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Inventory ControlInventory Control& &

Introduction to Introduction to SCMSCM Pradip Singh

Assistant ProfessorAITM Varanasi

What Is Inventory?What Is Inventory?

Stock of items kept to meet future demand

Inventory control is the process of maintaining sufficient inventory level to meet customer needs, keeping in mind the cost of carrying inventory to determine an appropriate inventory level.

Objectives of Inventory ControlObjectives of Inventory Control

• Services to customers• Continuity of productive operations• Effective use of capital• Economy in buying• Reduction of risk of loss• Allow flexibility• Reduction in surplus stock

Types of InventoryTypes of Inventory

Direct Inventories:-Raw materialsWork-in-process (partially completed) products (WIP)Finished goodsIndirect InventoriesMaintenance, repair and Operating Inventories

Holding, Ordering, and Setup Holding, Ordering, and Setup CostsCosts

Holding costs - the costs of holding or Holding costs - the costs of holding or “carrying” inventory over time“carrying” inventory over time

Ordering costs - the costs of placing an Ordering costs - the costs of placing an order and receiving goodsorder and receiving goods

Setup costs - cost to prepare a Setup costs - cost to prepare a machine or process for manufacturing machine or process for manufacturing an orderan order

Stock out Cost- The cost that is Stock out Cost- The cost that is associated with the loss of demand associated with the loss of demand when the stocks have been depleted.when the stocks have been depleted.

Basic EOQ ModelBasic EOQ Model

1.1. Demand is known, constant, and Demand is known, constant, and independentindependent

2.2. Lead time is known and constantLead time is known and constant

3.3. Receipt of inventory is instantaneous and Receipt of inventory is instantaneous and completecomplete

4.4. Quantity discounts are not possibleQuantity discounts are not possible

5.5. Only variable costs are setup and holdingOnly variable costs are setup and holding

6.6. Stock outs can be completely avoidedStock outs can be completely avoided

Important assumptionsImportant assumptions

Functions of InventoryFunctions of Inventory

1.1. To decouple or separate various parts To decouple or separate various parts of the production processof the production process

2.2. To decouple the firm from To decouple the firm from fluctuations in demand and provide a fluctuations in demand and provide a stock of goods that will provide a stock of goods that will provide a selection for customersselection for customers

3.3. To take advantage of quantity To take advantage of quantity discountsdiscounts

4.4. To hedge against inflationTo hedge against inflation

The Material Flow CycleThe Material Flow Cycle

InputInput Wait forWait for Wait toWait to MoveMove Wait in queueWait in queue SetupSetup RunRun OutputOutputinspectioninspection be movedbe moved timetime for operatorfor operator timetime timetime

Cycle timeCycle time

95%95% 5%5%

Inventory ManagementInventory Management

How inventory items can be How inventory items can be classifiedclassified

How accurate inventory records How accurate inventory records can be maintainedcan be maintained

ABC AnalysisABC Analysis

Divides inventory into three classes Divides inventory into three classes based on annual rupee volumebased on annual rupee volume Class A - high annual rupee volumeClass A - high annual rupee volume Class B - medium annual rupee Class B - medium annual rupee

volumevolume Class C - low annual rupee volumeClass C - low annual rupee volume

Used to establish policies that focus on Used to establish policies that focus on the few critical parts and not the many the few critical parts and not the many trivial onestrivial ones

ABC AnalysisABC Analysis

A ItemsA Items

B ItemsB ItemsC ItemsC Items

Perc

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t of

an

nu

al ru

pee u

sag

ePerc

en

t of

an

nu

al ru

pee u

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80 80 –

70 70 –

60 60 –

50 50 –

40 40 –

30 30 –

20 20 –

10 10 –

0 0 – | | | | | | | | | |

1010 2020 3030 4040 5050 6060 7070 8080 9090 100100

Percent of inventory itemsPercent of inventory items

What is SCM?What is SCM?

Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible.

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Definition…Definition… The term supply chain management was coined by

consultant Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982.

In essence, Supply Chain Management integrates supply and demand management within and across companies.

Supply chain management and logistics, are used interchangeably

Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.

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3 Major Flows in Supply Chain3 Major Flows in Supply Chain

Goods flow Get materials from suppliers Distribute products to retailers & customers

Information flow Order information: Price & Quantity

Money flow Get money from customers Pay money to suppliers

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What Is Supply Chain Management?What Is Supply Chain Management?

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Main links of supply chainMain links of supply chain

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Supply Chain DecisionsSupply Chain Decisions

Production - what? When? Where?

Inventory - how much?

Location – Where should manufacturing, distributions facilities be located?

Transportation – How will we get goods from “A” to “B”?

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Linear Supply Chain Linear Supply Chain CommunicationCommunication

Assembly,Manufacturing,

Packaging

Distributor 1st Tier Customer

2nd Tier Customer

1st TierSuppliers

2nd TierSuppliers

Info lag

Info lag

Info lag

Info lag

Info lag

Capacity, delivery schedule, availability, payment terms, invoices

Demand, order, returns, servicing, payments

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Why SCM?Why SCM?

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Benefits of SCMBenefits of SCM

Faster responses to supply and demand changes

Increased customer satisfactionRegulatory complianceImproved cash flowHigher margins

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Thank You