Inventory management

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Inventory management

  1. 1. … The Inventory Management & Control in Production & Operation… *** Flow of Presentation *** K h a r g h a r Introduction Functions, Importance & Utility Type & Classification Inventory Control & Control Tools Tools of Inventory Control Valuation- LIFO, FIFI & Avg. Cost Method Basic Order Quantity & Reorder Point Economic Production Qty. & Qty. Discount Model Presentation By: Namita Shinde J Ranjan Madhu Jaiswal ABC Analysis Just in Time (Japanese Vs. US Approach Conclusion SMBA 30-B Athira Nair (Roll No 79) Rachita Ramjiyani (Roll No 67) Sanjay Kumbhar (Roll No 107) Group -9-
  2. 2. … The Inventory Management & Control in Production & Operation… *** Introduction *** Inventory: Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Inventory System: Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be How much should be ordered When should it to be ordered K h a r g h a r SMBA 30-B Group Relates to EOQ Relates to un certainty -9-
  3. 3. … The Inventory Management & Control in Production & Operation… *** Functions *** Functions : • To maintain independence of supply chain • Anticipated customer demand • Smoothen production requirements • Decouple operations (eliminate sources of disruptions) • Protect against stock-outs • Advantage of order cycles • Hedge against price increases • Little's Law: the average amount of inventory in a system is equal to the product of the average demand rate and the average time a unit is in the system • Advantage of quantity discounts K h a r g h a r SMBA 30-B Group -9-
  4. 4. … The Inventory Management & Control in Production & Operation… *** Importance *** Importance: • Improve customer service • Economies of purchasing • Economies of production • Transportation savings • Hedge against future • Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) • To maintain independence of supply chain K h a r g h a r SMBA 30-B Group -9-
  5. 5. … The Inventory Management & Control in Production & Operation… *** Inventory Management *** Utility: • Track existing inventory • Know what quantity will be needed • Know when these items will be needed • Know how much items will cost K h a r g h a r SMBA 30-B Group -9-
  6. 6. … The Inventory Management & Control in Production & Operation… *** Types *** Types of Inventory: • Raw Materials or Purchased parts/consumables • Works-in-Process (WIP) • Finished Goods or merchandise • Maintenance, Repair and Operating (MRO) • Goods in Transit K h a r g h a r SMBA 30-B Group -9-
  7. 7. … The Inventory Management & Control in Production & Operation… *** Classification *** Classification: •ABC Classification •HML Classification •XYZ Classification •VED Classification •FSN Classification •SDF Classification •GOLF Classification K h a r g h a r •SOS Classification SMBA 30-B Group -9-
  8. 8. … The Inventory Management & Control in Production & Operation… *** Power of Buyers/Customers *** • Types of Inventory Control: • Perpetual Inventory Control System a) used in supermarkets or department storesb) A continuous flow of inventory count is tracked using a point of sale (POS) check out system. c) It manages what is sold and reorder when a reorder point is reached. d) its ability to account for shrinkage (theft) and inventory turnover K h a r g h a r SMBA 30-B Group -9-
  9. 9. … The Inventory Management & Control in Production & Operation… *** Types of Inventory Control *** • Types of Inventory Control: • Periodic Inventory Control System a) used in smaller retailers b) Used to take a physical count of inventory at periodic intervals to replenish the inventory. c) Beneficial for companies that do not have products with UPC or bar codes K h a r g h a r SMBA 30-B Group -9-
  10. 10. … The Inventory Management & Control in Production & Operation… *** Inventory Control Tools *** An optimum inventory level involves three types of costs Ordering costs:- Carrying costs:- • Quotation or tendering • Warehousing or storage • Requisitioning • Handling • Order placing • Clerical and staff • Transportation • Insurance • Receiving, inspecting and storing • Interest • Quality control • Deterioration, shrinkage • Clerical and staff • Evaporation and obsolescence • Taxes • Cost of capital Stock-out cost • Loss of sale • Failure to meet delivery commitments K h a r g h a r SMBA 30-B Group -9-
  11. 11. … The Inventory Management & Control in Production & Operation… *** Inventory Valuing Methods *** An optimum inventory level involves three types of costs First-In, First-Out (FIFO): This method assumes that the first unit making its way into inventory is the first sold. For example, let's say that a bakery produces 200 loaves of bread on Monday at a cost of $1 each, and 200 more on Tuesday at $1.25 each. FIFO states that if the bakery sold 200 loaves on Wednesday, the COGS is $1 per loaf (recorded on the income statement) because that was the cost of each of the first loaves in inventory. The $1.25 loaves would be allocated to ending inventory (appears on the balance sheet). Last-In, First-Out (LIFO): This method assumes that the last unit making its way into inventory is sold first. The older inventory, therefore, is left over at the end of the accounting period. For the 200 loaves sold on Wednesday, the same bakery would assign $1.25 per loaf to COGS, while the remaining $1 loaves would be used to calculate the value of inventory at the end of the period. K h a r g h a r SMBA 30-B Average Cost: This method is quite straightforward; it takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory. In our bakery example, the average cost for inventory would be $1.125 per unit, calculated as [(200 x $1) + (200 x $1.25)]/400. Group -9-
  12. 12. … The Inventory Management & Control in Production & Operation… *** Basic Order Quantity *** Basic Economic Order Quantity Model: Utility: used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory Assumptions: 1. Only one product involved 2. Annual demand requirements are known 3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant 4. Lead time does not vary K h a r g h a r SMBA 30-B 5. Each order is received in a single delivery 6. There are no quantity discounts Group -9-
  13. 13. … The Inventory Management & Control in Production & Operation… *** Reorder Point *** Under the Condition of Certainty: Certainty case of the inventory cycle Inventory level order quantity Q Average inventory = Q/2 0 T1 T3 T2 T4 K h a r g h a r Time SMBA 1. Here the negative slope from Q to T1 represents the inventory being used up 2. T1, T2, T3, T4 represents the replenishment points 3. The inventory varies between 0 and Q 30-B Group -9-
  14. 14. … The Inventory Management & Control in Production & Operation… *** Reorder Point *** K h a r g h a r Cost in RS. Graphical Method to Find EOQ: 0 EOQ Order quantity SMBA 30-B Group -9-
  15. 15. … The Inventory Management & Control in Production & Operation… *** Reorder Point *** K h a r g h a r Under the Condition of Uncertainty: reorder Qm point safety stock time SMBA 30-B Group -9-
  16. 16. … The Inventory Management & Control in Production & Operation… *** Economic Production Quantity *** Economic Production Quantity model (EPQ): Utility: Widely used in production; the reason for this is that capacity to produce a part exceeds the part’s usage or demand rate ( the larger the run size, the fewer the number of runs needed and, hence, the lower the annual setup cost; as long as production continues, inventory will continue to grow; (see formulas below) Assumptions: • Only one item is involved K h a r g h a r • Annual demand is known • Has a constant usage rate • Usage occurs continually, but production occurs periodically SMBA 30-B • The production rate is constant • Lead time does not vary • There are no quantity discounts Group -9-
  17. 17. … The Inventory Management & Control in Production & Operation… *** Power of Buyers/Customers *** Quantity Discount Model: Price reductions for large orders offered to customers to induce them to buy in large quantities; If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders that will result from buying in large quantities against the increase in carrying costs caused by higher average inventories; The buyers goal is to select the order quantity that will minimize total cost (see total cost formula below); K h a r g h a r SMBA 30-B Group -9-
  18. 18. … The Inventory Management & Control in Production & Operation… *** EPQ & RoP *** Quantifications: Annual carrying cost = (Q/2)*H [Q = Order quantity in units, H = Holding (carrying) cost per unit] Annual ordering cost = (D/Q)*S [ D = Demand, S = Ordering cost] Total cost (TC) =(Q/2)*H + (D/Q)*S Total cost curve is U-Shape Length of order cycle = Q/D EPQ= square root[(2DS)/H]*square root[p/(p-u)] K h a r g h a r p=production or delivery rate u=usage rate Reorder Point: ROP=d*LT SMBA 30-B d=demand rate(units per period/day/week) LT=lead time(same units as d) EOQ=square root of (2DS)/H Group -9-
  19. 19. … The Inventory Management & Control in Production & Operation… *** Reorder Point *** Total ordering cost = (annual requirement x per order cost) order size Total carrying cost = average inventory x per unit carrying cost Total cost = total order costs + total carrying cost + Reorder Point: K h a r g h a r Quantity to which inventory is allowed to drop before replenishment order is made Need to order EOQ at the Reorder Point: ROP = D X LT SMBA 30-B D = Demand rate per period LT = lead time in periods Group -9-
  20. 20. … The Inventory Management & Control in Production & Operation… *** ABC Analysis *** ABC Analysis: Used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost,while also providing a mechanism for identifying different categories of stock that will require different management and controls. The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance. K h a r g h a r SMBA 30-B Group -9-
  21. 21. … The Inventory Management & Control in Production & Operation… *** ABC Analysis *** ABC Analysis: A ITEMS: very tight control and accurate records. 'A' items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. B ITEMS: less tightly controlled and good records. 'B' items are important, but of course less important than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items K h a r g h a r C ITEMS: simplest controls possible and minimal records. SMBA 'C' items are marginally important. 30-B Group -9-
  22. 22. … The Inventory Management & Control in Production & Operation… *** ABC Analysis *** ABC Analysis: Example of ABC class are ‘A’ items – 20% of the items accounts for 80% of the annual consumption value of the items. ‘B’ items - 30% of the items accounts for 15% of the annual consumption value of the items. ‘C’ items - 50% of the items accounts for 05% of the annual consumption value of the items K h a r g h a r SMBA 30-B Group -9-
  23. 23. … The Inventory Management & Control in Production & Operation… *** Just In Time *** JIT: An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method able to accurately forecast demand. JIT focuses on.. continuous improvement.. return on investment, quality, and efficiency. K h a r g h a r SMBA 30-B Group -9-
  24. 24. … The Inventory Management & Control in Production & Operation… *** Just In Time *** Benefits: • Uses a systems approach to develop and operate a manufacturing system • Organizes the production process so that parts are available when they are needed. • A method for optimizing processes that involves continual reduction of waste. • Reduce inventory cost. • Lesser storage space. • No wastage, thereby higher profitability. • Defects are identified faster. K h a r g h a r • C0nsistency and improved quality. • Continuous improvement is assured. • Properly defined space for storage . SMBA 30-B Group -9-
  25. 25. … The Inventory Management & Control in Production & Operation… *** Just In Time *** JAPANESE JIT APPROACH U. S. APPROACH • Small size purchasing of raw material • Bulk quantity of raw material . • Inspection of Raw material at supplier’s end. • Inspection of Raw material at buyer’s end. • 2% defect in quality is acceptable. • Supplier is selected based on biding pricing for quoted quality. • Vary from consignment to consignment. • More paper formality as is based on tender system.  Heavy packing in handling of raw materials as bulk purchases. • Zero defect in quality is required. • Supplier is selected based on reasonable pricing as worked out in view quality consideration. • Long term agreement with suppliers. • Less paper formality • Minimum packing in handling of raw materials.  • • Transportation cost is less as supplier’s are located nearby. More suitable for single product system.  Transportation cost is more as supplier’s are scattered. More suitable for multi product system. K h a r g h a r SMBA 30-B Group -9-
  26. 26. … The Inventory Management & Control in Production & Operation… *** Conclusion *** K h a r g h a r SMBA 30-B Group -9-
  27. 27. … The Inventory Management & Control in Production & Operation… K h a r g h a r SMBA 30-B Group -9-

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