Inventory Control M0729,m0733,m0739

Inventory Management by neha gupta hemant sachan & jyotsana mishra

DEFINITION OF INVENTORY Inventory is the stock of any item or resource used in an organisation. Inventory system is the set of policies and controls that monitor levels of inventory and determine what level should be maintained, when stock should be replenished, and how large orders should be.

PURPOSES OF INVENTORY  To

maintain independence of operations. A supply of materials at a work center allows that center flexibility in operations.  To meet variation in product demand. If the demand for the product is known precisely, it may be possible to produce the product to exactly meet the demand.

 To

allow flexibility in production scheduling.  To provide a safe guard for variation in raw material delivery time.  To take advantage of economic purchase order size.

Types of Inventory  Raw

material  Work-in-progress  Maintenance/repair/operating supply  Finished goods

The Functions of Inventory     

 

To “decouple” or separate various parts of the production process To provide a stock of goods that will provide a “selection” for customers To balance the seasonal fluctuations in demand To take advantage of quantity discounts To meet the fluctuation losses during machinery breakdown, shut down arising out of nonavailability vital inputs To hedge against inflation and upward price changes To protect against stock-outs.

Disadvantages of Inventory 

Higher costs  

Item cost (if purchased) Ordering (or setup) cost • Costs of forms, clerks’ wages etc.



Holding (or carrying) cost • Building lease, insurance, taxes etc.

Difficult to control  Hides production problems 

INVENTORY MODELS 



Independent versus Dependent Demand Holding, Ordering, shortage costs and Setup Costs

INVENTORY MODELS FOR INDEPENDENT DEMAND

1.Basic Economic Order Quantity (EOQ) Model Minimizing Costs Reorder Points 2.Production Order Quantity Model 3.Quantity Discount Models

Independent versus Dependent Demand  Independent

demand - The demand for various items are unrelated to each other.  Dependent demand - demand for item is dependent upon the demand for some other item

INVENTORY COSTS  Holding

or carrying costs  Ordering costs  Shortage costs  Setup or production change costs.

Holding (Carrying) Costs  Obsolescence  Insurance  Extra

staffing  Interest  Damage  Warehousing  Etc.

Ordering Costs  Supplies  Forms  Order

processing  Clerical support  Etc.

SHORTAGE COSTS 

When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled. There is a trade off between carrying stock to satisfy demand and the costs resulting from stock out. This balance is sometime difficult to obtain, because it may not be possible to estimate lost profits, the effect of lost customers, or lateness penalties.

Setup Costs  Clean-up

costs  Re-tooling costs  Adjustment costs  Etc.

What is Inventory? Stock of materials  Stored capacity  Examples 

AMAZON.com  Jeff

Bezos, in 1995, started AMAZON.com as a “virtual” retailer – no inventory, no warehouses, no overhead; just a bunch of computers.  Growth forced AMAZON.com to excel in inventory management!  AMAZON is now a worldwide leader in warehouse management and automation.

Order Fulfillment at AMAZON 1.

2.

3.

You order items;, computer assigns your order to distribution center [closest facility that has the product(s)] Lights indicate products ordered to workers who retrieve product and reset light. Items placed in crate with items from other orders, and crate is placed on conveyor. Bar code on item is scanned 15 times – virtually eliminating error.

Order Fulfillment at AMAZON- Continued 1.

2. 3.

4.

Crates arrive at central point where items are boxed and labeled with new bar code. Gift wrapping done by hand (30 packages per hour) Box is packed, taped, weighed and labeled before leaving warehouse in a truck. Order appears on your doorstep within a week

The Material Flow Cycle

Techniques for Controlling Service Inventory Include:  Good

personnel selection, training, and discipline  Tight control of incoming shipments  Effective control of all goods leaving the facility

Inventory Models 

Fixed order-quantity models (Q- model)  Economic order quantity  Production order quantity  Quantity discount



Probabilistic models



Fixed order-period models (Pmodel)

Help answer the inventory planning questions!

EOQ ASSUMPTIONS:  Known and constant demand  Known and constant lead time  Instantaneous receipt of material  No quantity discounts  Only order (setup) cost and holding cost  No stockouts

Deriving an EOQ 1. 2. 3. 4.

Develop an expression for setup or ordering costs Develop an expression for holding cost Set setup cost equal to holding cost Solve the resulting equation for the best order quantity

EOQ Model When To Order Inventory Level Average Inventory (Q*/2)

Optimal Order Quantit y (Q*) Reorder Point (ROP) Lead Time

Time

EOQ Model How Much to Order? Annual Cost

Minimu m total cost

ve r u tC s o ve C r l u a tC Tot s o C g n ldi o H

Order (Setup) Cost Curve Optimal Order Quantity (Q*)

Order quantity

Why Holding Costs Increase 

More units must be stored if more are ordered

Purchase Order Description

Qty. Microwave 1

Order quantity

Purchase Order Description

Qty.

Microwave 1000

Order quantity

Why Order Costs Decrease Cost is spread over more units Example: You need 1000 microwave ovens

1 Order (Postage $ 0.33) Purchase Order

Description

Microwave

Qty. 1000

Order quantity

1000 Orders (Postage $330) PurchaseOrder Order Purchase Purchase Order Purchase Order Descriptio Qty. Descriptio Qty. Descriptio Qty.1 n Description Microwave Qty. n Microwave 1 n Microwave 1 Microwave 1

EOQ Model Equations

Optimal Order Quantity=Q = 2×D×S

H

xpected Number of Orders =N =

D Q

Days /Year xpected Time Between Orders =T Working =

N

d=

D

Working Days /Year

ROP = d × L

D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days

EXAMPLE 

A HOSPITAL PROCURES ITS SUPPLIES OF A MATERIAL ONCE A YEAR. THE TOTAL NUMBER PROCURED IS 2400 PACKAGES (IN A YEAR). THIS POLICY OF PROCURING MATERIAL ONCE A YEAR IS BEING QUESTIONED. THE ACCOUNTANTS CALCULATE THE COSTS OF INVENTORY HOLDING AT Rs. 36/ PACKAGE/ YEAR. IT IS ALSO FGURED OUT THAT THE COST OF PROCUREMENT AD UPTO Rs. 1200 PER ORDER. WHAT INVENTORY POLICY WOULD YOU ADVISE TO THIS HOSPITAL?

SOLUTION: EOQ = 2 x D x S H

= =

2 x 1200 x 2400 36

400 units

Therefore, it is best to place 2400 = 6 order in a year 400

The Reorder Point (ROP) Curve Q

Inventory level (units)

Slope = units/day =d

ROP (Unit s)

Lead time =L

Time (days)

Production Order Quantity Model  

Answers how much to order and when to order Allows partial receipt of material 



Suited for production environment  



Other EOQ assumptions apply Material produced, used immediately Provides production lot size

Lower holding cost than EOQ model

Reasons for Variability in Production

Most variability is caused by waste or by poor management. Specific causes include: ❑ employees, machines, and suppliers produce units that do not conform to standards, are late or are not the proper quantity ❑ inaccurate engineering drawings or specifications ❑ production personnel try to produce before drawings or specifications are complete ❑ customer demands are unknown

Quantity Discount Model Answers how much to order & when to order  Allows quantity discounts 







Reduced price when item is purchased in larger quantities Other EOQ assumptions apply

Trade-off is between lower price & increased holding cost

Quantity Discount Schedule Disco unt Numb er 1

Discount Quantity

Discount (%)

Discount Price (P)

0 to 999

$5.00

2

1,000 to 1,999 2,000 and over

No discount 4

$4.80

5

$4.75

3

Probabilistic Models  



Answer how much & when to order Allow demand to vary  Follows normal distribution  Other EOQ assumptions apply Consider service level & safety stock  Service level = Probability of stockout  Higher service level means more safety stock

Fixed Period Model  



Answers how much to order Orders placed at fixed intervals  Inventory brought up to target amount  Amount ordered varies No continuous inventory count (counted at particular times such as every week or every month)

Possibility of stockout between intervals Useful when vendors visit routinely Useful when buyers want to combine orders to save transportation costs. 

 

FIXED PERIOD MODEL CONTD. 



Fixed- time period models generate order quantities that vary from period to period, depending upon the usage rates. These generally require a higher level of safety stock than a fixed order quantity system. Fixed time period model with safety stockOrder quantity = average demand over the period + safety stock – inventory currently on hand

REVIEW PERIOD FOR PMODEL The optimal review period is approximately given by; P=

1 N (opt)

DIFFERENCE BETWEEN Q-MODEL AND P-MODEL Features

Q-model

P-model

Q- constant (Same amt. Ordered each time)

Q- variable (varies each time order is placed)

When to place order

when inventory position drops to the reorder level

When the review period arrives

Record keeping

Each time a withdrawal or addition is made

Counted only at review period

Size of inventory

Less than fixed time period model

Larger than fixed order quantity model

Order Quantity

ABC Analysis 





ABC classification scheme divides inventory items into three grouping: high rupee volume (A) moderate rupee volume (B) low rupee volume (C) Rupee volume is a measure of importance; an item low in cost but high in volume can be more important than a high cost item with low volume. Basis is usually annual volume 



volume = Annual demand x Unit cost

Policies based on ABC analysis   

Develop class A suppliers more Give tighter physical control of A items Forecast A items more carefully

Classifying Items as ABC % Annual Usage 100 80 60

Class A B C

% Vol 80 15 5

A

40

B

20

C

0 0

50

100

% of Inventory Items

% Items 15 30 55

CYCLE COUNTING 



Cycle counting is a physical inventory taking technique in which inventory is counted frequently rather than once or twice a year. The key to effective cycle counting is in deciding; which items are to be counted, when to be counted, by whom to be counted.

CYCLE COUNTING CONTD. The easiest time for stock to be counted is when there is no activity in the stock room or on the production floor. This means on the week-ends or during the second or third shift, when the facility is less busy.  The level of accuracy between physical inventory and records has been much debated. The recommended accuracy level by experts is: • + 0.2 % for A items, • + 1 % for B items, • + 5% for C items. 