2. :STOCK, STOCK, BEAUTIFUL STOCK
:PILES ON THE SHOP FLOOR and
in WARE-HOUSE and MORE IN
THE DOCK
:SOME OF IT ANICIENT, SOME OF IT
NEW
:ALAS and TOMORROW ANOTHER LOT
IS DUE….
-- UNKNOWN AUTHOR
3. Functions of Inventory
• Decouple components of the operations
and distribution
• Uncertainties/variations in demand
• Flexibility in production smoothing
• Economies of scale in purchase and mfg
• To help hedge against price increases
• To take advantage of order cycles
10. Inventory Hides Problems Areas
Work in
process
queues
(banks)
Change
orders
Engineering design
redundancies
Vendor
delinquencies
Scrap
Design
backlogs
Machine
downtime
Decision
backlogs
Inspection
backlogs
Paperwork
backlog
Tip of the Iceberg Analogy
11. Goals of Inventory Management
• Maximize customer service (this requires
carrying substantial inventory).
• Minimize inventory investment (this requires
carrying little inventory).
• Customer service takes absolute precedence.
– Customer service must be a strategic issue.
– Leading edge discussion now centers on types of
customer service
• Shortened delivery time
• Speed to market
• Design flexibility
12. Types of Inventories
• Raw materials
• Components
• Work-in-process
• Finished goods
• Vendor inventories
• Non-moving/slow moving stock
• Safety stock
• In-transit inventories
• Service parts/Consumables
14. Holding Cost
• Cost of storage facilities
• Handling cost
• Taxes
• Insurance
• Deterioration
• Obsolescence
• Shrinkage
• Cost of capital
15. Ordering Costs
• Preparation of purchase requisition/order
• Mail
• Expediting, including fax, telephone
• Transportation
• Receiving
• Put away
• Updating inventory records
• Paying invoice
16. Setup Costs
• Order preparation
• Stock picking
• Setup
• Inspection
• Waiting/Queue-time
• Order close out
• Updating inventory records
17. Inventory Control Systems
• How often should the assessment of stock
on hand be made?
• When should a replenishment order be
placed?
• What should be the size of the
replenishment order?
18. Inventory Counting Systems
• Periodic System
Physical count of items made at periodic intervals
• Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus monitoring
current levels of each item
19. Inventory Control Systems
•Fixed order quantity model (continuous
review)
•Fixed time period model (periodic review)
•Visual system
Two-bin system
Single bin system
•ABC classification system
20. The Inventory Order Cycle
Demand
rate
0 TimeLead
time
Lead
time
Order
Placed
Order
Placed
Order
Received
Order
Received
InventoryLevel
Reorder point, R
Order qty, Q
21. EOQ Model Cost Curves
Slope = 0
Total Cost
Ordering Cost = (D/Q)S
Order Quantity, Q
Annual
cost (Rs)
Minimum
total cost
Optimal order
Qopt
Carrying Cost = (Q/2)H
22. Notation
• D = annual demand
• C = per-unit cost
• h = inventory holding rate (%)
• S = order cost
• Q = order quantity
• R = reorder point
• SS = safety stock
• LT = lead time
23. EOQ Model
• Balance holding cost against ordering
costs
• Calculate the optimal EOQ:
* 2DS
Q
Ch
=
•No of orders per year = D/Q*
•Time between orders = Q*/D
24. Fixed Order Quantity Model
Reorder = Expected demand + Safety
point during lead time stock
25. Fixed Order Quantity Model
Reorder
point, R
Q
0
Inventorylevel
L L
Time
Safety stock
26. Fixed Time Period Model
• Reviewed at fixed specified time interval.
• Place an order for a quantity that, when added
to the quantity on hand, will equal a
predetermined maximum level.
• Independent demand is the usual situation.
• Difficult to record withdrawals and additions
from stock.
• Groups of items are purchased from a common
supplier.
• Items that have limited shelf life.
27. Fixed Time Period Model
• Small tools, manufacturing supplies.
• Common commercial parts such as nuts,
bolts, washers.
• Office supplies.
• Perishable items such as dairy products,
fruits and vegetables.
• Chemicals, solvents used in the
manufacturing process.
28. Fixed Time Period Model
0
Inventorylevel
L L
Time
Safety stock
Review Time
29. Two-Bin System
• Special case of fixed order quantity model.
• Amount of stock equivalent to the order point is
physically segregated into a second bin and is then
sealed.
• When all the open stock has been used up, the sealed
bin is opened and a new order is placed.
• Practical method for keeping control of low-value
items.
• Without adequate training this system can be abused.
• Quantity in the second bin should be reviewed from time
to time.
30. Single-Bin System
• Stock is periodically checked and each item is
ordered to a pre-established stock level.
• Works well on floor stocks located near the
point of use, like large grocery stores.
31. ABC Classification System
Classifying inventory according to
some measure of importance and
allocating control efforts accordingly.
AA - very important
BB - mod. important
CC - least important
Annual
Rs volume
of items
AA
BB
CC
High
Low
Few Many
Number of Items
32. ABC Analysis
• Pareto noted that many situations are dominated by a
relatively few vital elements.
• Controlling the relatively vital few will go a long way
toward controlling the situation.
• Applying the ABC principle to inventory management
involves:
– Classifying the inventory items on the basis of relative
importance.
– Establishing different controls for different classifications with
the degree of control being commensurate with the ranked
importance of each classification.
33. Inventory Turnover and Service Levels
Inventory turnover is the measure of how
well the business is managing its
inventory. It shows how many times a
year the inventory is turning(or moving)
through the organisation. The higher the
turnover,the better.However there is a
larger probability
That stock may not be available when the
customer needs it.
34. Inventory Turnover …..
• Inventory turnover in a Retail business
Total sales/Actual inventory
• Inventory turnover in a Manufacturing
business
Cost of Goods sold/Actual inventory
