Module 5 - Inventory Management

2

Describe the functions and costs of an inventory system.Determine the order quantity.Calculate the reorder point and safety stock for an inventory system.Design a continuous or periodic review inventory-control system.Conduct an ABC analysis of inventory items.New Trends in Inventory Management

Learning ObjectivesLearning Objectives

3

• Dictionary Meaning:– A complete list of goods

• Definition by IIMM:– “Any material, component or product that is

held for use at a later time.”

• Origin:– A medieval LATIN word– “Create by thought, originate(a method device

etc.)”

•

WHAT IS AN INVENTORYWHAT IS AN INVENTORY

4

‘Stocks’ and ‘Inventory’ : used for same purpose

What is difference between Stocks and Inventory?

– British people called Stocks and American called Inventory

“Necessary evil”

WHAT IS AN INVENTORYWHAT IS AN INVENTORY

5

Provide flexibility– minimum delay in supplying to customers– a good range

Protect against uncertaintiesEnable economic purchasingAnticipate changes in demand or supply– Buffers to feed processes and enable efficient

scheduling– Strategic stock holdings

WHY INVENTORY WHY INVENTORY

6

Demand forecast error

Unpredictable or late deliveries from suppliers

Minimum supplier order quantity

Supplier delivery interval

Stocking methodology

Reorder interval & quantity

Strategic stocking

WHY INVENTORY WHY INVENTORY

7

Purchase price advantage

Lead- times offered to customers are shorter than supplier lead- times

Consignment stocking

Minimization of delivery costs

Pipeline inventory

Anticipation or precautionary stocks

WHY INVENTORY WHY INVENTORY

8

RepercussionsRepercussions

Capital Costs

• Interest

• Insurance

• Tax

• Duties

• Depreciation

Risk Costs

• Obsolescence

• Pilferage

• Spoilage

• Damage / Breakage

• Security

9

Warehouse Throughput Costs

• Warehouse Space

• Labour

• Utilities

• Equipment / Building Maintenance

• Information Systems

• Order Processing Costs

• Lot Quantity Costs

Transportation Cost

RepercussionsRepercussions

10

• Raw Materials

• Finished Components

• Work in Progress

• Finished Goods

• Tools

• Machinery Spares / Components / sub-assemblies

• Consumables

• Scrap & Re-work

TYPES OF INVENTORIESTYPES OF INVENTORIES

11

E O Q

12

Optimal Inventory Level

The optimal quantity that should be ordered

It is the quantity that will minimize the total inventory costs.

Economic Order Quantity (EOQ)

13

• Single product line

• Demand rate: recurring, known, constant

• Lead time: constant , known

• No quantity discounts - stable unit cost

• No stock-outs allowed

• Items ordered/produced in a lot or batch

• Batch received all at once

• Holding cost is linear based on average stock level

• Fixed order + set up cost

Economic Order Quantity – Assumptions

14

2 2 x x S S x x CpCp

Cu Cu x x II

• Q* = Inventory order size in units• S = Total demand in units over planning

period• Cp = Ordering cost per order• Cu = Cost per unit • I = Cost of carrying 1 unit in inventory

Q* =

E O Q (Q*)

15

• Q = inventory order size in units • I = cost of carrying 1 unit in inventory =

18.75%• S = total demand in units over planning • period = 10,000 units• Cp = ordering cost per order = Rs. 250

2 2 x x S S x x CpCp

Cu Cu x x IIQ* =

E O Q - an example

16

•Vinitha wants to calculate the EOQ for Leather used to produce hand bags. – Last year demand = 10,000 metres (constant

rate).– Price per metre of Leather = Rs.6.40– Cp – each order = Rs.250.– I = 18.75%

•What is the EOQ?2 x 10,000 x Rs.250

= 2042 metresRs.6.40 x 18.75%

E O Q - an example

17

Follow up DifficultiesSupplier’s Minimum Order Quantity conditionLead Time ConsumptionGovernment RegulationsPacking RestrictionsShelf LifeQuantity DiscountsSeasonal AvailabilitySpace Restriction

Practical Hurdles - Modified E O Q

18

SELECTIVEINVENTORY CONTROL

19

Selective Inventory Control

ABC Analysis •(Always Better Control)HML Analysis• (High-Medium-Low)VED Analysis• (Vital-Essential-Desirable)SDE Analysis•(Scarce-Difficult-Easy)Golf Analysis• (Govt.-Ordinary-Local-Foreign)SOS Analysis•(Seasonal-Off Seasonal)FSN Analysis•(Fast-Slow-Non_Moving)XYZ Analysis

Usage Value

Unit Price

Criticality of Items

Procurement Difficulties

Source of Procurement

Seasonality

Issue from Stores

Inventory Investment

Analysis Criterion employed

20

Pareto’s Law of Causes & Effects-

20% of the activity causes 80% of the effects

20% of the machines are responsible for 80% of the total down time

20% of the End Products generates 80% of Sales Revenue

20% of the clerks make 80% of the clerical Errors

20% Employees create 80% of the troubles

20% of the Customers are responsible for 80% of Bad Debts

20% of the total items account for 80% of Annual Expenditure on Materials

A B C analysis

Pareto’s Law

21

• ABC Analysis is based on Principal – Vital Few : Trivial Many

• ABC Analysis also is based on Pareto’s Law of Causes & Effects

• ABC Analysis helps in classification of Items in Stores in A, B and C class

A B C analysis

Class of Items

% Items % Con. Value

A 10 – 15 70 – 75

B 10 – 15 10 – 15

C 70 – 75 5 – 10

3 6 9 2 4 1 10 8 5 7

Item No.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Per

cent

Usa

ge

0%

20%

40%

60%

80%

100%

120%

Cum

ulat

ive

% U

sage

Cumulative %

A B C

A B C analysis

23

Parameter A B C

Control on Stock Levels Tight Control Moderate Control Loose Control

Procurement Only Exact Requirement More or Less on Exact Requirement

On Estimated Consumption

Posting of Transactions Immediate Individual Posting

Individual posting on daily basis

Collective Posting

Planning checks on Schedules & Revision

Continuous Checking Broad Checks Surprise Checks

Buffer Stock Very Low or No Stocks Exact Requirement to work out

Fairly Large Stocks

Follow-up / Expediting Regular at Short Interval Moderate Follow-up No Follow-up

Issue of Material Authorized by Manager Authorized by Sr. Officer Record after use

Consumption Control Very Strict with Standards and Norms

Highly Essential 

Can be Delegated

Material Planning Very Accurate and Frequent Forecasting

Past Consumption as base Rough Estimates as base

Physical Stock Taking Daily / Weekly Weekly / Monthly Monthly / Quarterly

Control of Items Based on Classification

24

Second most widely used toolUsed especially in Spare parts Management. The analysis is done based on the ‘criticality of the item.’

V E D analysis

V – Vital – Spares that may cause stoppage of production

E – Essential – Plant may run, but at a lower performance level

D – Desirable – Non-availability may not adversely affect production.

25

F-S-N & X-Y-Z analysis

FSN Analysis is done based on the movement of the materialsXYZ Analysis is carried out at the end of the year, based on the value of the stocks

Item F S N

X Tight control Reduce Stock Level

Quick disposal at optimum price

Y Normal control Low level of control

Disposal at the earliest

Z Can reduce clerical labor by increasing stocks

Low level of stocks

Can dispose off at lower prices

26

Replenishment System

Fixed QuantityVariable Time

1. Reorder Level System2. Two Bin System

Fixed Time Review System

FixedQuantity

VariableQuantity

Replenishment System

27

Two Bin System –Implementation

Smaller items like Bolts, Nuts, Washers, electronic components can be easily stored in two separate bins

Heavy Items like Drums can be marked for Second Bin Qty, and issues are made first of items without marking.

Flat items like Stationary, Sheets, Plastic Bags, Tags are separated by wooden board or Card Board to differentiate two bins

Items like Belts, Angles can be tied with cord or tape for II’nd Bin Qty.

Items stored in Tanks like Oils, Chemicals are provided with two different Taps for two bins.

For other items Stock Cards are maintained for Second Bins Qty.

28

• Also Called Min. Stocks, Buffer Stocks

• Factors influencing Safety Stocks• 1. Lead Time• 2. Nature of Item• 3. Nature of Consumption• 4. Annual Consumption• 5. Risk of Obsolescence & Deterioration• 6. Storage Space Restrictions• 7. Stock Out Cost

Safety Stocks

29

EOQ is based on ‘fully known consumption pattern’ and ‘reliable delivery schedule’.

However, in reality such an ideal situation may not exist.

Why Hold Safety Stocks ?

30

Depends on: Uncertainty: demand & lead time

Cost of

Being out of stockCarrying inventoryIncreasingly better service

Service level policy % confidence of not hitting a stock-out situation

How much Safety Stock ?

31

• V M I – VENDOR MANAGED INVENTORY• J I T – JUST IN TIME• BAR CODE SYSTEM• R F I D – RADIO FREQUENCY

IDENTIFICATION

NEW TRENDS

32

• VMI transfers inventory management from the customer to the supplier

• VMI synchronizes the supply chain through the process of collaborative order fulfillment

Vendor Managed Inventory

33

•Customer– less resources for inventory

management– assurance that product will be

available when required

•Vendor– more freedom in when & how to

manufacture product and make deliveries– better coordination of inventory levels

at different customers– better coordination of deliveries to

decrease transportation cost

Advantages of VMI

34

• TRUST– Accurate information provided on a timely

basis– Inventory levels that meet demands– Confidential information kept confidential

• TECHNOLOGY– Automated electronic messaging systems

to exchange sales and demand data, shipping schedules, and invoicing

V M I Essentials

35

Integrated set of activities designed to achieve high-volume production using minimal inventories of raw materials, WIP, and FGI.

– Big JIT “lean production” -- Eliminate waste in all aspects of production activities

– Little JIT – scheduling goods inventories and production, as needed

Also known as Stockless Production, Toyota Production System

Approach to inventory management & control in which inventories are acquired & inserted in production at exact time when needed.

JUST-IN-TIME

36

Accurate production & inventory information system

Highly efficient purchasing Reliable suppliers Efficient inventory-handling system

(Common parts for different products) Requires high quality Management philosophy of continuous

and forced problem solving Elimination of waste

JUST-IN-TIME

Requirement

37

J I T – IUnder this approach, the materials are arranged just when they are

needed.

J I T – II Having a representative of the Supplier at the buying

Organization’s facility

J I T – IIISupplier stocks the material at the Buying organization’s facility

and the Buying organization uses the material as & when required. Billing is done either after the usage or periodically, depending on the credit period

J I T – IVAll the suppliers have their own manufacturing facilities inside the

Buying Firm’s facility & supplies are made on line just when the same are needed

JUST-IN-TIME

NEW TREND

38

Bar Code

These are used to capture data quickly & accurately into a computer.Used properly, can replace paper based tracking & data collection.Wide variety of bar coding printing & solutions are availableDuplication of keying avoidedHence, human errors are minimizedResults in faster throughput & less wait time

39

Bar Code

Focus on:

Reduced Costs

Saving on Time

Increased Sales / Customer Service

40

These enable large amount of data to be transported with a product, carton or pallet

Particularly valuable in identifying hazardous materials and carrying the government-mandated data.

Also act as EDI System supplements, especially in case of overseas shipments where there could be frequent change of routes or travel methods en-route.

Bar Code

41

Chip (IC)

Antenna

R F I D

42

RFID stands for Radio Frequency Identification

It is a technology that uses radio frequency waves to transfer data between a moveable object and a reader to identify, track, or locate that item

An RFID tag simply calls out its (unique) name or static data at a range of several meters

RFID tags as next generation barcodes

What is RFID ?

RFID - Application

Pallets ID

Reader/Write

Factory Ware house

PC Server

Pallets/Container Inventory Control

44

The End