Inventory

INVENTORY

CONCEPT “Inventory is an idle material resource of an enterprise awaiting future sales, use, or transformation”

“Inventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-process”

TYPES

PURPOSES OF INVENTORY 1. To maintain independence of operations 2. To meet variation in product demand 3. To allow flexibility in production scheduling 4. To provide a safeguard for variation in raw material delivery time

According to Tersine,1994: As per the utility, inventory can be categorized as per the following: 2.Working

/Cycle/Lot size stock

Average amount of inventory to get the benefits of minimum ordering & holding costs, quantity discounts and or favourable freight rates. 3.Safety

Stock

stock held to protect against uncertainties of demand & supply.

1.

Anticipation Stock Holding high level inventory to meet the peak seasonal demand, erratic requirements, or inconsistency in the production capacity.

3.

Pipeline Stock/ work in Process Inventory Goods in transit from manufacturer to be delivered to a customer

5.

Decoupling Stock Inventory accumulated between the various departments’ activities

1.

Psychic Stock Window display of an inventory in order to stimulate demand

Why CHECK Inventory??

Elements of Inventory Costs

3.

PROCUREMENT COST 4. CARRYING COST 5. STOCK-OUT COST

Inventory Procurement Cost Includes:  Cost of order processing i.e. use of stationary and services, cost of staff etc.  Cost of transmission of an order i.e. cost of postage & follow-up messages through telephone, fax, etc.  Cost of Transportation i.e. freight, transit insurance, protective packaging, etc.  Cost of Invoice Pricing i.e. checking, approval, book entries & payment procedures.  Cost of Goods receiving, handling, inspecting and entry in the stock register/computer.  Cost of final feeding of data in Logisitcs information system

Inventory Carrying Cost Includes:  Space rent for the storage of goods  Cost of working Capital locked in the inventory  Cost of insurance of goods  Cost of spoilage in the quality of goods in storage, breakages in handling  Cost of deterioration due to passes of time and change in weather  Cost of obsolescence of goods or depriciation

Stock-out Cost Internal shortages due to  Lost production  Delay in completion date External shortages resulting in  Back order cost  Loss of potential sale thus loss of present profit  Future profit cost due to loss of corporate image

COST of Stocking a Material

Total Inventory Cost Carrying Costs

Procurement Costs QOPT

Order Quantity (Q)

TOTAL INVENTORY COSTS

OBJECTIVE: Analyze and attend two major issues; Order Quantity (EOQ) & Re-Order Points (RP)

Inventory Management

1. Model –I (Basic EOQ) Assumptions: 3. 4. 5. 6.

Annual Demand, Carrying Cost, & ordering cost for a material can be estimated. Average inventory level for a material is half of order quantity, i.e. there is no safety stock. Stock-out, customer responsiveness and other cost having no effect. Quantity discount does not exist.

Basic Fixed-Order Quantity TC=Total annual cost (EOQ) Model Formula D =Demand Total Annual = Cost

Annual Annual Carrying + Ordering Cost Cost

Q D TC = C + S 2 Q

Q =Order quantity S =Cost of placing an order or setup cost C=Annual carrying cost per unit of inventory per year

Total order quantity should be minimum to get the optimal quantity, thus,

EOQ = Q =

2DS C

Reorder point, R = DT D = Average Daily Demand T = Average Replenishment Cycle time

Determination of Reorder Point

Basic Fixed-Order Quantity Model and Reorder Point Behavior 4. The cycle then repeats.

1. You receive an order quantity Q.

Number of units on hand

Q

Q

Q

R 2. Your start using them up over time.

L

L Time

R = Reorder point Q = Economic order quantity L = Lead time

3. When you reach down to a level of inventory of R, you place your next Q sized order.