INVENTORY
PLANNING AND
CONTROL
INVENTORY
Few examples for inventory that we see in everyday
life – Napkin/Tissue getting replaced.
A refrigerators at your house, where you store food
and drink necessary for a period.
Water Tank that stocks that water
Look at all above situations and you will find out
that Inventory means stocking.
What is inventory ?
Inventory is known as stock.
We do inventory for:
1.Rawmaterils
2.work-in-progress
3.finished goods
For example
Manufacturing company will have the stock of
materials
Tax company will have the stock information.
The role of inventory
Follow the example of a refrigerator:
1. Increased the speed – if guest arrives, we can respond
to the need quickly with the stored items.
2. Increase flexibility – helps to arrange different menu
according to the stock and avoid last minute
purchase.
3. Increases quality – often we purchase and stock, due
to the great quality of items.
4. Cost- there is a system of discounts, when purchasing
higher quantity
5. dependability – helps to avoid out of stock.
Advantages and disadvantages of
inventory
Advantages
Disadvantages
Provides security
It is involving working capital
Can manage high demand
It incurs storage costs
Satisfy customers with dependability
Consuming time
Can be helpful for planning and control
Inventory can be damaged or deteriorate
Smoothens the supply and demand
relationship
Inventory uses the space
Avoid shortages
Inventory costs admin and insurance costs
Avoid outdates items
Value depreciation of inventory
The importance of inventory
Inventory is used to balance relationship between
the supply and demand.
Proper inventory satisfies the customer.
If supply is limited or less, the inventory is a must
situation for smooth operation.
When supply increases, the rate of demand and
inventory increases. When demand increases,
the rate of supply and decreases.
Types of inventory
There five types of inventory
1. Buffer inventory – something that smoothens
the demand and supply.
For example supermarket, where demand
cannot be predicted exactly.
So keeping a minimum level of inventory is kept,
to avoid the shortages.
So the inventory that keeps a minimum level of
inventory is know buffer inventory.
Cycle inventory
Cycle inventory happens, because one or more
stages in the process cannot supply all the
items it produces at the same.
For example ABC bakery making three types of
bread and customers love it. However, the
bakery cannot process three types of breads
at the same time. Because it is a batch
process.
De-coupling inventory
• It happens with process layout. Where
transformed resources move between
departments.
This increases the speed of process. De-coupling
inventory is used allow the work stations or
processes to work independently.
Anticipation inventory
• it is used to adjust with demand variations or supply
variations.
• Here, goods produced ahead of demand. It is used when
demand changes are too high.
Pipeline inventory
This inventory exists because material cannot be transported
immediately, once ordered. For example a supermarket
ordering fixed amount of items from the suppliers and
suppliers first allocate the same in their ware house, pack,
load and send to the supermarket. So pipeline inventory is
allocated amount . The moment it is allocated, it becomes
the inventory of the supermarket.
What are the day-to-day inventory
decisions
How much to order
When to order
How to control
I. How much to order
Refer the example of fridge, we order items as it is
finished.
So here the order quantity is basic concern. We take
the decision of how much to order based on the
cost factors:
1. Cost of purchase
2. Cost of stock
Inventory costs
• cost of placing orders- example clerical works,
documentation, transactions arrangement of pay.
• Price-discount costs – large order brings big
discounts and vice versa.
• Stock-out-cost- no stock will affect the customer
satisfaction.
• working capital lost- we place order and pay
money to the suppliers. So this money can be
retrieved only when customer pays. Opportunity
cost and interest to the bank for borrowing
happens here.
Storage cost- for storing, renting,
lighting, cooling, insurance
• Obsolescence cost – items may lost, damage
or get old fashioned.
• Operating in-efficiency – high inventory hide
operational problems.
There are two methods for taking the
decision as how much to order:
• EOQ OR Economic Order Quantity formula
• EBQ – THE ECONOMIC BATCH QUANTITY
1. EOQ
This is the formula to decide, how much of any
particular item to be ordered. This is to
balance the advantages and disadvantages of
inventory. To do the EOQ we should find out
the cost of stocking, cost of placing order.
Holding cost
• working capital cost
• Storage cost
• Obsolescence cost
Order cost
cost of placing the order
Price discount cost
2. Economic Batch quantity or EBQ
The amount of items to be produced by a
machine or process that is supposed to
minimize the cost is EBQ.
II. When to place the order
Re-order – point
The point of time at which more items ordered,
usually it is calculated to make sure that
inventory doesn’t run out before the next
batch of inventory items.
Lead-time-usage
Having the safety stock to manage the
shortages.
Methods for fixing when to order:
1. Continuous review approach – review the
stock continuous, order when the stock
reaches the re-order point.
2. Periodic review
Order for stock at fixed or regular times.
Two-bin and three-bin systems
This is a system to track the inventory.
Two bin – storing the reorder point quantity +
the safety inventory in the second bin and
using from the first bin. So when first bin
empties the ordering happens.
Three –bin
Safety inventory + reorder point + items used
Inventory control
There are 2 steps:
1. Find out the difference in value between different stocked items
or prioritize
2. Invest in information processing system
Inventory priority
Many items are having different priorities, some items are more
important than others. Some items value will be high, so high
inventory will be expensive.
Methods for prioritizing :
Usage value – quantity of item used multiplied by price
Pareto law- A 20% of something causing 80% of something else.
ABC inventory control
• Class A – High usage items
• Class B – Medium Usage items
• Class C- Low-usage items
2. Inventory information systems
More inventories are happening by
computerized systems. For example bar code
reading, point-of-sale recording e.t.c
1. Updating the stock records
Any time the transaction happens the position, status,
value of stock is changes this is to be recorded.
2. Generating order
Deciding how much to order and when to order by
computer systems.
3. Generating inventory reports
Inventory control systems can generate regular reports of
stock value or different items stored.
4.Forecasting
The inventory control systems can compare actual
demand against the forecast.