managemnet students....get set go...
2. Inventory Definition
- A stock of items held to meet future demand
- Inventory is a list for goods and materials, or those goods and
materials themselves, held available in stock by a business .
06/08/09 3. Introduction
- Constitute significant part of current assets
- On an average approximately 60% of current assets in Public
Limited Companies in India
- A considerable amount of fund is required
- Effective and efficient management is imperative to avoid
unnecessary investment
- Improper inventory management affects long term profitability
and may fail ultimately
- 10 to 20% of inventory can be reduced without any adverse
effect on production and sales by using simple inventory planning
and control techniques
06/08/09 4. Types of Inventory 06/08/09 Work in process Work in
process Work in process Finished goods Raw Materials Vendors
Customer 5. Nature of Inventories
- Raw Materials Basic inputs that are converted into finished
product through the manufacturing process
- Work-in-progress Semi-manufactured products need some more
works before they become finished goods for sale
- Finished Goods Completely manufactured products ready for
sale
- Supplies Office and plant cleaning materials not directly enter
production but are necessary for production process and do not
involve significant investment.
06/08/09 6. ReasonsTo HoldInventory
- Meet variations in customer demand:
-
- Smooth seasonal or cyclical demand
-
- Temporary price discounts
-
- Hedge against price increases
-
- Take advantage of quantity discounts
- Process & supply surprises
-
- Internal upsets in parts of or our own processes
-
- External delays in incoming goods
06/08/09 7. Objective of Inventory Management
- To maintain a optimum size of inventory for efficient and
smooth production and sales operations
- To maintain a minimum investment in inventories to maximize the
profitability
- Effort should be made to place an order at theright
timewithright sourceto acquire theright quantityat theright
priceandright quality
06/08/09 8. An effective inventory management should
- Ensure a continuous supply of raw materials to facilitate
uninterrupted production
- Maintain sufficient stocks of raw materials in periods of short
supply and anticipate price changes
- Maintain sufficient finished goods inventory for smooth sales
operation, and efficient customer service
- Minimize the carrying cost and time
- Control investment in inventories and keep it at an optimum
level
06/08/09 9. An optimum inventory level involves three types of
costs
- Receiving, inspecting and storing
- Failure to meet delivery commitments
- evaporation and obsolescence
06/08/09 10. Dangers of Over investment
- Unnecessary tie-up of firms fund and loss of profit involves
opportunity cost
- Risk of liquidity- difficult to convert into cash
- Physical deterioration of inventories while in storage due to
mishandling and improper storage facilities
06/08/09 11. Dangers of under-investment
- Production hold-ups loss of labor hours
- Failure to meet delivery commitments
- Customers may shift to competitors which will amount to a
permanent loss to the firm
- May affect the goodwill and image of the firm
06/08/09 12. Functions of Inventory Management 06/08/09
13. Classification of inventory
14. ABC Classification
- In most of the cases 10 to 20 % of the inventory account for 70
to 80% of the annual activity.
- A typical manufacturing operation shows that the top 15% of the
line items, in terms of annual rupees usage, represent 80% of total
annual rupees usage.
- Next 15% of items reflect 15% of annual rupees
- Next 70% accounts only for 5% usage
A B C 15. XYZ Classification
- On the basis of value of inventory stored
- Whereas ABC was on the basis of value of consumption to
value.
- Aimed to identify items which are extensively stocked.
16. HML Classification
- On the basis of unit value of item
- There is 1000 unit of Q @ Rs. 10 and 10,000 units of W @ Rs.
5.
- Aimed to control the purchase of raw materials.
- H High, M- Medium, L - Low
17. VED Classification
- Mainly for spare parts because their consumption pattern is
different from raw materials.
- Raw materials on market demand
- Spare parts on performance of plant and machinery.
- V Vital, E Essential, D Desirable
Therefore V items has to be stocked moreand D Items has to be
less stocked 18. FSN Classification
- According to the consumption pattern
19. SDF & GOLF Classification
- Based on source of procurement
- S Scarce, D- Difficult, E- Easy.
- G Government, O Ordinary, L Local, F Foreign.
20. SOS Classification
- Raw materials especially for agriculture units
21. Deciding on the inventory model
- Assume an analyst applies an inventory model that does not
allow for spoilage to a grocery chains ordering policy for lettuce
and formulates the strategy of ordering lettuce in large amounts
every 14 days. A little thought will show that this is obliviously
foolish. This strategy implies that lettuce will be spoiled.
However it is not a failure of inventory, it is a failure to apply
the correct model.
22. Different approaches
- Uncertain variables and risk are addressed separately
- Uncertain variables and risk are addressed simultaneously
23. Basic EOQ Model
- Seasonal fluctuation in demand are ruled out
- Zero lead time Time lapsed between purchase order and inventory
usage
- Cost of placing an order and receiving are same and independent
of the units ordered
- Annual cost of carrying the inventory is constant
- Total inventory cost = Ordering cost + carrying cost
24. EOQ Three Approaches
06/08/09 25. EOQ & Re-order point
- EOQ gives answer to question How much to Order
- Re-order point gives answer to question when to order
06/08/09 26. Trial & Error Method
- Annual requirement (C)=1200 units
- Ordering cost (O) =Rs.37.5
06/08/09 Order size Q1200 600 400 300 240 200 150 120 100
Average inventory Q/2600 300 200 150 120 100 75 60 50 No. of orders
C/Q1 2 3 4 5 6 8 10 12 Annual carrying cost I* Q/2600 300 200 150
120 100 75 60 50 Annual ordering cost O*C/Q37.5 75 112.5 150 187.5
225 300 375 450 Total annual cost637.5 375 312.5 300 307.5 325 375
435 500 27. Order- Formula approach
- O = Ordering cost per order
- I= Carrying cost per unit
- EOQ =(2*1200*37.5/1)= 300 units
06/08/09 28. Q 0 T1 T2 T3 T4 Average inventory = Q/2 Time
Inventorylevel order quantity Certainty case of the inventory
cycle
- Here the negative slope from Q to T1 represents the inventory
being used up
- T1, T2, T3, T4 represents the replenishment points
- The inventory varies between 0 and Q
29. Graphical method to find EOQ CostinRS. Order quantity 0
Ordering cost = DS/Q Carrying cost = CQ/2 Total costEOQ 30.
Extension of basic EOQ model
- This model can be extended to include quantity discounts, were
simple calculation for quantity discount is added.
Non zero lead time 31. Extension of basic EOQ model
- If the lead time is n then procurement must be done prior to n
days, i.e. T-n as shown in the figure
T1 - n T2 - n T3 - n T4 - n T1T2T3T4Time Q 0 Reorder point
Placement of a order 32. Probabilistic inventory model
- In practical inventory management assumption may not be
strictly correct.
- Demand may fluctuate over time due to seasonal, cyclical and
random influences.
- Lead time may also fluctuate because of transportation delay,
strikes or natural disaster. For such reason most of the companies
use safety stock.
33.
- But in some cases even the safety stock becomes ineffective to
combat stock out. Like:-
Probabilistic inventory modelcontd Reorder point Safety stock
Placement oforder Lead time T1 T2 T3 T4 T5 T6 Stock out 34. A
Review
- And now we will be dealing withspecial inventory models
35. Special inventory model
- Non Instantaneous replenishment
36. Non Instantaneous replenishment Special inventory model A B
C D A B C Thus the inventory is replenished gradually than in lots
Particularly in situation were manufacturers use
continuesproduction process e.g. FACT makes Ammonium on a continual
basis Capacity 10 units 37. Discount Quantities
- If discount increases with the order quantity, then the price
of inventory is no more constant
Special inventory model Hence a new approach is needed to find
the best lot size Total cost Annual holding cost Annual ordering
cost Annual cost of materials = + + 38. One period decisions
- If a newspaper seller does not buy enough papers to resell on
the street corner, sales opportunity is lost. If the seller buys
too many, the overage cannot be sold because nobody wants
yesterdays newspaper.
Special inventory model Applicable to fashion goods, seasonal
goods anddue to change in technology Thenewsboyproblem 39.
Inventory management under uncertainty
- Risk adjusted discount cash flow (DFC) Model
40. Option price model
- Option is a contract that gives the holder a right to acquire
or sell certain things at a predetermined price without any
obligation.
- Calculated by integrating the market information and inventory
control.
41. Risk adjusted discount cash flow (DFC) Model
- Inventory control problem is converted to capital budget
problem
- Suppose a television dealer decides to hold an additional
inventory of 1000 television per month. The cost of holding
inventory is spread overtime.
- Inflows = no: of units probability present value
Beneficial for projects like oil drilling were thebenefit is
acquired only after a long timebutonce oil is struck the additional
expanse is covered. 42. Dynamic inventory model
- Uncertain variables are identified
- Probability associated with them is taken
- Simulation techniques are applied
43. Emerging trends in inventory management
- Entering into log term contract at a fixed price to reduce
uncertainties
- Kanbans Japanese technique (Only produce when demand
comes)
- Internet based ordering system
- Investment in plant and machinery
44. Inventory control responsibility
- Purchasing naturally has vest interest in inventories, even to
the extend that in some companies the purchasing and stores
functions are combined.
- Production looks after the work in progress
- Logistics plays a major role in inventory control
- Inventories are economic importance to finance department
- The fact that materials must be moved from one place to another
is of importance to materials department
In effect the responsibility cannot be kepton one head since
inventory managementis a integrated effort 45. THANK YOU