP Calculation
Refer to the handout for the exercise.
Write the answers in the space provided in the handout.
Objective of the exercise:
To calculate ROP & place orders

18. Exercise 3: ROP Calculation (Solution)
ROP = 2 x = 200
Opening Stock
Demand
Receipts
Order Qty.
Week 1
230 70
200
Week 2
160 60
Week 3
100 65
Week 4
235 45
Week 5
190 50
Week 6
140 80
Week 7
260
Week 8
Week 9
150
Week 10
280

19. Fixed Period Review Policy
Base Stock Level:
Average Daily Demand x (Lead Time + Review Period) + Safety stock
Review Period
Re-Stock Level
Order Quantity
Quantity
Lead Time
Safety Stock
Period
Place order for the quantity = Base Stock Level – Current Stock

20. Periodic Review Policy
Place order on fixed intervals for the qty. difference between Restock Level and inventory at the time of review
Period
Quantity
Restock Level = 1300
Place Order
Place Order
Place Order
Place Order
Safety Stock =100
Review Period = 4 weeks; Lead time = 2 Weeks; Weekly Demand = 200
Restock Level (RS) = Average Demand x (Review Period + Lead Time) + Safety Stock
= 200 *(4+2) = 1300

21. Exercise 4: Restock Level
Refer to the handout for the exercise.
Write the answers in the space provided in the handout.
Objective of the exercise:
To calculate ROP & place orders

22. Exercise 4: Restock Level (Solution)
Opening Stock
Demand
Receipts
Order Qty.
Week 1
230 70
Week 2
160 60
255
Week 3
355 65
Week 4
290 45
150
Week 5
245 50
Week 6
195 80
Week 7
265
Week 8
205
235
Week 9
155
Week 10 85
Restock Level = 60 x (4+2) + 80 = 440

23. Periodic Review: Fixed Review Period (T)
Stock Level
Safety Stock
Time T

24. Comparison between Fixed Q and Fixed T Systems
Feature
Fixed Quantity Q
Fixed Period T
Order Quantity
Q - Constant
Q - Variable
Order Placed
When inventory reaches reorder level
When the review period arrives
Control
Continuous
Periodic
Size of Inventory
Less
More
Time Required
High due to perpetual record keeping
Less due to periodicity
Type of Items
High Value, Vital to Essential
Low to Medium Value,
Desirable

25. Applying Inventory Policies
A Class
Few Items
High Value
Continuous Review / JIT / VMI
B Class
More Items
Lower Value
Periodic Review
C Class
High Number of Items
Lowest Value (Tail)
Two Bin System

26. Multi-Stage Inventory Planning
Central
Depot
Distribution
Suppliers
Local
Distribution
Points
Sales
Operation
Central Depot
Local Distribution Pt.
Fast Moving
Low Safety Stock
Safety stocks for demand /supply variation
Slow Moving
Safety Stock for consolidated demand of all Local Distribution Points
Lower Safety Stock

27. Just in Time What is JIT? What does JIT do? Elimination of all Wastes
Pull System through Plant
It is a Management Philosophy
Attacks Wastes (time, inventory, scrap, etc.)
Exposes Problems & Bottlenecks
Achieves Streamlined Production
Main Mantras of JIT
Elimination of Wastes
Pull-type System
Lot Size Reduction
Zero Defects
What is required in JIT?
What is assumed in JIT?
Employee Participation
Small Lot Size
Total Quality Control
Basics of Industrial Engineering
Stable Environment
Commitment to Quality & Reduction of Waste
Involvement at all Levels of Organization

28. Session Summary
EOQ is the order quantity of inventory that minimizes the total cost of inventory management
ROP is the point at which a stock replenishment requisition would be submitted to maintain the predetermined or calculated stockage objective
JIT helps eliminate wastes & aims at zero defect
Exposes Problems & Bottlenecks in a process
Achieves Streamlined Production
Trainer’s Talk:
Trainer Instructions:
Additional details:
Divide the class into teams of 5 to 6 students. Each team will be asked to select any known company each. The teams will need to discuss and present the following: 28

29. Discussion and Query 29

30. 30