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  • Sir, thank you for a very elaborate and understandable presentation. Do you have similar slide shows or discussion on Advance procurement management and how to utilize the tools to improve organizational procurement activity, making the ordering on right time, achieving prompt deliveries, etc etc. Please share your view to my comment on my email ID thahir554@gmail.com
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  • 1. Managing Inventory for Profit Maximisation Anand Subramaniam
  • 2. Key points
    • Inventory Management Overview & Controls
    • Material Flows
    • Inventory Planning Models
    • Inventory Cost
    • Economic Ordering Cost
    • Minimum Quantity Calculation
    • Safety Stock
    • Inventory Counting
    • ABC Classification
  • 3. Inventory Management Overview
  • 4.
    • To achieve satisfactory levels of customer service whilst keeping inventory costs within reasonable bounds.
    Overall Objective of Inventory Mngt.
  • 5.
    • Raw material
    • Work-in-progress
    • Maintenance / Repair / Overhaul (MRO) supply
    • Finished goods
    Types of Inventory
  • 6. Inventory Classifications Inventory Process stage Demand Type Number & Value Other Raw Material WIP Finished Goods Independent Dependent A Items B Items C Items Maintenance Repair Overhaul .
  • 7.
    • Maximise inventory turnover
    • Minimise damage and waste while in inventory
    • Minimise handling and storage
    • Minimise out of stock situations (stockouts)
    • Minimise the after “best before date” cases
    • Minimise engineering/design/customer changes
    • Minimise time from request to shipping
    • Minimise ordering costs from producer to stock
    • Minimise ‘interest’ costs of holding materials
    Inventory Management Objectives
  • 8. What are the functions of Inventory?
    • Smooth seasonal production requirements
    • Protect against stockouts
    • Hedge against price increases
    • To ”decouple” or separate various parts of the production process
    • To provide a stock of goods that will provide a “selection” for customers
    • To take advantage of quantity discounts
  • 9.
    • Where should stores be placed & Why
    • What should be stored there & Why
    • How much of an item should be stored & Why
    • How much safety stock should be stored & Why
    • How long before an order is placed (safety time)
    • How to find and keep track of what is stored
    • How to move/use items from different stores
    • What is the Min / Max for each item & Why
    Decisions to Make
  • 10.
    • Level of customer service
    • Costs of ordering inventories
    • Cost of carrying inventories
    • Good personnel selection, training, and discipline
    • Tight control of incoming shipments
    • Effective control of all goods leaving the facility
    Inventory Controls
  • 11.
    • Inventory is a significant asset and for many companies the largest asset.
    • Inventory is central to the main activity of merchandising and manufacturing companies.
    • Mistakes in determining inventory cost can cause critical errors in financial statements.
    • Inventory must be protected from external risks ( such as fire and theft) and internal fraud by employees.
    Why inventory controls are important?
  • 12.
    • If merchandise inventory is overstated
    • Cost of merchandise sold is . . understated
    • Gross profit and net income are . . overstated
    • Total stockholders’ equity is . . overstated
    Effect of inventory errors on Financials STOCK-HOLDERS’ EQUITY Merchandise Inventory Cost of Merchandise Sold ASSETS COSTS & EXPENSES Net Income REVENUES LIABILITIES
  • 13.
    • Carrying Too Much Inventory
    • Increased overhead costs
    • Increased financial holding costs
    • Increased risk of loss of market value
    • Decreased inventory flexibility
    • Increased inventory shrinkage
    • Carrying Too Little Inventory
    • Increased risk of lost sales
    • Increased ordering costs
    • Increased risk of supplier price increases
    • Increased exposure to non delivery
    • Decreased bulk order discounts
    Inventory Management Challenges
  • 14.
    • Lead time : time interval between ordering and receiving the order
    • Holding (carrying) costs : cost to carry an item in inventory for a length of time, usually a year
    • Ordering costs : costs of ordering and receiving inventory
    • Shortage costs : costs when demand exceeds supply
    • Independent demand - demand for item is independent of demand for any other item
    • Dependent demand - demand for item is dependent upon the demand for some other item
    Inventory Terms
  • 15.
    • What is on hand and where?
    • Who wants it and how much do they require?
    • How much is on order and who from?
    • When will it arrive?
    • What is Available To Promise (ATP)?
    • What were your past Stock Holdings?
    • What were your past sales?
    Does your current system tell you…..
  • 16.
    • Allow you to create a demand forecast
    • Advise you of the current lead time
    • Calculate your manufacturing lead time
    • Allow you to classify inventory items into ABC classes
    • Let you keep an eye on your business while on business trips
    Does your current system also…..
  • 17. Material Flow
  • 18. Manufacturing Suitability Process Discrete Make to Stock Consumer Packaged Goods Batch Food Products Pharmaceuticals Oil & Gas Process Repetitive Electronic Components Configurable Products Make to Order Assemble to Order Personal Computers Automotive Components Aerospace Project Engineer to Order Custom Products & Equipment
  • 19. Material Flow Cycle
  • 20.
    • Run time : Job is at machine and being worked on
    • Setup time : Job is at the work station, and the work station is being "setup."
    • Queue time : Job is where it should be, but is not being processed because other work precedes it.
    • Move time : The time a job spends in transit
    • Wait time : When one process is finished, but the job is waiting to be moved to the next work area.
    • Other: Moving stock from delivery to the actual warehouse shelves.
    Other Wait Time Move Time Queue Time Setup Time Run Time Input Cycle Time Output Material Flow Cycle - Details
  • 21. Inventory Planning Models
  • 22.
    • Fixed order-quantity models - EOQ
    • Probabilistic models
    • Fixed order-period models
      • Minimum Quantity
      • Safety Stock
    • Min / Max models
    Help answer the inventory planning questions! Inventory Models
  • 23. Inventory Cost
  • 24.
    • Holding costs - associated with holding or “carrying” inventory over time
    • Ordering costs - associated with costs of placing order and receiving goods
    • Setup costs - cost to prepare a machine or process for manufacturing an order
    Inventory Costs
  • 25.
    • Obsolescence
    • Insurance
    • Extra staffing
    • Interest
    • Pilferage
    • Damage
    • Warehousing
    Holding / Carrying Costs
  • 26.
    • More units must be stored if more are ordered
    Purchase Order Description Qty. Microwave 1 Order quantity Why Holding Costs Increases? Purchase Order Description Qty. Microwave 1000 Order quantity
  • 27.
    • Category
    • Housing costs (building rent, depreciation, operating cost, taxes, insurance)
    • Material handling costs (equipment, lease or depreciation, power, operating cost)
    • Labor cost from extra handling
    • Investment costs (borrowing costs, taxes, and insurance on inventory)
    • Pilferage, scrap, and obsolescence
    • Overall carrying cost
    • Cost as a
    • % of Inventory Value
    • 6% (3 - 10%)
    • 3% (1 - 3.5%)
    • 3% (3 - 5%)
    • 11% (6 - 24%)
    • 3% (2 - 5%)
    • 26%
    Inventory Holding Costs (Example)
  • 28.
    • Supplies
    • Forms
    • Order processing
    • Clerical support
    Order Costs
  • 29.
    • Cost is spread over more units
    • Example: You need 1000 microwave ovens
    Why Order Costs Decreases? Purchase Order Description Qty. Microwave 1 Purchase Order Description Qty. Microwave 1 Purchase Order Description Qty. Microwave 1 Purchase Order Description Qty. Microwave 1 1 Order (Postage $ 0.33) 1000 Orders (Postage $330) Order quantity Purchase Order Description Qty . Microwave 1000
  • 30.
    • Clean-up costs
    • Re-tooling costs
    • Adjustment costs
    Setup Costs
  • 31.
    • Holding costs - associated with holding or “carrying” inventory over time
    • Ordering costs - associated with costs of placing order and receiving goods
    • Setup costs - cost to prepare a machine or process for manufacturing an order
    Inventory Costs
  • 32. Economic Order Quantity
  • 33.
    • How much should you order?
    • Balances cost of ordering too much, too little
    • Too much – carrying costs – hold more
    • Too little – ordering costs – order more
    • Minimize annual costs of holding and ordering
    Why EOQ?
  • 34.
    • What must firms balance?
    • EOQ attempts to answer what questions?
      • How much inventory should we order?
      • When do we place the inventory order ?
    Economic Order Quantity - EOQ costs carrying too much inventory costs carrying too little inventory
    • EOQ attempts to balance these costs:
      • overhead costs, holding costs,
      • risk of lost market values, shrinkage
  • 35. A = The annual usage in units S = The overhead cost of placing one order C = The unit cost i = The carrying cost rate What is the formula for EOQ? What do the terms mean? Calculating EOQ EOQ iC AS 2 
  • 36. C O S T ORDER QUANTITY E.O.Q . ORDER PLACEMENT/ SETUP COST STOCK HOLDING COST Economic Batch Quantity
  • 37. Minimum Quantity Calculation
  • 38. When do we place the inventory order? What is the formula?
    • Define Lead Time:
      • time lag between initiating a purchase order and when inventory is delivered and ready for sale.
    Minimum Quantity Calculation Minimum Quantity = Average lead time in days x Average daily sales + Safety Stock
  • 39. TIME S T O C K L E V E L SAFETY STOCK LEVEL (SS) MQ LT USAGE ( U) = 10 UNITS / DAY LEAD TIME ( LT) = 5 DAYS SAFETY STOCK (SS) = 20 UNITS Minimum Quantity (MQ) = SS + ( LT x U ) = 20 + ( 5 X 10 ) = 70 UNITS MQ = user defined 20 40 70 Minimum Quantity - Example
  • 40.
    • Minimum Quantity - When the quantity on hand of an item drops to this amount, the item is reordered
    • Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
    • Service Level - Probability that demand will not exceed supply during lead time.
    When to Reorder with EOQ Policy
  • 41. Safety Stock
  • 42.
    • Safety stock and safety lead time are both hedges .
    • Safety lead time is more based on the uncertainty in the timing rather than the quantity.
    • Safety stock tends to be used in MRP where uncertainty about quantities is the problem – scrap.
    Safety Stock & Safety Lead Times
  • 43.
    • Not all demand is dependent – spares may have a service requirement that has an independent demand.
    • Variable lead times form suppliers due to uncertainty.
    • Firms may experience machine breakdowns, scrap or last minute customer changes .
    Safety Stock Reasons - Components
  • 44. LT Time Expected demand during lead time Maximum probable demand during lead time MQ Quantity Safety stock Determining Safety Stock
  • 45.
    • Safety stock set high because of a one time event
    • Safety stock still active on an obsolete item
    • Safety stock levels inconsistent.
    Safety Stock Challenges
  • 46. EOQ MQ Safety Stock Inventory (Units) 3 days 6 days 9 days 12 days Average Lead Time (3 days) MQ with Safety Stock EOQ, Minimum, Safety Stock Levels
  • 47. Inventory Counting
  • 48.
    • Cyclical / Perpetual Inventory System
    • A system that keeps track of removals from inventory continuously, thus monitoring current levels of each item
    • Periodic System
    • A system that physical count of items made at periodic intervals
    Inventory Counting Systems
  • 49.
    • Physically counting a sample of total inventory on a regular basis
    • Used often with ABC classification
      • Items counted most often (e.g., daily)
    Cycle Counting Systems
  • 50.
    • Eliminates shutdown and interruption of production necessary for annual physical inventories
    • Eliminates annual inventory adjustments
    • Provides trained personnel to audit the accuracy of inventory
    • Allows the cause of errors to be identified and remedial action to be taken
    • Maintains accurate inventory records
    Advantage of Cycle Counting
  • 51. ABC Classification
  • 52.
    • Classifying inventory according to some measure of importance and allocating controls efforts accordingly.
      • A - very important
      • B - mod. important
      • C - least important
    Annual $ volume of items A B C High Low Few Many Number of Items ABC Classification Systems
  • 53.
    • Divides on-hand inventory into 3 classes
      • A class, B class, C class
    • Basis is usually annual $ volume
      • $ volume = Annual demand x Unit cost
    • Policies based on ABC analysis
      • Develop class A suppliers more
      • Give tighter physical control of A items
      • Forecast A items more carefully
    ABC Analysis – Basis & Policy
  • 54. % of Inventory Items Classifying Items as ABC 0 20 40 60 80 100 0 50 100 % Annual $ Usage A B C Class % $ Vol % Items A 80 15 B 15 30 C 5 55
  • 55.
    • Inventory Management Overview & Controls
    • Inventory Planning Models
    • Inventory – EQO, Min / Max, Safety Stock
    • Inventory Counting / ABC Classification
    Recap