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WAREHOUSING & INVENTORY MANAGEMENT
DEFINITION
• A simple definition: ‘A WH is a planned space for the storage and handling of goods and material.’
• In general, WHs are focal points for product and information flow between sources of supply and beneficiaries.
• However, in humanitarian supply chains, WHs vary greatly in terms of their role and their characteristics.
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IS WH ONLY A STORAGE FACILITY ?
• A WH is typically viewed as a place to store inventory.
• However, in many logistical system designs, the role of the WH is more properly viewed as a switching facility as contrasted to a storage facility.
GLOBAL WH • Global WH concept has gained popularity over last
decade as stock pre-positioning becomes one of the strategies for ensuring a timely response to emergencies.
• Usually purpose built or purpose designed facilities.• Operated by permanent staff that has been trained in
all the skills necessary to run an efficient facility or utilising 3PL staff and facilities.
• For such operations, organisations use, information systems that are computer based, with sophisticated software to help in the planning and management of the WH.
• The operating situation is relatively stable and management attention is focused on the efficient and cost effective running of the WH operation.
NEED FOR WH
• Seasonal Production. • Seasonal Demand. • Large-scale Production. • Quick Supply.• Continuous Production• Price Stabilization.
ISSUES AFFECTING WH• Market and product base stability• Type of materials to be handled • WH Facility: type, size and location. • Inventory and Inventory Location• Level of technology. • The decision can be influenced by– Company-wide strategic marketing or employment
policies,– Financial considerations,– Ability to achieve specified degree of throughput,
and– Required customer service level.
SEQUENCE OF WAREHOUSING DECISION
• Should WH be used?• What forms of WH should be used (public or
private)?• What should be the size and number of WH
utilized?• Where should WH be located?• What WH layout and design approach should be
followed?
CHARACTERISTICS OF IDEAL WH• Located at a convenient place near HWs, railway stations,
airports and seaports where goods can be loaded and unloaded easily.
• Mechanical appliances for loading and unloading the goods to reduce wastages in handling and also minimises handling costs.
• Adequate space inside the building to keep the goods in proper order.
• WH meant for preservation of perishable items like fruits, vegetables, eggs and butter etc should have cold storage facilities.
• Proper arrangement to protect the goods from sunlight, rain, wind, dust, moisture and pests.
• Sufficient parking space inside the premises to facilitate easy and quick loading and unloading of goods.
• Round the clock security arrangement to avoid theft. • Building should be fitted with latest fire-fighting equipments to avoid
loss of goods due to fire.
TYPES OF WH• Private WH:
– Owned and managed by manufacturers or traders to store, exclusively, their own stock of goods.
– Generally constructed by farmers near their fields, by wholesalers and retailers near their business centres and by manufacturers near their factories.
– Design and facilities provided are according to the nature of products to be stored.
• Public WH:– To store goods of the general public : any one can store
his goods on payment of rent.– An individual, a partnership firm or a company may
own these WHs with a license from the government.– Government also regulates functions and operations.– Mostly used by manufacturers, wholesalers, exporters,
importers, government agencies, etc.
TYPES OF WH• Government WH :
– owned, managed and controlled by central or state governments or public corporations or local authorities.
– Both government and private enterprise may use these.– CWC of India, SWC and FCI are examples of agencies
maintaining government WH.• Bonded WH:
– owned, managed and controlled by government as well as private agencies. Private bonded WH require govt license.
– used to store imported goods for which import duty is yet to be paid because importers not allowed to take away goods from ports till duty is paid.
– generally owned by dock authorities and found near ports.• Co-operative WH :
– Owned, managed and controlled by co-op societies. – Provide facilities at most economical rates to members.
COST OF STORAGE• Fixed Costs :cost of space per square/cubic
meter.• Variable costs in the shape of cost per unit
processed or handled (Staff, MHE, ITES, Storage Devices and Internal Transportation), added to fixed costs.
• Interest on the capital used/ borrowed. • Interest on the funds used to buy furniture/
fitment.• Periodic repairs and maintenance• Depreciation on building and equipment• Insurance• Max efficiency is achieved by processing a larger
number of units through the WH space: larger the number of processed units, lesser the cost per unit.
PUBLIC WH: ADVT & DISADVTAdvantages• Less expensive and more efficient and effective.• Usually strategically positioned and easily available.• Adequately flexible to meet most space requirements,
for several plans are available to suit the requirements of different users.
• Fixed costs of WH are distributed among many users. Therefore, overall cost of WHPU works out to a lower figure.
• Facilities can be given up as soon as necessary without any additional liability on part of the user.
• Cost can be easily and exactly ascertained, and the user pays only for the space and services he uses.
PUBLIC WH: ADVT & DISADVTAdvantages (contd)• Conservation of capital is more in public WH. • It has got enough space to handle peak
requirements. • Reduced risk in their operations.• Good economies of scale • Give Tax advantages for end users.• Exact storage and handling costs are known to end
users.• It is insulated from labor disputes.
PUBLIC WH : ADVT & DISADVT
Disadvantages Problems in communication due to system
incompatibility Specialized services may not always be available
whenever it is needed. Adequate space may not always be available for
end users.
PRIVATE WH: ADVT & DISADVT
Advantages• Better monitoring systems over handling and
storage of products by management :enhances performance.
• Less likelihood of error as products handled by company’s own employees who can identify different products.
• Cost of private WH comparatively less than that of public WH, provided volume of goods to be WH is sufficient.
• Best choice for some of the locations and products handled because of the non-availability of the public WH.
PRIVATE WH: ADVT & DISADVT
Advantages (contd)• Has opportunity to specially design its
facilities for automatic MHE where as public WH may not have same.
• Enabling end user to increase their efficiency by means of better design and structured lay-out.
• Efficient use of human resources in WH operation improves end users’ overall performance.
• Intangible benefits in form of cost reduction in all WH operations.
PRIVATE WH: ADVT & DISADVT
Disadvantages • Lack of Corporate flexibility which
increases the complexity in the operation.
• Financial issues• Low rate of return.• Tax issues are complicated
DECIDING ON TYPE OF WH• Impact of fixed costs with reference to volume of goods
handled in public WH as well as in private WH. • A strategic decision : type of WH which would suit its
corporate goal. • Ascertain volume of goods to be handled as per business
plan to decide on type of WH.• Desirable to use both private and public WH according to the
products and customer base. • Private WH need not be owned: may be rented or leased
with or without MHE and other office equipments.• In a public WH, WH man’s integrity is only security for
owner;– Of goods (protection of quality and quantity of the goods). – He is responsible for goods only as a bailee.– He is expected to take care of the goods as a man of normal
prudence. – He is an ideal third party between the buyer and the seller,
between the borrower and the lender.
DECIDING ON TYPE OF WH• WH renders physical support to trading as WH
receipt for goods is accepted for sale or for borrowing. • Goods stored in WH, can be used as collateral for
borrowing (goods in the godown of a trader or a private WH of a firm are a part of the general assets of the trader and not a separate entity).
• As borrower has no control over these goods, they cannot be used, sold or even handled by the borrower without the previous and written permission of the bank. Thus, a perfect security for a loan.
• It is specifically insured beyond the reach of attachment or legal process.
• Less risk of fire in a WH than in a factory: accordingly, lower insurance rates for goods in a WH.
LOCATION PROBLEM OF WH
• locating a WH system at the production facility itself;
• locating a single central distribution WH system away from the production plant
• Locating WH system at more than one place.
CONSIDERATIONS THAT DETERMINE LOCATION OF A WH
• Market service area and cost of distribution from the WH to the market service area.
• Satisfaction of transport requirements and facilities available in the form of rail, link roads and road vehicles.
• Transportation rates prevailing in the area and distribution costs per unit.
• Competition by rival companies and whether they have WH in the same area.
• Availability of power, water, gas sewage disposal and their cost.
• Labour supply and labour costs in the area.• Industrial relations climate and labour productivity..
CONSIDERATIONS THAT DETERMINE LOCATION OF A WH (contd)
• Pricing arrangements and the level of service desired to be rendered in terms of availability of the product to the customer.
• Individual company requirements and constraints.• Real estate, excise and government taxes assessed in
the area.• Attitudes of local residents and govet towards
establishment of WH.• Restrictions associated with WH.• Potential for later expansion.• Cost of land for the WH and other costs.• Possibility of change in the use of the facility at a later
date if the company so desires, and lease or sale of the land and buildings.
FACTORS AFFECTING THE NUMBER OF WHS
– Inventory costs– Warehousing costs– Transportation costs– Cost of lost sales– Maintenance of customer service levels– Service small quantity buyers
FUNCTIONS OF THE WH• Receiving• Inspection• Repackaging• Put away• Storage• Order-Order picking / selection• Sortation • Packing and shipping• Cross-docking• Replenishing
WH OPERATIONS – DECENTRALIZED & CENTRALIZED
Decentralized WH Operations• Each WH considered as a separate entity. Thus each
WH will have a separate safety stock, there will be orders from lower to upper WH and there will be in-transit stocks.
• Consumption centres are located at different and distant places. The transaction of goods is very high.
• Each WH will optimize inventory individually .• Advantages;
– Prevents obsolescence and accumulation of surplus materials,
– Offers service where it is needed.• Disadvantages of having high running cost due to;
– Increased stock and personnel in each WH– Due to handling of more information.
WH OPS – CENTRALIZED & DE-CENTRALIZED (Contd)
Centralized System of WH Operations; • Order processing, storing of safety stocks and control
stock movements done centrally. • A well established IS: an important prerequisite • Advantages:
– Orders for multiple items on a single source can be bunched together.
– Reduction in safety stock and thus total inventory cost is also reduced (justifies the cost of information system)
• In centralized system, the central WH will;– Do additional record keeping and decision making required
in a branch WH operation. – Keep track of each branch’s current stock of each item, rate
of sale at each branch, amount currently on order and in transit.
– Make decisions about when and how much to reorder from the factory.
STORAGE
Factors Influencing the Choice of a Storage System;
• The nature and characteristics of the goods and unit loads held;
• The effective utilization of building volume-horizontal and vertical:
• Good access to stock;• Compatibility with IS requirements;• Maintenance of stock condition and integrity;• Personal safety;• Overall system cost: Need to consider following in
addition to Storage Equipment;– Space-land, building and building services;– Fire protection;– Handling equipment including maintenance;– Staff;– IMS
STORAGE SYSTEMS CLASSIFICATION
• Bulk storage for solids, such as silos, bunkers and stockpiles;
• Loose item storage, ex casting and fabrications held loose on the floor;
• Pallet storage systems;• Small item storage for individual items or
small unit loads;• Non-standard unit loads such as long
loads.
INVENTORY
• An itemized catalog or list of tangible goods or property or the intangible attributes or qualities.
• Value of materials and goods held by an organization; – To support production (raw materials, sub
assemblies, WIP). – For support activities (repair, maintenance,
consumables) or– For sale or customer service (merchandise, finished
goods, spare parts).• Inventory is often the largest item in the current
asset category, and must be accurately counted and valued at the end of each accounting period to determine a company’s profit or loss.
INVENTORY
• Organisations whose inventory items have a large unit cost generally keep a day to day record of changes in inventory (perpetual inventory method) to ensure accurate and on-going control.
• Organisations with inventory items of small unit cost generally update their inventory records at the end of an accounting period or when financial statements are prepared (called periodic inventory method) ).
• The value of an inventory depends on the valuation method used, such as FIFO or LIFO method .
• GAAP require that inventory should be valued on the basis of either its cost price or its current market price, whichever is lower to prevent overstating of assets and earnings due to sharp increase in the inventory's value in inflationary periods.
ROLE OF INVENTORY IN THE SUPPLY CHAIN• Inventory exists in the entire supply chain because of
disparity between supply and demand.• To increase the quantity of demand that can be
satisfied by having product ready and available when customer wants it.
• Optimize cost by exploiting economies of scale that may exist during both production and distribution
• It is spread across entire supply chain from raw materials to work in process to finished goods that supplier, manufactures, distributors, and retailers hold.
• Inventory is a most important source of cost in any supply chain and it has an enormous impact on responsiveness.
• Inventory also has a major impact on the material flow time in a supply chain.
• Inventory has a significant impact on throughput (is the rate at which sales occur). Little’s law ; I (inventory) = D (throughput) x T (flow time)
ROLE OF INVENTORY IN COMPETITIVE STRATEGY
• STRATAGEY INVENTORY TRADEOFF
Very high level of responsiveness
Locating large amounts of inventory close to the customer
Between the responsiven-ess ( more inventories) and efficiency (fewer inventories)
Low-cost producer
Optimizing inventory through centralized stocking
FUNCTIONS OF INVENTORY
• Minimize costs at acceptable inventory levels: Small inventories result in low investments but high ordering costs. Need to identify total inventory carrying cost is bare minimum but the level of inventory does not effect production or customer base.
• Provide desired customer service level: Inventories enable satisfying customer demand and influences time & costs of service. Location determines time while company policies concerning EOQ, safety stocks, placement procedures and time determine cost at which customer is served.
FUNCTIONS OF INVENTORY (contd)
• Couple successive operations or functions: A demand by a customer triggers a chain reaction of demand at each preceding level, i.e. manufacturing and purchasing, whereas, customer does not have time or patience to wait for chain reaction. Instant response from and cost of transport system becomes an issue.
• Stabilize production and the labor force, thereby trying to reduce capital requirements: Associated to manufacturing process, though it influences the distribution function as well.
TYPES OF INVENTORY :
• RAW Material Inventory• WIP Inventory• Finished Goods Inventory• MRO Inventory
TYPES OF INVENTORY :
RAW MATERIAL INVENTORY
• From which the final product is made and does not include material that supports production ( indirect materials).
• Limited to the direct material (or) component that actually becomes a part of the final product.
• Raw material of one industry is usually the finished product of another, eg Steel & automobile.
• Some RM available seasonally, eg cotton, sugar cane etc.
• Certain RM are governed by govt control and quota system, like newsprint, coke etc.
TYPES OF INVENTORY :WORK-IN-PROCESS(WIP) INVENTORY
• Materials that have been transformed from RM stage by some manufacturing process but are not final products.
• It is in-process until it is in the form that can leave the plant. WIP can be found on the conveyors, trucks, pallets, in and around the machines and in temporary areas of storage waiting to be worked upon or assembled.
• The reason for keeping In-Process inventory is;– As liquid stock to cater for variety and shorten the
manufacturing cycle.– As protective buffer against production breakdowns,
rejections etc.– For economic lot production.
TYPES OF INVENTORY: FINISHED GOODS INVENTORY
• Consists of all the stock that is ready for dispatch, eg, the bottles of beverages that are in their cartons or cases and are ready for shipment in a bottling plant are finished products.
• Acts as a buffer between the production and marketing department. Higher the stock of finished goods, higher the cost of inventory. If the stock level is low or nil then the customer service shall be affected, damaging the goodwill of the company and the product.
• Aims is to reach market by constant supply through distribution channels, which is controlled by marketing department. The stock that is to be held at the WH, with the distributors and with retailers will be different depending upon the sales rate.
• Reasons for holding this inventory are– To protective buffer against sales rate changes.– To absorb economic production lots.– To stabilize the level of production and employment when the
sales is of a seasonal variety.
TYPES OF INVENTORY:
MRO INVENTORIES
–Maintenance, repairs & operating supplies which are consumed during the production process and generally do not form part of the product itself (e.g. oils and lubricants, machinery and plant spares, tools and fixtures, etc) are referred to as MRO inventories
INVENTORY COSTS
– Order or Procurement Cost– Carrying or Holding Cost– Storage Cost– Out Of Stock Cost– Over Stock Cost
INVENTORY COSTS: ORDER OR PROCUREMENT COST
• It is total cost incurred during the ordering of an item. • These costs are not connected with quantity
ordered but with physical activities required to process order.
• All time spent dealing with vendor invoices would be included in procurement cost.
• In manufacturing, the order cost would include time;– To initiate the work order, – taken for picking and issuing components excluding time
associated with counting and handling specific quantities, – All production scheduling time, – Machine set up time, and– Inspection time.
• Order cost is primarily labour associated with processing order, however, the other costs such as costs of phone calls, faxes, postage, envelopes, etc can be include .
INVENTORY COSTS: CARRYING (OR HOLDING) COST
• Cost associated with having inventory on hand. • Primarily made up of the costs associated with
inventory investment and storage cost. • For the purpose of the EOQ calculation, if the cost does
not change based upon the quantity of inventory on hand it should not be included in carrying cost. In the EOQ formula, carrying cost is represented as the annual cost per average on hand inventory unit.
• Primary components of carrying cost;– Interest: Borrowings/loans on other capital items/if
debt free-ROI. – Insurance: Directly related to the total value of the
inventory.– Taxes: Taxes on the value of inventory.
INVENTORY COSTS: STORAGE COST
• Generally applied as a percentage of the inventory value.
• There are situations where storage costs is not included in EOQ calculation, eg, if operation has excess storage space of which it has no other uses since reducing your inventory does not provide any actual savings in storage costs.
• As operation grows near a point at which there is need to expand physical operations, then start including storage in the calculation.
INVENTORY COSTS: OUT OF STOCK COST
• Incurred when a customer places an order and the order cannot be filled from inventory to which it is assigned.
• Costs are divided into two main categories;– Lost sales costs– Back-order costs.
• Lost Sales Costs (Intangible): When customer chooses to withdraw his order for the product. The cost is profit that would have been made if the sale had occurred and cost of negative effect that the stock out may have on future sales. The higher the degree of substitutes in market, the higher is the cost.
• Back order costs (Tangible) : Back order costs assume that a customer will wait for his order to be filled so that the sales is not lost, only delayed. But these back-orders create clerical and sales costs for order-processing additional transport, which have to be incurred to fulfill these back-orders out of course of normal distribution channel.
INVENTORY COSTS: OVER STOCK COST
• Cost when the company is left with some stock on hand even after demand for product has terminated.
• This cost is proportional to whether inventory is static or dynamic.– Static inventory is one which is replenished only once a
year eg, diwali crackers, with very short shelf life, has a very limited sales seasonwhich is only a few days long and thus the replenishment of stock will have a next to zero salvage value. Thus if he has too much stock he will suffer loss equal to cost of over stock.
– Dynamic stock is one which can be replenished throughout season, eg; a departmental store which has dynamic stock, selling various household items will have a different over stock value. Compare towel (any stock left can be carried forward to next/indefinite period: no over stock cost) with woolen fashion accessory with shorter product life cycle.
• A company can incur either overstock cost or under stock cost at a given point of time, but not both simultaneously.
NEED TO HOLD INVENTORY• To keep down productions costs: It is essential,
however, to balance these costs with the costs of holding stock.
• To accommodate variations in demand: To avoid stockouts, therefore, some level of safety stock must be held.
• To take account of variable supply leads: Additional safety stock to cover any delivery delays from suppliers.
• Buying costs: For this the EOQ is used.• To take advantage of quantity discounts: • To account for seasonal fluctuations• To allow for price fluctuations/speculations• To help the production and distribution operations
run more smoothly: To ‘decouple’ the two different activities.
• To Provide Customers with immediate service• To minimize production delays due to lack of spare
parts.• WIP: Facilities production process by providing semifinished
stocks between different processes.
INVENTORY MANAGEMENT
• IM can be defined as sum total of those related activities essential for the procurement, storage, sale, disposal or use of material.
• Utilities are created in goods when the right product is available at the right place, at the right time, at the right quantity and is available to the right customer.
MECHANICS OF INVENTORY CONTROL
Consists of finding answers to three questions
• Should this item be stocked at all?• If so, when to order it?• How much to order?
SHOULD THIS ITEM BE STOCKED AT ALL? LIKELY ERRORS
• Increased order and acquisition cost.• Increased cost of transportation and packaging.• Increased receiving and inspection cost.• Increased risk of obsolescence and deterioration.
WHEN TO ORDER?
The various levels of stocks;• Deficiency Level: Indicates actual/potential out-of-stock situ .
Orders are placed through faster alternative source of supply.• Exhaust bin level: Out of stock where storage bin is empty.
Emergency measures are taken to stock the bin.• Buffer stock or MSL (Min) : Level at which any further
demands will necessitate withdrawals from the reserve or buffer stock. Usually goods are ordered through normal channels as soon as inventory reaches this level.
• Danger warning level: It is the point of no return. After this point, a stock – out is inevitable if delay occurs.
• A computer program can readily include warning levels, and manager should take one of following actions if delay envisaged:– Find an alternative source of supply– Request sales department to warn their customers of possible
delay in supplies.– Put extra pressure on the supplier
SELECTIVE INVENTORY CONTROLClassificatio
n
Stands for Criteria
ABC Always Better Control Annual value of consumption of the items concerned
HML High, Medium & Low Unit price of material (opposite of ABC)
VED Vital, Essential, Desirable
Critical nature of component in respect to production
SDE Scare, Difficult to obtain and easy to obtain
Purchasing problem in regard to Availability.
GOLF Government, Ordinary, Local, Foreign
Source of material
FSN Fast moving, slow moving or non moving
Issues from stores
XYZ ---------------------- Inventory value of items stored
REORDER LEVEL• It determines when a re supply shipment be initiated;
– If set too low, stock out position might occur ,– If set too high over stock costs will be high and will lead
to increased investment and increased inventory carrying cost
• The basic reorder point formula is : R = D x TWhere• R = Reorder point, D = Average daily demand• T= Average Performance Cycle Length
• Eg: ABC industry has a demand rate of approx100 u/day and its performance cycle of 20 days.
Then, R = 100 x 20= 2000 Units• This approach is satisfactory as long as both D and T
are certain. But when there is an element of uncertainty in any of these elements, then an inventory buffer is necessary ie R = D x T + Safety Stock (SS)
EOQ
• EOQ is the order quantity that minimizes the total inventory holding costs and ordering costs.
• It is one of the oldest classical production scheduling models.
• The framework used to determine this order quantity is also known as Wilson EOQ Model, Wilson Formula or Andler Formula.
EOQ: HOW MUCH TO ORDER?
• EOQ concept tries to balance inventory and ordering cost.
• Practically, the two costs have inverse relationship: If the order quantity is larger, the order cost will be low but the inventory carrying cost will be high.
• Point at which two costs are minimum is the optimum point. • EOQ is the most useful techniques for determining “how
much to order”: aims at determining the right quantity so as to ensure that the sum total of the two costs, i.e carrying cost and procurement cost are minimum possible.
• Result of this effort is “purchase of right quantity’ by Company.• Mathematically, EOQ is represented by the equation:
EOQ = √2AP/UC• Where
A = Annual Consumption in units.P = Procurement cost per order.C= Inventory carrying cost expressed as percentage (of value)U = Unit price
GRAPHICAL REPRESENTATION
EOQ CALCULATION•Purchasing cost: Rs.150 Per order and inventory carrying cost @ 30 per cent and unit value of one rupee, Working this out we have,
Annual Consumption In U/Year
EOQ per Order
No of orders per year
Period
1000 1000 1 1 Year9000 3000 3 4 months16000 4000 4 3 months49000 7000 7 7.5 weeks80000 9000 9 6 weeks100000 10000 10 5.5 weeks400000 20000 20 18 weeks
Q = √2AP/UC =√2 x 80,000 x 150/1x100/30 = 8944.3 (9000 APPROX)Therefore, Requirement = 80,000/9000 = 9 orders per year.
CONCEPT OF EOQ: IS IT FOOLPROOF?
Most helpful in establishing optimum inventory levels and effectively conserving working capital invested in inventories; yet in actual application EOQ faces objections;
– Often the inventory holding costs & ordering costs cannot be identified accurately and sometimes cannot be even identified properly.
– EOQ as calculated is often an inconvenient number.– Use of EOQ usually leads to orders at random points in time so
that suppliers receive an irregular stream of orders.– EOQ applied without due regard to the possibility of falling
demand can lead to high value of obsolescent inventory.– EOQ may not be applicable when the requirements are
irregular, or where there is impending price rise.
Therefore, every decision has to be taken in consideration of variables like volume, transportation rates, quantity discount, production lot size, capital limitation and so on.
METHODS OF CONTROLLING STOCK LEVELS
• Re-order level system• Optimum Order Quantity• Optimum Order interval• Fixed Time System• Imprest stock control• Open access bin• Two Bin Systems (Clerical method of inv
entory control)• JIT System
REORDER LEVEL SYSTEM
• It represents a smooth average rate of consumption say100 U/M.
• Supplies are obtained once in a quarter, i.e 300 units. • Min SS (buffer ) is fixed at 100 units or one month’s
consumption. • The lead time, lets assume, in this case is 45 days. • Thus, logically a company should re order the stock as soon as it
reaches the level where the stock in the bin is equal to 45 days in other words, 250 units and is called reorder level.
• The maximum stock held by the company, according to this figure will be 400 units or, reorder level quantity (300) plus SS (100).
OPTIMUM ORDER QUANTITY• Two major influences on the decision regarding quantity
to order: Ordering Cost & Inventory Carrying Cost (ICC).
• Because of the fixed nature of the ordering cost, it keeps on decreasing per unit as order size increases. But this increases the time of storage for the quantity, ie it will increase the inventory conversion period (assuming constant rate of depletion).
• Point X, at which point, inventory carrying cost per unit purchased (IC) and order cost curve (S) intersect, is equal to S/Q (order cost/ unit of quantity purchased).
• Average annual unit inventory cost at point X = ICQ/2, WhereX = Average annual unit inventory cost.I = ICC as a percentage of unit cost.C= Price per unit.Q= Order Quantity in units.
• The order cost (s) at point Q over the period of time comparable to inventory carrying cost for one year will be equal to; D x S/Q, Where– D = Annual rate of inventory depletion.– S= Order cost per order.
• Because two levels are equal at point X, we have,ICQ/2 = DS/Q (ie (IC)Q2 =2(DS) Multiplying both sides by 2Q) or Q2 = 2(DS) ICor Q* (Optimum order quantity = √2 (DS)/IC
• A manufactured item ZB. Manufacturing cost of this item is Rs.600, carrying cost in the stock is 25 %, ie Rs150 and cost of placing an order is Rs 100. Assume demand to be constant at 2/3 units per day, based on a lot size day week. The order quantity will be;– Q* =√2(DS) IC – or =√2 (208) (100)/.25(600) Where DS = 2/3 x6 x 52– = 16.7 Units (approx 17 Units)
OPTIMUM ORDER INTERVAL• The optimum length of the order interval, for any
item in an inventory is a function of demand rate, ordering cost, and inventory holding cost for the unit.
• Mathematically it can be presented as, Q* = √2DS/ICN* = D/Q* (Where N* is optimum number of order
placements in a time). • Therefore, Q* = D/N* (as also Q* = √2DS/IC)• Thus N* = √DIC/2S• Expanding the example,• N* = √ 208 (.25) (600)/2(100) = 12.5 units.• ie orders should be placed every 313/12.5 =25
business days. (313 working days as six days a week)
FIXED TIME SYSTEM (CONSTANT CYCLE SYSTEM)• In this case, instead of considering the stock
level we give more importance to time. • Orders are placed at constant intervals to
time. • The quantities orders can change. • Eg: In re-order level figure, the axis is showing
the months in which the order was placed. • Let’s say the orders were placed on the fifteenth
of February or May.• Then it would be a fixed time system. • The time of placement of order is 100 %
motivated by administrative convenience or the EOQ.
IMPREST STOCK CONTROL• Simplest method of inventory control and involves
determination of a maximum level for the bin and a periodical inspection of stock levels in the bin.
• Bin is then filled up as required immediately to maximum level.
• Usually this system is restricted only to classification “c” materials – materials with relatively low value- whose lead time is minimum.
• Eg: Post Offices are supposed to maintain a certain level of stamps for a fixed time period. After a week, the stocks are checked and the remaining items are ordered, so as to bring inventory back to maximum levels again.
OPEN ACCESS BINS• It would be a waste of time and other resources if
the same accounting procedure was maintained for nuts and bolts as is for tyres or engines in a Car Company.
• In the factory, the optimum procedure would be where the employees have accounted for access to engines and tyres but a free work point access to nuts and bolts.
• This is called open access bin.• This is used in combination with the Imprest
system. The quantity replenished in this case is simply equal to quantity used
TWO BIN SYSTEMS (CLERICAL METHOD OF INVENTORY CONTROL) • In this system, two bins are maintained
by the companies which have different levels. When the first bin is exhausted, it indicated the time for replenishment. The second bin is like a reserve stock.
• The concept is similar to the petrol needle of a car. When the needle reaches the red segment of the gauge, the driver knows that the car is operating on reserve stock and it is time to replenish it.
JIT SYSTEMFeatures;• Focuses on minimizing the holding costs of stock.• Stocks are brought into the production process at
the time they are needed• Attempts to operate production with minimal /
zero buffer stocks• Production and purchasing are closely linked to
sales demand on a week to week basis.• Continuous flow of raw materials into stock.• When work in progress is completed, it goes
straight to the customer
REQUIREMENTS FOR JIT SYSTEMFlexibility• Suppliers and internal workforce need to be able to
expand and contract output at short notice• Need to be able to deliver supplies quickly and reliably.High quality• Raw materials must be of guaranteed quality• Whole production process must focus on quality• There are no/minimal buffer stocks should a batch of
raw materials from a particular supplier prove faulty, or if they are damaged during the production process.
Close working relationship with suppliers• Often geographically close• Joint approach to ensuring quality• Systems need to be able to share information (e.g.
sales data, purchasing requirements, delivery times).
POTENTIAL BENEFITS OF JIT
• Lower levels of cash tied up in stocks (ie lower Working capital)
• Reduction in stock holding costs• Reduced manufacturing lead times• Improved labour productivity• Reduced scrap and warranty costs• Price reductions on purchased materials• Reduction in the time and cost of purchasing
/accounting.
PITFALLS/ PROBLEMS WITH JITNot suitable for many industries / organizations• Higher risk of stock outs E.g. critical medical suppliesLots of potential problems for suppliers• Break in supply causes immediate problem for supplier
to solve.• May require new systems.• Potential loss of reputation if supplier responsible for
stopping whole of customer’s production.Not something that can be done easily• Requires careful planning.• Cannot be done overnight – production needs to move
gradually towards minimal / zero buffer stocks.• Often requires a substantial change in production
culture.
