Your SlideShare is downloading. ×
  • Like
Inventorycontrol
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Now you can save presentations on your phone or tablet

Available for both IPhone and Android

Text the download link to your phone

Standard text messaging rates apply
Published

 

Published in Business
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
330
On SlideShare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
30
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Inventory Control
  • 2. Inv.Control - ObjectivesInv.Control - Objectives IntroductionIntroduction Purpose of InventoriesPurpose of Inventories Inventory Cost StructuresInventory Cost Structures Independent versus Dependent DemandIndependent versus Dependent Demand Economic Order QuantityEconomic Order Quantity Continuous Review SystemContinuous Review System Periodic Review SystemPeriodic Review System Using P and Q System in PracticeUsing P and Q System in Practice Selective Inventory Control SystemsSelective Inventory Control Systems
  • 3. IntroductionIntroduction Inventory: a stock of materials used toInventory: a stock of materials used to facilitate production or to satisfy customerfacilitate production or to satisfy customer demand.demand. Types of inventoryTypes of inventory – Raw materials (RM)Raw materials (RM) – Work in process (WIP)Work in process (WIP) – Finished goods (FG)Finished goods (FG) – Maintenance, repair & operating supplies (MRO)Maintenance, repair & operating supplies (MRO)
  • 4. A Material-Flow ProcessA Material-Flow Process Work in process Work in process Work in process Finished goods Raw Materials Vendors Customer Productive Process
  • 5. A Water Tank Analogy for InventoryA Water Tank Analogy for Inventory Supply Rate Inventory Level Demand Rate Inventory Level
  • 6. Purpose of InventoriesPurpose of Inventories To protect againstTo protect against uncertaintiesuncertainties – in demand (finished goods, MRO)in demand (finished goods, MRO) – supply (RM, MRO)supply (RM, MRO) – lead times (RM/PP or WIP)lead times (RM/PP or WIP) – schedule changes (WIP)schedule changes (WIP) To allow economic production andTo allow economic production and purchase (as in discounts for buying RM/PPpurchase (as in discounts for buying RM/PP in bulk)in bulk)
  • 7. Purpose of Inventories (Contd.)Purpose of Inventories (Contd.) To cover anticipated changes in demand (asTo cover anticipated changes in demand (as in a level strategy) or supplyin a level strategy) or supply – finished goodsfinished goods – RM/PPRM/PP To provide for transit (pipeline inventories)To provide for transit (pipeline inventories) – RM/PPRM/PP – finished goodsfinished goods – WIP (independence of operations)WIP (independence of operations)
  • 8. Inventory Cost StructuresInventory Cost Structures Ordering (or setup) costOrdering (or setup) cost – Paperwork, worker time (ordering)Paperwork, worker time (ordering) – worker time, downtime (setup)worker time, downtime (setup) – Typically expressed as a fixed cost per order orTypically expressed as a fixed cost per order or setup.setup.
  • 9. Inventory Cost Structures(contd.)Inventory Cost Structures(contd.) Carrying (or holding) cost:Carrying (or holding) cost: – Cost of capital (market rate or internal rate of return)Cost of capital (market rate or internal rate of return) – Cost of storage (building, utilities, insurance, handling)Cost of storage (building, utilities, insurance, handling) – Cost of obsolescence, deterioration, and lossCost of obsolescence, deterioration, and loss (shrinkage)(shrinkage) – Management cost (record keeping, counting)Management cost (record keeping, counting) Typically expressed as a percentage of SKU cost.Typically expressed as a percentage of SKU cost. Average in INDIA is estimated to beAverage in INDIA is estimated to be 25 percent25 percent per year.per year. Businesses often use only cost of capitalBusinesses often use only cost of capital (understatement).(understatement).
  • 10. Inventory Cost Structures(contd.)Inventory Cost Structures(contd.) How the 25 percent carrying cost is distributedHow the 25 percent carrying cost is distributed Cost of Capital—15 percentCost of Capital—15 percent Obsolescence—2 percentObsolescence—2 percent Storage—5 percentStorage—5 percent Materials Handling—2 percentMaterials Handling—2 percent Shrinkage/pilferage—1 percentShrinkage/pilferage—1 percent Insurance—1 percentInsurance—1 percent
  • 11. Inventory Cost Structures(contd.)Inventory Cost Structures(contd.) Stock out Cost (Back order or Lost sales orStock out Cost (Back order or Lost sales or Understocking Cost)Understocking Cost) – record maintenancerecord maintenance – lost incomelost income – customer dissatisfactioncustomer dissatisfaction – Typically expressed as a fixed cost per backorderTypically expressed as a fixed cost per backorder or as a function of aging of backorders.or as a function of aging of backorders.
  • 12. Inventory Cost Structures(contd.)Inventory Cost Structures(contd.) Overstocking Cost ( Opportunity Loss Cost)Overstocking Cost ( Opportunity Loss Cost) - Cost incurred due to carrying Inventories- Cost incurred due to carrying Inventories excess to set normsexcess to set norms
  • 13. Forms of DemandForms of Demand Independent demandIndependent demand – finished goods, spare parts, MROfinished goods, spare parts, MRO – based on market demandbased on market demand – requires forecastingrequires forecasting – managed using ‘replenishment philosophy’, i.e.managed using ‘replenishment philosophy’, i.e. reorder when you reach a pre-specified level.reorder when you reach a pre-specified level.
  • 14. Forms of Demand(contd.)Forms of Demand(contd.) Dependent demandDependent demand – parts that go into the finished products, RM/PPparts that go into the finished products, RM/PP oror WIPWIP – dependent demand is a known function ofdependent demand is a known function of independent demandindependent demand – calculate instead of forecastcalculate instead of forecast – Managed using a ‘requirements philosophy’,Managed using a ‘requirements philosophy’, i.e. only ordered as needed for higher leveli.e. only ordered as needed for higher level components or products.components or products.
  • 15. Economic Order Quantity (EOQ) Developed in 1915 by F.W. HarrisDeveloped in 1915 by F.W. Harris Answers the question ‘How much do I order?’Answers the question ‘How much do I order?’ Used forUsed for independent demandindependent demand items.items. Objective is to find order quantity (Q) that minimizesObjective is to find order quantity (Q) that minimizes the total cost (TC) of managing inventory.the total cost (TC) of managing inventory. Must be calculated separately for each SKU.Must be calculated separately for each SKU. Widely used and very robust (i.e. works well in a lotWidely used and very robust (i.e. works well in a lot of situations, even when its assumptions don’t holdof situations, even when its assumptions don’t hold exactly).exactly).
  • 16. Economic Order Quantity (EOQ)Economic Order Quantity (EOQ) Basic Model AssumptionsBasic Model Assumptions Demand rate is constant, recurring, and known.Demand rate is constant, recurring, and known. Lead time is constant and known.Lead time is constant and known. No stockouts allowed.No stockouts allowed. Material is ordered or produced in a lot or batchMaterial is ordered or produced in a lot or batch and the lot is received all at onceand the lot is received all at once Costs are constantCosts are constant – Unit cost is constant (no quantity discounts)Unit cost is constant (no quantity discounts) – Carrying cost is a constant per unit (SKU)Carrying cost is a constant per unit (SKU) – Ordering (setup) cost per order is fixedOrdering (setup) cost per order is fixed The item is a single product or SKU.The item is a single product or SKU.
  • 17. EOQ Lot Size ChoiceEOQ Lot Size Choice There is a trade-off between frequency ofThere is a trade-off between frequency of ordering (or the size of the order) and theordering (or the size of the order) and the inventory level.inventory level. – Frequent orders (small lot size) lead to a lowerFrequent orders (small lot size) lead to a lower average inventory size,average inventory size, i.e.i.e. higher ordering costhigher ordering cost and lower holding cost.and lower holding cost. – Fewer orders (large lot size) lead to a largerFewer orders (large lot size) lead to a larger average inventory size,average inventory size, i.e.i.e. lower ordering cost andlower ordering cost and higher holding cost.higher holding cost.
  • 18. Notations and measurementNotations and measurement units in EOQunits in EOQ DD == Demand rate, units per yearDemand rate, units per year SS == Cost per order placed, or setup cost,Cost per order placed, or setup cost, Rupees per orderRupees per order CC == Unit cost, Rupees per unitUnit cost, Rupees per unit ii == Carrying rate, percent of value per yearCarrying rate, percent of value per year QQ == Lot size, unitsLot size, units TCTC== total of ordering cost plus carrying costtotal of ordering cost plus carrying cost
  • 19. Cost Equations in EOQCost Equations in EOQ Ordering cost = (cost per order) x orders per year) = SD/Q Carrying cost per year = (annual carrying rate) x (unit cost) x average inventory = iCQ/2 Total annual cost (TC) = ordering cost per year + carrying cost per year = SD/Q + iCQ/2
  • 20. Total Cost of InventoryTotal Cost of Inventory
  • 21. TC and EOQTC and EOQ TC = ordering cost + holding costTC = ordering cost + holding cost = S*(D/Q) + iC*(Q/2)= S*(D/Q) + iC*(Q/2) EOQ =EOQ = note: Although we have usednote: Although we have used annualannual costs, any time period is allcosts, any time period is all right. Just be consistent! The same is true for currencyright. Just be consistent! The same is true for currency designations.designations. iC SD Q 2 =
  • 22. Continuous Review SystemContinuous Review System Relax assumption of constant demand.Relax assumption of constant demand. Demand is assumed to be random.Demand is assumed to be random. Check inventory position each time there is aCheck inventory position each time there is a demand (i.e continuously).demand (i.e continuously). If inventory position drops below the reorderIf inventory position drops below the reorder point, place an order for the EOQ.point, place an order for the EOQ. Also called fixed-order-quantity or Q systemAlso called fixed-order-quantity or Q system (the fixed order size is EOQ).(the fixed order size is EOQ).
  • 23. A Continuous Review (Q) SystemA Continuous Review (Q) System R = Reorder Point Q = Order Quantity L = Lead time
  • 24. A Continuous Review (Q) SystemA Continuous Review (Q) System Amount to order = EOQ Order when inventory position = reorder point. Reorder point = lead time * demand/period = R = lead time demand (when demand is constant) Reorder point is independent of EOQ! EOQ tells how much to order. Reorder point tells when to order.
  • 25. Periodic Review SystemPeriodic Review System Instead of reviewing continuously, we reviewInstead of reviewing continuously, we review the inventory position atthe inventory position at fixed intervalsfixed intervals. For. For example, the bread truck visits the groceryexample, the bread truck visits the grocery store on the same days every week.store on the same days every week. Also known as “P system”, “Fixed-order-Also known as “P system”, “Fixed-order- interval system” or “Fixed-order-periodinterval system” or “Fixed-order-period system”system”
  • 26. Periodic Review SystemPeriodic Review System (contd.)(contd.) Each time we review the inventory, we eitherEach time we review the inventory, we either order or don’t. The decision depends upon ourorder or don’t. The decision depends upon our reorder point.reorder point. The amount we order is the amount needed toThe amount we order is the amount needed to bring us up to a target (T).bring us up to a target (T).
  • 27. A Periodic Review (P) SystemA Periodic Review (P) System
  • 28. Using P and Q System in PracticeUsing P and Q System in Practice Use P system when orders must be placed atUse P system when orders must be placed at specified intervals.specified intervals. Use P systems when multiple items areUse P systems when multiple items are ordered from the same supplier (joint-ordered from the same supplier (joint- replenishment).replenishment). Use P system for inexpensive items.Use P system for inexpensive items.
  • 29. Using P and Q Systems inUsing P and Q Systems in PracticePractice P may be easier to use since levels areP may be easier to use since levels are reviewed less often.reviewed less often. P requires more safety stock since may onlyP requires more safety stock since may only order at fixed points.order at fixed points. P is more likely to run out since cannotP is more likely to run out since cannot respond to increases in demandrespond to increases in demand immediatelyimmediately Either may be more costly: P in safetyEither may be more costly: P in safety stock, Q in monitoring cost.stock, Q in monitoring cost.
  • 30. FORMULAE –FORMULAE – INVENTORY MANAGEMENTINVENTORY MANAGEMENT E.O.Q. =E.O.Q. = 2 X Annual Demand X Ordering cost2 X Annual Demand X Ordering cost Unit Price X Inv. Carr. Cost (%)Unit Price X Inv. Carr. Cost (%) Fixed order Qty model ( “Q” System)Fixed order Qty model ( “Q” System) o Order Qty = E.O.Q.Order Qty = E.O.Q. o Reorder Point = Average Daily Demand X Lead-time in daysReorder Point = Average Daily Demand X Lead-time in days Total Annual Cost = Annual + Annual + AnnualTotal Annual Cost = Annual + Annual + Annual Purchase Ordering InventoryPurchase Ordering Inventory Cost Cost Carr. CostCost Cost Carr. Cost (i.e. Annual(i.e. Annual Demand XDemand X Unit Cost)Unit Cost)
  • 31. o Safety Stock = Constant based X Std. deviationSafety Stock = Constant based X Std. deviation on Service level in demandon Service level in demand Fixed order Qty model with safety stockFixed order Qty model with safety stock o Reorder Point = (Average daily demand + SafetyReorder Point = (Average daily demand + Safety X StockX Stock lead-time in days)lead-time in days) Fixed – Time Period Model with Safety Stock (“P” System)Fixed – Time Period Model with Safety Stock (“P” System) o Safety stock = Constant based X Std. deviationSafety stock = Constant based X Std. deviation on Service level (during Reviewon Service level (during Review period + leadtime )period + leadtime ) Where = (R.P. + L.T.) X (Std. Dev.)Where = (R.P. + L.T.) X (Std. Dev.) 22 * *
  • 32. o Optimal Order Qty (Q) =Optimal Order Qty (Q) = Average Daily Demand X (Review Period +Leadtime) +Average Daily Demand X (Review Period +Leadtime) + (Plus)(Plus) Safety StocksSafety Stocks –– (minus)(minus) Current Inventory StatusCurrent Inventory Status (Physical Stocks + Quantity on order)(Physical Stocks + Quantity on order)
  • 33. Selective Inventory Control SystemSelective Inventory Control System Methods of classification:-Methods of classification:- Title Basis Main Use A-B-C Value of Consumption To control- raw material/ w.i.p/ components H-M-L (High-Med- Low) Unit price of the material Mainly to control purchase X-Y-Z Value of items in storage To review the inventories & their uses at scheduled intervals V-E-D (vital/essen/ desirable Criticality of the component To determine stock levels of spare parts F-S-N (fast/slow/non- moving) Consumption pattern of the component To control obsolescence S-D-E (scarce/diff/easy) Problems faced in procurement Lead-time analysis & purchasing strategy G-O-L-F (govt/open/local/fore ign) Source of materials Procurement strategies S-0-S (seasonal/ off seasonal) Nature of supplies Procurement stocking strategies for seasonal items like agricultural V-E-I-N (vital/ essen/ imp/normal) Plant &machinery Production Machinery & Services
  • 34. A-B-C AnalysisA-B-C Analysis Class ‘A’ Class ‘B’ Class ‘C’ 0 65 90 100 15 40 100 Cumulative % of Total number of items Cumulative%ofAnnualconsumptionvalue
  • 35. ABC Inventory ManagementABC Inventory Management Based on “Pareto” concept (80/20 rule) andBased on “Pareto” concept (80/20 rule) and total usage in dollars of each item.total usage in dollars of each item. Classification of items as A, B, or C based onClassification of items as A, B, or C based on usage.usage. Purpose is to set priorities on effort used toPurpose is to set priorities on effort used to manage different SKUs, i.e. to allocate scarcemanage different SKUs, i.e. to allocate scarce management resources.management resources.
  • 36. ABC Inventory ManagementABC Inventory Management (contd.)(contd.) ‘‘A’ items: 20% of SKUs, 80% ofA’ items: 20% of SKUs, 80% of Ann.Con.ValueAnn.Con.Value ‘‘B’ items: 30 % of SKUs, 15% ofB’ items: 30 % of SKUs, 15% of Ann.Con.ValueAnn.Con.Value ‘‘C’ items: 50 % of SKUs, 5% of A.C.ValueC’ items: 50 % of SKUs, 5% of A.C.Value Three classes is arbitrary; could be any number.Three classes is arbitrary; could be any number. Percents are approximate.Percents are approximate. Danger: Consumption Value may not reflectDanger: Consumption Value may not reflect importance of any given SKU!importance of any given SKU!
  • 37. Miscellaneous Systems: Bin Systems Two-Bin System Full Empty Order One Bin of Inventory One-Bin System Periodic Check Order Enough to Refill Bin
  • 38. The Two-Bin System Second Bin First Bin Re-order Level Re-order point shifts with usage Normal Lead-time Usage Time Safety stock Lead-time Q O
  • 39. Inventory Accuracy and Cycle Counting  Inventory accuracy refers to how well the inventory records agree with physical count  Cycle Counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year
  • 40. 40 Question Bowl The average cost of inventory in India is which of the following? a. 10 to 15 percent of its cost b. 15 to 20 percent of its cost c. 20 to 25 percent of its cost d. 25 to 30 percent of its cost e. 30 to 35 percent of its cost Answer: d. 25 to 30 percent of its cost
  • 41. 41 Question Bowl Which of the following is a reason why firms keep a supply of inventory? a. To maintain independence of operations b. To meet variation in product demand c. To allow flexibility in production scheduling d. To take advantage of economic purchase order size e. All of the above Answer: e. All of the above (Also can include to provide a safeguard for variation in raw material delivery time.)
  • 42. 42 Question Bowl An Inventory System should include policies that are related to which of the following? a. How large inventory purchase orders should be b. Monitoring levels of inventory c. Stating when stock should be replenished d. All of the above e. None of the above Answer: d. All of the above
  • 43. 43 Question Bowl Which of the following is an Inventory Cost item that is related to the managerial and clerical costs to prepare a purchase or production order? a. Holding costs b. Setup costs c. Carrying costs d. Shortage costs e. None of the above Answer: e. None of the above (Correct answer is Ordering Costs.)
  • 44. 44 Question Bowl Which of the following is considered a Independent Demand inventory item? a. Bolts to a automobile manufacturer b. Timber to a home builder c. Windows to a home builder d. Containers of milk to a grocery store e. None of the above Answer: d. Containers of milk to a grocery store
  • 45. 45 Question Bowl If you are marketing a more expensive independent demand inventory item, which inventory model should you use? a. Fixed-time period model b. Fixed-order quantity model c. Periodic system d. Periodic review system e. P-model Answer: b. Fixed-order quantity model
  • 46. 46 Question Bowl If the annual demand for an inventory item is 5,000 units, the ordering costs are Rs100 per order, and the cost of holding a unit is stock for a year is Rs10, which of the following is approximately the Qopt? a. 5,000 units b. Rs5,000 c. 500 units d. 316 units e. None of the above Answer: d. 316 units (Sqrt[(2x5000x1 00)/10=316.227 7)
  • 47. 47 Question Bowl The basic logic behind the ABC Classification system for inventory management is which of the following? a. Two-bin logic b. One-bin logic c. Pareto principle d. All of the above e. None of the above Answer: c. Pareto principle
  • 48. 48 Question Bowl A physical inventory-taking technique in which inventory is counted frequently rather than once or twice a year is which of the following? a. Cycle counting b. Mathematical programming c. Pareto principle d. ABC classification e. Stockkeeping unit (SKU) Answer: a. Cycle counting
  • 49. 49 Solved Problems – OPERATIONS MANAGEMENT (Class of 2010) Q1. A supplier is offering stainless steel bars at Rs 95 per kg for order of upto 100kg each, and at Rs 80 per kg for orders of 101kg and above. Your annual requirement is 1200kg. If your ordering cost is Rs 300 per order, and holding cost is 20%, what would be the most economical quantity to order? (10 Marks) Answer. E.O.Q(1) = √2 × Annual Demand × Ordering Cost √Unit Cost × Holding Cost E.O.Q = √2 × 1200 × 300 √95 × 0.20 E.O.Q = 195 units E.O.Q(2) = √2 × 1200 × 300 √80 × 0.20 = 212 units
  • 50. 50  Now, E.O.Q (1), i.e. 195 units does not fall in the category of upto 100kg Therefore here consider it’s optimum E.O.Q as 100 units so that it falls under the category of Rs 95 per kg Now, find the Total Cost  For 100 units • Ordering Cost = 1200 × 300 = Rs 3600/- 100 • Purchase Cost = 1200 × 95 = Rs 1,14,000/- • Holding Cost = 100 × 0.2 × 95 = Rs 950/- Therefore Total Cost = Rs 1,18,550/-  For 212 units • Ordering Cost = 1200 × 300 = Rs 1698/- 212 • Purchase Cost = 1200 × 80 = Rs 96,000/-
  • 51. 51 • Holding Cost = 212 × 0.2 × 80 = Rs 1696/- 2 Therefore Total Cost = Rs 99,394/- Therefore most Economic Order Quantity to order is 212 kgs