INVENTORY Management

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M.Tech.(M.E.M) Sch.No.132116201

Kuldeep kumar anal 132116201

Inventory Management

Inventory Management

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Inventory ManagementInventory Management

The objective of inventory The objective of inventory management is to strike a balance management is to strike a balance between inventory investment and between inventory investment and

customer servicecustomer service


Importance of InventoryImportance of Inventory

One of the most expensive assets of many companies representing as much as 50% of total invested capital

Operations managers must balance inventory investment and customer service


Functions of InventoryFunctions of Inventory

1. To decouple or separate various parts of the production process

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

3. To take advantage of quantity discounts

4. To hedge against inflation


Types of InventoryTypes of Inventory Raw material

Purchased but not processed

Work-in-process Undergone some change but not completed

A function of cycle time for a product

Maintenance/repair/operating (MRO) Necessary to keep machinery and

processes productive

Finished goods Completed product awaiting shipment


The Material Flow CycleThe Material Flow Cycle

Input Wait for Wait to Move Wait in queue Setup Run Outputinspection be moved time for operator time time

Cycle time

95% 5%


ABC AnalysisABC Analysis

Divides inventory into three classes based on annual dollar volume Class A - high annual dollar volume

Class B - medium annual dollar volume

Class C - low annual dollar volume

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


C Items

ABC AnalysisABC Analysis

A Items

B Items

Pe

rce

nt

of

an

nu

al d

olla

r u

sa

ge

80 –

70 –

60 –

50 –

40 –

30 –

20 –

10 –

0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory items


Record AccuracyRecord Accuracy Accurate records are a critical

ingredient in production and inventory systems

Allows organization to focus on what is needed

Necessary to make precise decisions about ordering, scheduling, and shipping

Incoming and outgoing record keeping must be accurate

Stockrooms should be secure


Cycle CountingCycle Counting Items are counted and records updated

on a periodic basis

Often used with ABC analysis to determine cycle

Has several advantages

1. Eliminates shutdowns and interruptions

2. Eliminates annual inventory adjustment

3. Trained personnel audit inventory accuracy

4. Allows causes of errors to be identified and corrected

5. Maintains accurate inventory records


Control of Service Control of Service InventoriesInventories

Can be a critical component of profitability

Losses may come from shrinkage

Applicable techniques include

1. Good personnel selection, training, and discipline

2. Tight control on incoming shipments

3. Effective control on all goods leaving facility


Inventory Models for Inventory Models for Independent DemandIndependent Demand

1. Basic economic order quantity

2. Production order quantity

3. Quantity discount model

Need to determine when and how Need to determine when and how much to ordermuch to order


Basic EOQ ModelBasic EOQ Model

1. Demand is known, constant, and independent

2. Lead time is known and constant

3. Receipt of inventory is instantaneous and complete

4. Quantity discounts are not possible

5. Only variable costs are setup and holding

6. Stockouts can be completely avoided

Important assumptions


Inventory Usage Over TimeInventory Usage Over Time

Figure 12.3

Order quantity = Q (maximum inventory

level)

Usage rate Average inventory on hand

Q2

Minimum inventory

Inve

nto

ry le

vel

Time0


Minimizing CostsMinimizing CostsObjective is to minimize total costs

Table 12.4(c)

An

nu

al c

ost

Order quantity

Total cost of holding and setup (order)

Holding cost

Setup (or order) cost

Minimum total cost

Optimal order quantity (Q*)


The EOQ ModelThe EOQ ModelQ = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

Annual setup cost = (Number of orders placed per year) x (Setup or order cost per order)

Annual demand

Number of units in each orderSetup or order cost per order

=

= (S)DQ




Annual holding cost = (Average inventory level) x (Holding cost per unit per year)

Order quantity

2= (Holding cost per unit per year)

= (H)Q2




Optimal order quantity is found when annual setup cost equals annual holding cost

DQ

S = HQ2

Solving for Q*2DS = Q2HQ2 = 2DS/H

Q* = 2DS/H


Reorder PointsReorder Points

EOQ answers the “how much” question

The reorder point (ROP) tells “when” to order

ROP =Lead time for a

new order in daysDemand per day

= d x L

d = D

Number of working days in a year


Reorder Point CurveReorder Point Curve

Q*

ROP (units)In

ven

tory

lev

el (

un

its)

Time (days)

Figure 12.5 Lead time = L

Slope = units/day = d

Resupply takes place as order arrives


Production Order Quantity Production Order Quantity ModelModel

Used when inventory builds up over a period of time after an order is placed

Used when units are produced and sold simultaneously


Production Order Quantity Production Order Quantity ModelModel

Inve

nto

ry l

evel

Time

Demand part of cycle with no production

Part of inventory cycle during which production (and usage) is taking place

t

Maximum inventory


Quantity Discount ModelsQuantity Discount Models

Reduced prices are often available when larger quantities are purchased

Trade-off is between reduced product cost and increased holding cost

Total cost = Setup cost + Holding cost + Product cost

TC = S + H + PDDQ

Q2



Discount Number Discount Quantity Discount (%)

Discount Price (P)

1 0 to 999 no discount $5.00

2 1,000 to 1,999 4 $4.80

3 2,000 and over 5 $4.75

A typical quantity discount schedule



1. For each discount, calculate Q*

2. If Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount

3. Compute the total cost for each Q* or adjusted value from Step 2

4. Select the Q* that gives the lowest total cost

Steps in analyzing a quantity discountSteps in analyzing a quantity discount



1,000 2,000

To

tal

cost

$

0

Order quantity

Q* for discount 2 is below the allowable range at point a and must be adjusted upward to 1,000 units at point b

ab

1st price break

2nd price break

Total cost curve for

discount 1

Total cost curve for discount 2

Total cost curve for discount 3

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ConclusionConclusion

Small businesses have limited financial resources and bargaining power. Long-distance suppliers, big fluctuation of demand and lack of formalized inventory control system result on inventory management. The authors analyze the collected data and establish a formal inventory control system as the solution to improve the company’s inventory management.


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ReferenceReference

1.Buxey, G. (2006). Reconstructing inventory management theory. International Journ Onwubolu, G. C., & Dube, B. C. (2006). Implementing an Improved Inventory Control

2.System in a Small Company: A Case Study. Production Planning & Control, 17(1), 67-76. al of Operations& Production Management, 26(9), 996-1012.

3.Chopra, S., & Meindl, P. (2001). Supply Chain Management: Strategy, Planning, and Operation. Englewood Cliffs: Prentice-Hall.

4.Fuerst, W. L. (1981). Small Business Get A New Look at ABC Analysis for Inventory Control.Journal of Small Business Management, 19(3), 39-44.


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INVENTORY Management