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INVENTORY INVENTORY MANAGEMENTMANAGEMENT

What Is Inventory?What Is Inventory? Stock of items kept to meet future demandIt is most significant part of the current assetsIt serves as a link between production & distribution process.. About 90% part of working capitals invented in inventory.

Work inprocess

Work inprocess

Finishedgoods

RawMaterials

Work inprocess

CustomerVendors

INVENTORY MANAGEMENTINVENTORY MANAGEMENT

A proper planning of purchasing of raw material handling storing and recording is to be considered by the inventory management.

Inventory management is considered:

What to purchase?How to purchase?How much to purchase? Where to purchase?Where to store?When to use for product?

Why We Want to Hold InventoriesWhy We Want to Hold Inventories

Finished GoodsEssential in produce-to-stock positioning strategiesNecessary in level aggregate capacity plansProducts can be displayed to customers

Work-in-ProcessNecessary in process-focused productionMay reduce material-handling & production costs

Raw MaterialSuppliers may produce/ship materials in batchesQuantity discounts and freight/handling $$ savings

Why We Do Not Want to Hold Inventories

Certain costs increase such asCertain costs increase such as• carrying costscarrying costs• cost of customer responsivenesscost of customer responsiveness• cost of coordinating productioncost of coordinating production• cost of diluted return on investmentcost of diluted return on investment• reduced-capacity costsreduced-capacity costs• large-lot quality costlarge-lot quality cost• cost of production problemscost of production problems

Inventory Cost StructuresInventory Cost StructuresCarrying costCarrying cost

Cost of holding an item in inventoryCost of holding an item in inventory

Ordering costOrdering costCost of replenishing inventoryCost of replenishing inventory

Shortage costShortage costTemporary or permanent loss of sales when demand cannot Temporary or permanent loss of sales when demand cannot

be metbe met

Inventory Control Systems

Continuous system Continuous system (fixed-order-(fixed-order-quantity)quantity)

constant amount ordered when constant amount ordered when inventory declines to inventory declines to predetermined levelpredetermined level

Periodic system Periodic system (fixed-time-(fixed-time-period)period)

order placed for variable amount order placed for variable amount after fixed passage of timeafter fixed passage of time

METHOD/TECHNIQUESLEVEL SETTINGLEVEL SETTINGEOQ ANALYSISEOQ ANALYSISVED ANALYSISVED ANALYSISABC ANALYSISABC ANALYSISJUST IN TIME JUST IN TIME SYSTEMSYSTEM

MAX.LEVEL

AVG. LEVEL

REORDERING LEVEL

DANGER LEVEL

Reordering level+ Reordering quantity-(minimum consumption*minimum reorder period)

Average consumption*Maximum reorder period for emergency purchase

MINIMUM LEVEL

Minimum stock level + ½ of reorder quantity

Maximum consumption*maximum reorder period

Reordering level – ( Normal consumption * Normal reorder period)

Economic Ordering QuantityEconomic Ordering Quantity

EOQ is the quantity of material which can be purchased at minimum cost.

EOQ is the point at which inventory carrying cost equal to order cost

Determining an optimum level two types of cost ordering cost and carrying cost is necessary.

Assumptions of Basic EOQ Model

Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once

EOQ Cost Model (cont.)EOQ Cost Model (cont.)

Total CostTotal Cost

Carrying Cost =Carrying Cost =CCccQQ

22

Slope = 0Slope = 0

Minimum Minimum total costtotal cost

Optimal orderOptimal order EOQEOQ

Ordering Cost =Ordering Cost =CCooDD

QQ

ABC AnalysisTypical observations

A small percentage of the items (Class A) make up a large percentage of the inventory valueA large percentage of the items (Class C) make up a small percentage of the inventory value

These classifications determine how much attention should be given to controlling the inventory of different items

Class Class AA• 5 – 15 % of units5 – 15 % of units• 70 – 80 % of value 70 – 80 % of value

Class Class BB• 30 % of units30 % of units• 15 % of value15 % of value

Class Class CC• 50 – 60 % of units50 – 60 % of units• 5 – 10 % of value5 – 10 % of value