Inventory management

Inventory in operation
.
CASH

Marketing
SALES

Finance Operation
PROCESSING

Inventory
STOCK

Inventory management
It is a scientific process of monitoring and regulating the flow of inventory in operation management Materials management should ensure uninterrupted supply of materials to operation department

Classification of inventory
Manufacturing Inventory: Raw materials, components, sub-assemblies, work-in-process, finished goods Maintenance Repair & operation supplies inventory: Spares, consumables, fuel oil, lubricants etc. Miscellaneous inventory: stationery, scrap, obsolete items etc.

Types of Inventory control

Static inventory control: Deterministic model Probabilistic model Dynamic inventory control Prescribed rule method Fixed E.O.Q. method

Deterministic models for control

ECONOMIC ORDER QUANTITY = v ( 2.D.C0 / Ch. ) where D = Annual demand C0 = Ordering cost per order Ch = Inventory holding cost C = Cost per unit Reordering Level= avg. demand x lead time

Exercise - 1
The annual demand of an item of inventory is 9000 units, priced at Rs. 8/per unit. The ordering cost is Rs. 40/- per order and inventory carrying cost is 25% of inventory value. Find EOQ; reordering level and nos. of order, if lead time is 10 days.

Exercise - 2
There is constant demand rate of an item. The annual demand is 6000 units and price is Rs. 60/- per unit. The ordering cost is Rs. 150/- and inventory carrying cost is 20% of average inventory. What is the optimal order quantity? If the supplier offers a discount of 1% for 1200 units order, should the discount be accepted?

Dynamic inventory control

Exercise on prescribed rule method: A co. estimates demand of an item as follows: variable demand from January to December are: 130; 88; 52; 124; 10; 62; 12; 154; 129; 160; 238;41. ordering cost is Rs. 54/-, inventory holding cost is 2% per unit; item cost is Rs. 20/-. Procurement every three months. Supply is instantaneous, no stock out & full months quantity is ordered.

Fixed EOQ method

Exercise: compute monthly EOQ full month requirement is to be ordered compute total cost.

Probabilistic models for control

Safety stock absorbs fluctuations in demand as well as of lead time: Models for control are > Fixed Quantity Order system: Q System Safety stock and reordering level Periodic Review system: P System Safety stock and review period Single time purchasing system

Selective Inventory Controls

ABC analysis: based on consumption value VED analysis: based on importance of item FSN analysis: based on rate of consumption SDE analysis: based on availability of item HML analysis: based on unit price of item XYZ analysis: based on annual stock value

100 90 60

C O N S U M P T I O N

Pareto analysis
C B

A 10 20 70 Number of items

VED vrs. ABC matrix

Vital A B C Tight control Moderate stock High stock Essential Moderate stock Moderate stock Moderate stock Desirable Almost no stock Very low stock Low stock

Control process
Activity Group I Group II Group III Control Tight moderate loose Forecast Accurate estimate rough Quantity Exact exact estimated Reports Weekly monthly quarterly Follow up Maximum periodical exception

Codification of items
Enables Computerized operation Reduction in variety of items Prevents duplication of items Accurate identification of items Helps sorting of items Standardization of items Simplification of operation

Code is two part code: operation code and control code:

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

Coding logic
Operation Code 1 plant or unit 2 equipment 3 common item 4 spares 5 material class 6 specifications 7 specifications 8 location 9 location 10 check digit Control Code 11 VED / ABC 12 XYZ / FSN 13 EOQ 14 ROL 15 price 16 preservation 17 handling 18 unit measure 19 a/c code 20 a/c code 6-9 > Bin number