INVENTORY

MANAGEMENT

By :

Kuldeep Uttam
Production and Industrial Engineer
Outline
Elements of Inventory Management

Inventory and Supply Chain Management
Inventory Control Systems
Economic Order Q...
What is inventory?
A physical resource that a
firm holds in stock with
the intent of selling it or
transforming it into a
...
Types of Inventories
Raw materials

Purchased parts and supplies
Finished Goods
Work-in-process (partially completed produ...
Nature of Inventories
Raw Materials – Basic inputs that are converted into finished product
through the manufacturing proc...
Inventory and Supply Chain Management
Bullwhip effect

• demand information is distorted as it moves away from
the end-use...
Two Forms of Demand

Dependent
(not used by customer directly)

• Demand for items used to
produce final products
• Tires ...
Inventory and Quality Management

Customers usually perceive quality service as
availability of goods when they want them
...
Inventory Costs
Carrying cost
• cost of holding an item in inventory

Ordering cost
• cost of replenishing inventory
Short...
Inventory Control Systems

Continuous system
(fixed-order-quantity)

Periodic system
(fixed-time-period)

• constant amoun...
Economic Order Quantity (EOQ) Models

EOQ

• We want to determine the optimal number of
units to order so that we minimize...
Assumptions of Basic EOQ Model
Demand is known, constant, and independent

Lead time is known and constant
Order quantity ...
Inventory Order Cycle
Order quantity, Q
Inventory Level

Demand
rate

Reorder point, R

0

Lead
time
Order Order
placed re...
EOQ Cost Model
Co - cost of placing order
Cc - annual per-unit carrying cost

D - annual demand
Q - order quantity

Annual...
EOQ Cost Model
Proving equality of
costs at optimal point

Deriving Qopt

Co D
CcQ
TC =
+
Q
2
Cc
TC - CoD
=
+
Q2
2
Q

-C...
EOQ Cost Model (cont.)
Annual
cost ($)

Total Cost
Slope = 0
CcQ
Carrying Cost =
2

Minimum
total cost

CoD
Ordering Cost ...
Production Quantity Model
An inventory system in which an order is received gradually, as
inventory is simultaneously bein...
Production Quantity Model (cont.)
p = production rate

d = demand rate

Maximum inventory level = Q - Q d
p
=Q1- d
p
Q
d
A...
Quantity Discounts

Price per unit decreases as order quantity
increases

CoD
CcQ
TC =
+
+ PD
Q
2

P = per unit price of t...
Quantity Discount Model (cont.)
ORDER SIZE
0 - 99
100 – 199
200+

PRICE
$10
8 (d1)
6 (d2)

TC = ($10 )
TC (d1 = $8 )

Inve...
Reorder Point
Level of inventory at which a new order is placed

R = dL

where

• d = demand rate per period
• L = lead ti...
Variable Demand with a Reorder Point

Inventory level

Q

Reorder
point, R

0
LT

LT
Time
Inventory level

Reorder Point with a Safety Stock

Q
Reorder
point, R

Safety Stock

0
LT

LT

Time
Classifying Inventory Items
ABC Classification (Pareto Principle)

In any Retail organization there are large numbers of
i...
ABC Analysis
Divides inventory into three classes based on
Consumption Value
Consumption Value = (Unit price of an item) (...
ABC Analysis
Item
Stock
Number
#10286

Percent of
Number of
Items
Stocked
20%

Annual
Volume
(units)

x

Unit
Cost

Annual...
ABC Analysis
Item
Stock
Number

Percent of
Number of
Items
Stocked

Annual
Volume
(units)

x

Unit
Cost

=

Annual
cons.
v...
% of Consumption Value

ABC Analysis
A Items

80 –
70 –
60 –
50 –

40 –
30 –
20 –

B Items
C Items

10 –
|

|

|

|

|

|
...
Inventory Management Policy
A Items:
very tight control, complete and accurate records, frequent review via EOQ model.
B I...
References:
• Cox, James F., III, and John H. Blackstone, Jr. APICS
Dictionary. 9th ed. Falls Church VA: American Producti...
Thank You
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Inventory management

  1. 1. INVENTORY MANAGEMENT By : Kuldeep Uttam Production and Industrial Engineer
  2. 2. Outline Elements of Inventory Management Inventory and Supply Chain Management Inventory Control Systems Economic Order Quantity Models Reorder Point Classification of Inventories: ABC, VED
  3. 3. What is inventory? A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Purpose of inventory management • How many units to order? • when to order? discount
  4. 4. Types of Inventories Raw materials Purchased parts and supplies Finished Goods Work-in-process (partially completed products ) Items being transported Tools and equipment
  5. 5. Nature of Inventories Raw Materials – Basic inputs that are converted into finished product through the manufacturing process Work-in-progress – Semi-manufactured products need some more works before they become finished goods for sale Finished Goods – Completely manufactured products ready for sale Supplies – Office and plant materials not directly enter production but are necessary for production process and do not involve significant investment.
  6. 6. Inventory and Supply Chain Management Bullwhip effect • demand information is distorted as it moves away from the end-use customer(forecast) • higher safety stock inventories are stored to compensate Seasonal or cyclical demand Sale of umbrella , dominos sale in weekend Inventory provides independence from vendors Take advantage of price discounts Inventory provides independence between stages and avoids work stoppages WIP inventories
  7. 7. Two Forms of Demand Dependent (not used by customer directly) • Demand for items used to produce final products • Tires stored at a plant are an example of a dependent demand item Independent • Demand for items used by external customers • Cars, computers, and houses are examples of independent demand inventory
  8. 8. Inventory and Quality Management Customers usually perceive quality service as availability of goods when they want them Inventory must be sufficient to provide highquality customer service
  9. 9. Inventory Costs Carrying cost • cost of holding an item in inventory Ordering cost • cost of replenishing inventory Shortage cost • temporary or permanent loss of sales when demand cannot be met
  10. 10. Inventory Control Systems Continuous system (fixed-order-quantity) Periodic system (fixed-time-period) • constant amount ordered when inventory declines to predetermined level • order placed for variable amount after fixed passage of time
  11. 11. Economic Order Quantity (EOQ) Models EOQ • We want to determine the optimal number of units to order so that we minimize the total cost associated with the purchase, delivery and storage of the product. Basic EOQ model Production quantity model
  12. 12. Assumptions of Basic EOQ Model Demand is known, constant, and independent Lead time is known and constant Order quantity received is instantaneous and complete No shortage is allowed
  13. 13. Inventory Order Cycle Order quantity, Q Inventory Level Demand rate Reorder point, R 0 Lead time Order Order placed receipt Lead time Order Order placed receipt Time
  14. 14. EOQ Cost Model Co - cost of placing order Cc - annual per-unit carrying cost D - annual demand Q - order quantity Annual ordering cost = CoD Q Annual carrying cost = CcQ 2 Total cost = CoD + Q CcQ 2
  15. 15. EOQ Cost Model Proving equality of costs at optimal point Deriving Qopt Co D CcQ TC = + Q 2 Cc TC - CoD = + Q2 2 Q -C0D 0= 2 Q Qopt = Cc + 2 2CoD Cc CoD CcQ = Q 2 Q2 2CoD = Cc Qopt = 2CoD Cc
  16. 16. EOQ Cost Model (cont.) Annual cost ($) Total Cost Slope = 0 CcQ Carrying Cost = 2 Minimum total cost CoD Ordering Cost = Q Optimal order Qopt Order Quantity, Q
  17. 17. Production Quantity Model An inventory system in which an order is received gradually, as inventory is simultaneously being depleted Also known as non-instantaneous receipt model Now replenishment not at once Assumption • Q is received all at once is relaxed • p - daily rate at which an order is received over time, or production rate • d - daily rate at which inventory is demanded
  18. 18. Production Quantity Model (cont.) p = production rate d = demand rate Maximum inventory level = Q - Q d p =Q1- d p Q d Average inventory level = 12 p CoD CcQ d TC = Q + 2 1 - p 2CoD Qopt = d Cc 1 p
  19. 19. Quantity Discounts Price per unit decreases as order quantity increases CoD CcQ TC = + + PD Q 2 P = per unit price of the item where D = annual demand
  20. 20. Quantity Discount Model (cont.) ORDER SIZE 0 - 99 100 – 199 200+ PRICE $10 8 (d1) 6 (d2) TC = ($10 ) TC (d1 = $8 ) Inventory cost ($) TC (d2 = $6 ) Carrying cost Ordering cost Q(d1 ) = 100 Qopt Q(d2 ) = 200
  21. 21. Reorder Point Level of inventory at which a new order is placed R = dL where • d = demand rate per period • L = lead time
  22. 22. Variable Demand with a Reorder Point Inventory level Q Reorder point, R 0 LT LT Time
  23. 23. Inventory level Reorder Point with a Safety Stock Q Reorder point, R Safety Stock 0 LT LT Time
  24. 24. Classifying Inventory Items ABC Classification (Pareto Principle) In any Retail organization there are large numbers of inventories to be maintained. It is not practical to have very stringent inventory control system for each & every item. So with the modus of having an effective Purchase & stores control we implement ABC Inventory Classification model Known as Always Better Control (ABC) based upon Pareto rule ( 80/20 rule)
  25. 25. ABC Analysis Divides inventory into three classes based on Consumption Value Consumption Value = (Unit price of an item) (No. of units consumed per annum)  Class A - High Consumption Value  Class B - Medium Consumption Value  Class C - Low Consumption Value
  26. 26. ABC Analysis Item Stock Number #10286 Percent of Number of Items Stocked 20% Annual Volume (units) x Unit Cost Annual Consump = tion value Percent of Annual consumpti on value Class 1,000 $ 90.00 $ 90,000 38.8% #11526 500 154.00 77,000 33.2% A #12760 1,550 17.00 26,350 11.3% B 72% A 23% #10867 #10500 30% 350 42.86 15,001 6.4% B 1,000 12.50 12,500 5.4% B
  27. 27. ABC Analysis Item Stock Number Percent of Number of Items Stocked Annual Volume (units) x Unit Cost = Annual cons. value Percent of Annual cons. value Class #12572 600 $ 14.17 $ 8,502 3.7% C #14075 2,000 .60 1,200 .5% C 100 8.50 850 .4% 5% C #01307 1,200 .42 504 .2% C #10572 250 .60 150 .1% C $232,057 100.0% #01036 50% 8,550
  28. 28. % of Consumption Value ABC Analysis A Items 80 – 70 – 60 – 50 – 40 – 30 – 20 – B Items C Items 10 – | | | | | | | | 10 20 30 40 50 60 70 80 % of inventory items | | 90 100
  29. 29. Inventory Management Policy A Items: very tight control, complete and accurate records, frequent review via EOQ model. B Items: less tightly controlled, good records, regular review C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder Some time with the view of doing Lean inventory management Within ABC category VED ( Vital , essential & desirable factor) is introduced with the view of further having effective control of inventory on the basis if its being critical. V (Vital) is the inventory where neither Substitute nor Variation Gap is allowed . E (Essential) is the inventory which allows either of the one to be changed D (Desirable ) is the one which can have variation in both of the parameters
  30. 30. References: • Cox, James F., III, and John H. Blackstone, Jr. APICS Dictionary. 9th ed. Falls Church VA: American Production and Inventory Control Society, 1998. • Anupindi, Ravi, et al. Managing Business Process Flows: Principles of Operations Management. 2nd ed. Upper Saddle River, NJ: Pearson Prentice Hall, 2004. • Meredith, Jack R., and Scott M. Shafer. Operations Management for MBAs. 2nd ed. New York: John Wiley & Sons Inc., 2002. • Stevenson, William J. Production/Operations Management. 8th ed. Boston: Irwin/McGraw-Hill, 2005.
  31. 31. Thank You
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