2. INVENTORY MANAGEMENT
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
3. TYPES OF INVENTORIES
• Raw materials
• Purchased parts and supplies
• Finished Goods
• Work-in-process (partially completed
products
• Items being transported
• Tools and equipment
CONCEPTS OF INVENTORY
MANAGEMENT
• JIT (JUST IN TIME)
• VIM (VENDOR MANAGED
INDUSTRY)
• ECR ( EFFICIENT CONSUMER
RESPONSE)
4. SELECTIVE INVENTORY MANAGEMENT
ABC ANALYSIS :
• 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.
• 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
5. VED (VITAL, ESSENTIAL & DESIRABLE)
• VITAL: Vital category items are those items without which the production activities
or any other activity of the company, would come to a halt, or at least be drastically
affected.
• ESSENTIAL: Essential items are those items whose stock – out cost is very high for
the company.
• DESIRABLE: Desirable items are those items whose stock-out or shortage causes
only a minor disruption for a short duration in the production schedule. the cost
incurred is very nominal
6. ECONOMIC ORDER QUANTITY
MEANING:
ECONOMIC ORDER QUANTITY (EOQ) is the order quantity that minimizes the total
inventory holding costs and ordering costs. it is one of the oldest classical
production scheduling models. economic order quantity is also known as reorder
quantity.
• FORMULA
7. 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
8. SAFETY STOCK
MEANING:
SAFETY STOCK (ALSO CALLED BUFFER STOCK) is a term used by logisticians to describe
a level of extra stock that is maintained to mitigate risk of stock outs (shortfall in raw material or
packaging) due to uncertainties in supply and demand.
Adequate safety stock levels permit business operations to proceed according to their plans. safety
stock is held when there is uncertainty in demand, supply, or manufacturing yield; it serves as an
insurance against stock outs.
FORMULA:
9. REORDER POINT
Level of inventory at which a new order is
placed
where
• d = demand rate per period
• L = lead time
R=dl
10. QUANTITY DISCOUNTS
• Price per unit decreases as order quantity
increases
• QUANTITY DISCOUNT' an incentive offered to a
buyer that results in a decreased cost per unit of
goods or materials when purchased in greater
numbers.
• A QUANTITY DISCOUNT is often offered by
sellers to entice buyers to purchase in
larger quantities.
• THE BUYER’S GOAL is to select the order
quantity that will minimize total cost, wherein total
cost is the sum of carrying cost, ordering cost and
purchase cost.
Editor's Notes
In the last decade or so we have seen adaptation of enhanced customer service concept on the part of the manufacturers agreeing to manage and hold inventories at their customers end and thereby effect Just In Time deliveries. Though this concept is the same in essence different industries have named the models differently. Manufacturing companies like computer manufacturing or mobile phone manufacturers call the model by name VMI - Vendor Managed Industry while Automobile industry uses the term JIT - Just In Time where as apparel industry calls such a model by name - ECR - Efficient consumer response. The basic underlying model of inventory management remains the same.
For example----- Let us take the example of DELL, which has manufacturing facilities all over the world. They follow a concept of Build to Order where in the manufacturing or assembly of laptop is done only when the customer places a firm order on the web and confirms payment. Dell buys parts and accessories from various vendors. DELL has taken the initiative to work with third party service providers to set up warehouses adjacent to their plants and manage the inventories on behalf of DELL’s suppliers. The 3PL - third party service provider receives the consignments and holds inventory of parts on behalf of Dell’s suppliers. The 3PL warehouse houses inventories of all of DELL’s suppliers, which might number to more than two hundred suppliers. When DELL receives a confirmed order for a Laptop, the system generates a Bill of material, which is downloaded at the 3PL, processed and materials are arranged in the cage as per assembly process and delivered to the manufacturing floor directly. At this point of transfer, the recognition of sale happens from the Vendor to Dell. Until then the supplier himself at his expense holds the inventory.
