Inventory Management
:STOCK, STOCK, BEAUTIFUL STOCK
:PILES ON THE SHOP FLOOR AND THE
WARE-HOUSE AND MORE IN THE DOCK.
:SOME OF IT ANICIENT, SOME OF IT NEW
:ALAS AND TOMORROW ANOTHER LOT IS
DUE….
-- UNKNOWN AUTHOR
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
Departmental Orientation
Towards Inventory
• Marketing
– Sell the product
– Good customer service
– Large inventory
Departmental Orientation
Towards Inventory
• Production
– Make the product
– Efficient lot sizes
– Large inventory
Departmental Orientation Towards
Inventory
• Purchasing
– Buy the required materials
– Low cost per unit
– Large inventory
Departmental Orientation
Towards Inventory
• Finance
– Provide working capital
– Efficient use of capital
– Low inventory
Goals of Inventory Management
• Maximize customer service (this requires carrying
substantial inventory).
• Minimize inventory investment (this requires
carrying little inventory).
– Customer service must be a strategic issue.
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
Inventory Costs
• Carrying cost or Holding cost
• Ordering cost
• Shortage costs
Carrying cost
•
•
•
•
•
•
•
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Cost of storage facilities
Handling cost
Taxes
Insurance
Deterioration
Obsolescence
Shrinkage
Cost of capital
Ordering Costs
• Preparation of purchase
requisition/order
• Mail
• Expediting, including fax, telephone
• Transportation
• Receiving
• Put away
• Updating inventory records
• Paying invoice
S HORTAGE C OST

Costs arising out of pushing the order back
and rescheduling the production system to
accommodate these changes

Rush purchases, uneven utilisation of
available resources and lower capacity
utilisation

Missed delivery schedules leading to
customer dissatisfaction and loss of good
will

The effects of shortage are vastly intangible,
it is indeed difficult to accurately estimate
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?
The Inventory Order Cycle
Inventory Level
Order qty, Q
Demand
rate
Reorder point, R
0
Lead
time
Order
Order
Placed
Received
Lead
Time
time
Order
Order
Placed
Received
EOQ M ODEL
A
GRAPHICAL
REPRESENTATION
Cost of Inventory
Sum of the two costs
Total cost of carrying
Minimum Cost
Total cost of ordering
Economic
Order Qty.
Level of Inventory
EOQ Model
• Balance holding cost against ordering
costs
• Calculate the optimal EOQ:
2
D
S
Q
=
C
h
*
•No of orders per year = D/Q*
Inventory Control Systems
Continuous Review System
System that keeps track of removals from
inventory
continuously, thus monitoring current levels of
each item
Periodic Review System
Physical count of items made at periodic intervals
Inventory Control Systems
•Continuous review -Fixed order quantity model Two-bin system
-Less responsive to change in demand
-Difficulty of ordering of multiple items from same
supplier
Periodic Review - Fixed time period model
C ONTINUOUS R EVIEW (Q)
S YSTEM
AN
Inventory Position
Physical Inventory
Q
Inventory Level
ILLUSTRATION
ROP
Mean Demand during LT
SS
Safety Stock
L
Time
Fixed Order Quantity Model
Reorder = Expected demand
point
during lead time
+ Safety
stock
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.
P ERIODIC R EVIEW (P)
S YSTEM
AN
Q2R
QR
Q3R
ILLUSTRATION
Inventory Position
Physical Inventory
Order Up to Level
Inventory Level
S
SS
Safety Stock
R
2R
3R
L
Time
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.
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.
Single-Bin System
• Special case of fixed time period model.
• 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.
ABC Classification System
Classifying inventory according to
some measure of importance and
allocating control efforts accordingly.
A - very important
B - mod. important
C - least important
High
A
Annual
Rs volume
of items
B
C
Low
Few
Many
Number of Items
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.
A LTERNATIVE C LASSIFICATION S CHEMES

ABC Classification (on the basis of consumption value)

XYZ Classification (on the basis of unit cost of the item)


FSN Classification (on the basis of movement of inventory)


Fast Moving - Slow Moving
- Non-moving
VED Classification (on the basis of criticality of items)


High Unit cost - Medium Unit cost - Low unit cost
Vital - Essential - Desirable
On the basis of sources of supply

Imported - Indigenous (National Suppliers)- Indigenous
(Local Suppliers)
I NVENTORY T URNOVER
AND
S ERVICE L EVELS
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.
Simple physical techniques may
provide more economical
control of inventories.