Inventory Control Model


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Inventory Control Model

  3. 3. TYPES OF MATERIALS REQUIRED IN AN INDUSTRIAL UNIT <ul><li>Raw materials for producing the end product. </li></ul><ul><li>Spare parts for repair and maintenance. </li></ul><ul><li>Consumables for repairs and maintenance of plant and machinery and also for support functions necessary to run the organization, such as cleaning materials for up-keep of the buildings. </li></ul><ul><li>Chemicals and glassware for testing laboratory supporting the quality control activities. </li></ul><ul><li>Uniforms and safety gadgets such as helmets, shoes and goggles etc for safety of persons. </li></ul>
  4. 4. IMPORTANCE OF MATERIALS IN PLANT OPERATIONS <ul><li>Materials are used in every activity of the organization. </li></ul><ul><li>60% of the cost of the production of the end product is the cost of materials. </li></ul><ul><li>It is important for continuing operations and should be available in right time. </li></ul><ul><li>Control on the cost of materials helps to keep the competitiveness of the organization. </li></ul>
  5. 5. INVENTORY CONTROL MODEL Lead time Receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Inventory Level Time
  6. 6. HOW INVENTORY CONTROL MODEL OPERATES - 1 <ul><li>In a stabilized production operation inventory of an item is controlled in such a way that: </li></ul><ul><ul><li>There is a minimum stock at any time. </li></ul></ul><ul><ul><li>That material should never cross the maximum level. </li></ul></ul><ul><li>These levels are fixed with the help of operations staff in the plant based on historical data and the expected requirements of materials keeping in view the condition of the plant and machinery. </li></ul>
  7. 7. HOW INVENTORY CONTROL MODEL OPERATES - 2 <ul><li>Crossing the maximum level means over stocking. </li></ul><ul><li>When the inventory level goes below the minimum level, it could result in stock out. </li></ul><ul><li>A reorder point is set in between these two set points i.e. the maximum and the minimum level of inventory. </li></ul><ul><li>Order for material is placed at the reorder point is reached. </li></ul><ul><li>The reorder point is set in such a manner that ordered material is received before the stock level reach the minimum stock level. </li></ul><ul><li>An order is placed for the working quantity of the material. </li></ul><ul><li>The working quantity is received at the end of the lead time, and when the inventory has reached to the minimum level. </li></ul><ul><li>On receipt of material, the stock level of inventory jumps to the maximum level. </li></ul>
  8. 8. INVENTORY CONTROL CONCEPT - 1 <ul><li>Materials kept in the warehouse are known as inventory. </li></ul><ul><li>These may include raw materials and spare parts and consumables. </li></ul><ul><li>Materials are issued for use when needed. </li></ul><ul><li>There should not be any shortage of materials when needed. </li></ul><ul><li>Excess of materials in the stores is also not desirable. </li></ul><ul><li>Control on the quantity of each item in the inventory is known as inventory control . </li></ul>
  9. 9. INVENTORY CONTROL CONCEPT - 2 <ul><li>Inventory control is to maintain inventory items in such a quantity that the items in the inventory do not remain in stock for long and has high turnover. </li></ul><ul><li>Inventory should not block the useable financial resources. </li></ul><ul><li>Inventory items should be in sufficient in quantity: </li></ul><ul><ul><li>so that they are available when needed and do not results in loss of production </li></ul></ul><ul><ul><li>Do not delay in repair and maintenance of the machines. </li></ul></ul><ul><li>Cost of inventory is another aspect and is to be kept low by purchasing right quantity at right price and at right time. </li></ul><ul><li>Inventory control is used as a tool for cost reduction. </li></ul>
  10. 10. ASSUMPTIONS IN INVENTORY CONTROL MODEL <ul><li>The consumption of inventory is at a uniform rate through out the cycle, </li></ul><ul><li>The order is placed when the inventory level reaches the reorder point. </li></ul><ul><li>The ordered quantity is received by the time inventory level reaches to the minimum level. </li></ul><ul><li>The lead time does not change between reorder point and the point when inventory reaches the minimum level when fresh quantity is received. </li></ul><ul><li>However, in real life situations there are variations in each condition due to both internal and external factors and inventory controller has to review the situation regularly. </li></ul>
  11. 11. ELEMENTS OF INVENTORY CONTROL <ul><li>Minimum stock level. </li></ul><ul><li>Maximum stock level. </li></ul><ul><li>Safety stock level </li></ul><ul><li>Reorder level. </li></ul><ul><li>Lead time. </li></ul>
  12. 12. MINIMUM STOCK LEVEL <ul><li>It is the level below which the inventory level is not allowed to fall. </li></ul><ul><li>If the level of inventory is below this level, there are chances that plant operations are adversely affected. </li></ul><ul><li>As soon as the stock level reaches the minimum level for any reason: </li></ul><ul><ul><li>The matter is to be reported to the higher management immediately </li></ul></ul><ul><ul><li>Extra efforts are made or additional resources are deployed to ensure that the material is received at the earliest. </li></ul></ul><ul><ul><li>What is done? </li></ul></ul><ul><ul><li>The item could be received by faster mode of transport say by air or by courier service in place of sea or rail or is purchased from any other source even at a higher cost. </li></ul></ul><ul><li>Minimum level is an indication of the danger and provides alert for stock out situation. </li></ul>
  13. 13. MAXIMUM STOCK LEVEL <ul><li>It is the inventory level, beyond which the stock level is not allowed to exceed. </li></ul><ul><li>The maximum level is used as a control point to avoid any extra stocks. </li></ul><ul><li>Order quantity for material is controlled in such a way that when the material is received the inventory level is below the maximum level. </li></ul><ul><li>However, at times the maximum level is crossed: </li></ul><ul><ul><li>To avail benefits of attractive discounts, </li></ul></ul><ul><ul><li>Saving on the transportation/freight charges, </li></ul></ul><ul><ul><li>Due to strategic buying decision. </li></ul></ul><ul><li>The maximum level if crossed with prior evaluation of overall benefits is a correct approach. </li></ul><ul><li>If it crossed due to lack of control, the matter should be viewed seriously. </li></ul><ul><li>Failure to control the maximum level may result in non-moving or slow moving items and in some cases obsolete items. </li></ul><ul><li>Inventory turnover would be adversely affected if maximum level is not controlled. </li></ul><ul><li>Maximum level is fixed by taking into consideration the lead time for the item. </li></ul>
  14. 14. SAFETY STOCK -1 <ul><li>Safety stock is the level of inventory which is to be maintained always to take care of unforeseen factors such as: </li></ul><ul><ul><li>Delay in ordering, </li></ul></ul><ul><ul><li>Delay in supply by supplier, </li></ul></ul><ul><ul><li>Delay in transportation </li></ul></ul><ul><ul><li>Hindrances' in execution of orders by the supplier, which may be beyond his control like war, flood or strike. </li></ul></ul><ul><li>A very high degree of safety would need high level of inventory, </li></ul><ul><li>A low degree of safety would require low inventory stock. </li></ul><ul><li>Safety stock follows the path of ‘S’curve. </li></ul>
  15. 15. S CURVE – PATH OF SAFETY STOCK Level of Inventory Degree of safety
  16. 16. SAFETY STOCK -2 <ul><li>Higher level of inventory is to be maintained for high level of safety and blocking of financial resources: </li></ul><ul><li>The safety level is decided depending on: </li></ul><ul><ul><li>The criticality of the stoppage of operations, </li></ul></ul><ul><ul><li>Reliability of source of supply, </li></ul></ul><ul><ul><li>Location of supplier </li></ul></ul><ul><ul><li>Number of sources of supply. </li></ul></ul><ul><li>The desired safety level of inventory level then determine the ‘Safety Stock’. </li></ul><ul><li>Normally, most of the organizations maintain safety stock equal to minimum stock level. </li></ul>
  17. 17. REORDER POINT <ul><li>Reorder point is important tool for controlling inventory and to ensure that there is no stock out. </li></ul><ul><li>Reorder point is dependant on lead time. </li></ul><ul><li>It is set in such a manner that if order is placed at reorder point, the material is received by the time the inventory level reaches minimum stock level. </li></ul><ul><li>Reorder point shifts with the change in rate of consumption and is set based on average yearly consumption. </li></ul><ul><li>The lead time if changes, the reorder point should be adjusted. </li></ul><ul><li>In practice, the reorder point is established quite correctly based on: </li></ul><ul><ul><li>Past experience, </li></ul></ul><ul><ul><li>Rate of consumption </li></ul></ul><ul><ul><li>Lead time. </li></ul></ul><ul><ul><li>Reorder point is normally calculated by computer automatically. </li></ul></ul>
  18. 18. CALCULATION OF MAXIMUM, MINIMUM, REORDER AND AVERAGE STOCK LEVELS The formulae used for fixing various levels are: Maximum level = Reordering level Expected minimum consumption in - units during least time to obtain delivery + Reorder quantity Maximum level = Reorder level - Average usage per period x Average time to obtain delivery Reorder level = Maximum reorder period x Maximum usage Maximum level + Minimum level Average stock level = 2 Reorder Point = Average daily usage x Lead time in days + Safety Stock
  19. 19. FACTORS INFLUENCING INVENTORY CONTROL <ul><li>An operating plant faces new problems every time, which have an impact on inventory control activities. </li></ul><ul><li>Rate of consumption of materials, order quantity, reorder point and lead time undergo changes for one or the other reasons and disturb the theoretical inventory control model. </li></ul>
  20. 20. EFFECT OF HIGHER RATE OF CONSUMPTION Lead time Receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Normal rate of consumption Higher rate of consumption Need for early replenishment of materials Inventory Level The effect of higher rate of consumption of material call for replenishment of inventory earlier than schedule
  21. 21. EFFECT OF LOWER RATE OF CONSUMPTION Scheduled Lead time Planned receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Normal rate of consumption Lower rate of consumption Need for delayed replenishment of lead time Inventory Level The lower rate of consumption on inventory would generate high inventory in the stock and therefore call for delay in replenishment of materials
  22. 22. INCREASE IN INVENTORY LEVEL DUE TO SHORTER LEAD TIME THAN THE SCHEDULED LEAD TIME Scheduled Lead time Planned receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Normal rate of consumption Inventory Level Maximum inventory level is higher than the normal level Shorter lead time Actual receipt of material
  23. 23. SHORTAGE OF INVENTORY DUE TO LONGER LEAD TIME THAN THE SCHEDULED LEAD TIME Scheduled Lead time Planned receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Inventory Level Longer lead time Actual receipt of material Order quantity Shortage of inventory