Inventory Management & Techniques

Manisha Abichandani - 01 Jaicky Sathnathi – 38 Amol Shelar – 42 Shrutika Surve - 46

Definitions

Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Zero Inventory?

Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.

Reducing the amount of works-in process by using just-in-time production.

Reducing the amount of finished goods by shipping to markets as soon as possible.

Reasons for Inventories

Improve customer service Economies of purchasing Transportation savings Hedge against future Unplanned shocks (labor strikes,

natural disasters, etc.)

How to Measure Inventory

It closely monitors and controls inventories to keep them as low as possible while providing acceptable customer service.

Average Aggregate Inventory Value:how much of the company’s

total assets are invested in inventory? Ford:6.825 billion Sears: 4.039 billion

Inventory Measures

Weeks of Supply Ford: 3.51 weeks Sears: 9.2 weeks

Inventory Turnover (Turns) Ford: 14.8 turns Sears: 5.7 turns GM: 8 turns Toyota: 35 turns

Objectives of Inventory Control

1) Maximize the level of customer service by avoiding understocking.

2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.

Types of classification

1.ABC ANALYSIS 2.HML ANALYSIS

3.VED ANALYSIS 4.SDE ANALYSIS

5.GOLF ANALYSIS6.SOS ANALYSIS

7.MNG ANALYSIS 8.FSN ANALYSIS

9.XYZ ANALYSIS 10.EOQ ANALYSIS

11.QUADRANT ANALYSIS

ABC ANALYSIS (Pareto Principle)

A Items: very tight control, complete and accurate records, frequent review

B Items: less tightly controlled, good records, regular review

C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder

Conducting ABC analysis

a) Prepare the list of the items & estimate their annual consumptionb) Determine unit price of each items.c) Multiply each annual consumption by its unit price.d) Arrange items in the descending order of their annual usage starting with the highest annual usage down on the smallest usage.e) Calculate cumulative annual usages & express the same as cumulative usage percentage.f)Graph cumulative usage percentages against cumulative item percentage & segregate the items into A, B and C categories.

HML ANALYSIS

HML analysis is similar to ABC analysis except for the difference that instead of “usage value", "price” criterion is used. The items under this analysis are classified into three groups which are called “High”, “Medium” and “Low”. To classify, the items are listed in the descending order of their unit price.

HML analysis helps to-

•Assess storage & security requirement.•To keep control over consumption at the departmental head level.•Determine the frequency of stock verification.•To evolve buying policies to control purchase .•To delegate authorities to different buyers to make petty cash purchase.

VED ANALYSIS

VED analysis represents classification of items based on their critically.the analysis classifies the items into three groups vital, essential & desirable.

VED (vital-essential-desirable)analysis is carried out to identify critical items.

Number of reasons:-

•If the non-availability of the items can cause serious production losses.•Lead time for procurement is very large.•It is non-standard items & is procured to buyer’s design.•The sources of supply is only one & is located far off from the buyer’s plant.

Steps involved in making VED analysis are:

i. Identify the factors to be considered for VED analysis.

ii. Assign points/ weightages to be factors.

iii.Divide each factor into three degrees & allocate points to each degree.

iv.Prepare categorization plan.v. Evaluate items.vi.Place the items.

Factors First degree Second degree Third degree

1. Stock out cost in the event of non-availability

(30)

Above Rs. X(30)

Between Rs.X to y (60)

Above Rs.Y(90)

2. Lead time for procurement (30)

1-4 weeks(30)

4-8 weeks(60)

Over 8Weeks(90)

3. Nature of the items (20)

Produced to commercial standard, or off the shelf availability(20)

Produced to suppliers’Design (40)

Produced to buyer’s design or proprietory items (60)

4. Sources of supply (20)

Local(20)

Outstation(40)

Imported, quota items i.e. controlled supply (60)

Typical VED analysis categorization plan

S-E-D analysis(“Scarce”, “Difficult” & “Easy“)

It is based on the problems of procurement namely:

Non-availabilityScarcityLonger lead time Geographical location of suppliersReliability of suppliers

S-D-E analysis is employed by the purchase department

I. To decide on the method of buying.

I. To fix responsibility of buyers.

G-NG-LF ANALYSIS/GOLF ANALYSIS

G-NG-LF analysis (or GOLF analysis) like S-D-E analysis based on the nature of the suppliers which determine quality, lead time, terms of payments, continuity or otherwise of supply & administrative work involved.

“G” group covers items procured from “government” suppliers such as the STC, the MMTC and the public sector undertakings.

“NG”(O in GOLF analysis)group comprises of items procured from “Non-Government”(or Ordinary) suppliers.

“L” group contains items bought from “Local suppliers”.

“F” group contains those items which purchased from “foreign” suppliers. The transactions with such suppliers.

olot of administrative.oNecessitate search of foreign suppliers.oRequire letter of credit.oArrangement for shipping & port clearance

S-OS ANALYSIS

S-OS analysis is based on seasonality of the items & it classifies the items into two group S(seasonal) & OS(off seasonal).

oSeasonal & are available only for a limited period.oSeasonal but are available throughout the year.

M-N-G ANALYSIS

M-N-G analysis based on stock turn over rate & it classifies the items into M(Moving items), N(Non-moving items) & G(Ghost items)

M-N-G analysis helps to identify :- Non-existing items for which the store keeps bin-cards or waste computer memory or Waste computer stationery while preparing stores ledger.

F-S-N ANALYSIS

F-S-N analysis is based on the consumption figures of the items. The items under this analysis are classified into three groups : F (fast moving), S (slow moving), N(non-moving).

To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into account and the period, usually in terms of number of months, that has gone since the last movement is recorded.

Such an analysis helps to identify:

I.Active items which require to be reviewed regularly.II. Surplus items whose stocks are higher than their rate of consumption.III. Non-moving items which are not being consumed.

X-Y-Z ANALYSIS

X-Y-Z analysis is based on value of the stocks on hand(i.e. inventory investment)

X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.

Class Of items

A B C

X Efforts to be made reduce stocks to Z category

Efforts to be made to convert them to Y category

Steps to be taken to dispose off surplus stocks

Y Efforts to be made convert these to Z category

Control may be further tightened

Z Stocks levels may be reviewed twice a year

XYZ analysis when combined with ABC analysis is used as under

Items are within control. No further action is necessary

Class Of items

F S N

X Tighen control Deplete stocks to very low level.

Dispose off immediately at optimum price.

y Deplete the stocks further at good price .

Dispose off as early as possible.

Z Liberalise control (to reduce office cost)

Dispose off as early as possible even at lower prices.

XYZ analysis when combined with FSN analysis

EOQ ANALYSIS

Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs.

EOQ only applies where the demand for a product is constant over the year and that each new order is deliveredin full when the inventory reaches zero. There is a fixedcost charged for each order placed, regardless of the number of units ordered. There is also a holding or storage cost for each unit held in storage (sometimes expressed as a percentage of the purchase cost of the item).

EOQ FORMULA

Qo = 2 x S x Cp

Cu x i

S= annual consumption(units)Cp=procurement cost per order(Rs)Cu=price or cost per unit(Rs)i=inventory carrying cost per year (decimals)

A company uses 75 numbers of an items per month.Each unit costs the company Rs.25/-. The cost of putting Through each order and inventory carrying charges per Month are computed at Rs.36 & 1.5% of the inventoryInvestment respectively.

In what economic lots, should the items be purchased toMinimize total cost?

Illustration on use of the formula

The quadrant technique enables the supply chain manager to assess the importance of each product or service being purchased. the quadrant technique utilizes a two-by-two matrix to determine a procured item’s relative importance on the basis of value and risk. the criteria used to delineate importance are value and risk.

VALUE:-The value criterion examines product or service features that enhance profit for the final product and firm’s ability to maintain a competitive advantage in the marketplace

RISK:- Risk reflects the chance of failure ,non-acceptance in the marketplace, delivery failures and source non-availability.

QUADRANT ANALYSIS

Distinctives High risk, low valueEngineered items

Critcals

High risk , high value Unique items Items critical to the final product

Generics

Low risk, low valueOffice suppliesMRO items

Commodities

Low risk ,high valueBasic production itemsBasic packaging Logistics services

FAIR SHARE ANALYSIS

The Fair share analysis is an index which indicates how important a specific category/brand is for a list of retailers by comparing the performance of each retailer in the category with the overall performance of each retailer.

CALCULATION:-• Step 1 – Compute Individual Mean= Individual’s Mean of all Some Store Attributes Rated– Grand Mean = Mean of All Individual Attribute Means• Step 2– Difference Score = Aggregate Attribute Mean - Grand Mean• Step 3– Sort Results from High to Low, Round, and Magnify by a Factor of Ten

Inventory Costs

Procurement costs Carrying costs Out-of-stock costs

Procurement Costs

These costs are independent on the order size.Order costs are incurred when purchasing a good from a

supplier.Telephone Checking the orderLabour Transportation

Setup costs are incurred when producing goods for sale to others.

-Cleaning machines -Calibrating equipment -Training staff

And also costs incurred on shipping and handling

Inventory Carrying Costs

Capital (opportunity) costs:- This cost focuses upon what having capital tied up in inventory costs a company.

Storage space costs:-It includes handling costs associated with moving products into and out of inventory, as well as storage costs such as rent ,heating and lighting.

Inventory service costs:-It includes insurance and taxes depending on the value and type ,the risk of loss or damage may require high insurance premiums .

Inventory risk costs:-This major component of inventory carrying cost reflects the very real possibility that inventory value may decline for reasons beyond corporate level.

Out-of-Stock Costs Out-of-stock costs are incurred when an order Is placed but

cannot be filled from the inventory to which the order is normally assigned .

Back-order cost:-It occurs when customer will wait for his /her order to be filled so that the sale is not lost ,only delayed .

Lost sales cost:-It occurs when the customer ,face with an out-of-stock situation ,chooses to withdraw his/her request from the product.

Reasons Against Inventory

Non-value added costs Opportunity cost:-It is the implicit

value of having capital tied up in inventory, instead of using it in some worthwhile project

Inventory deteriorates, becomes obsolete, lost, stolen, etc.

Independent Demand

Uncertainty in terms of requirements for items in manufacturing inventory exists only for those items that will be delivered to external consumers. This type of item requirement is called an independent demand.

Independent demand is unrelated to demand for other items in the manufacturing inventory.

Forecasting plays a critical role Due to uncertainty- extra units must

be carried in inventory

Dependent Demand

Dependent Demand is demand for items that are subassemblies or component parts to be used in production of finished goods.

Most manufacturing inventory items subject to dependent demand.

Once the independent demand is known, the dependent demand can be determined.

Reorder Point

Reorder point is the inventory level sufficient to satisfy the demand until the order arrives.

Reorder point =daily demand /usage by lead time x days

Under uncertainty the firm must reformulate the reorder point to allow for safety stock

The reorder point becomes the average daily demand during lead time plus the safety stock

changing lead times changing demand Uncertainty creeps in:

Plug in safety stock

Safety stock - allows manager to determine the probability of stock levels - based on desired customer service levels

Planning for Uncertainty