Project Report On INVENTORY MANAGEMENT &MULTI ITEM JOINT REPLENISHMENT Submitted By : Aman Kumar NIshant Latika Arora Nishant Singh Nitin Nigam
Vivek Gupta ContentWhat is inventoryWhy keep inventory?ABC AnalysisControlling inventoryHolding costs.Purchasing costMulti Item Joint ReplenishmentAdvantages of Multi Item Joint ReplenishmentNumerical Explanation On Multi Item Joint Replenishment What is Inventory
Stock of any item or resource used in an organization (Raw Materials, Finished Products,Component parts, Supplies, and Work-in-process).Despite its importance to the supply chain, inventory is not universally well understood. It isvariously characterized, both positively and negatively, as an economic asset to a non-income-producing use of capital funds. Only when considered in light of all quality, client service andeconomic factors—from the viewpoints of purchasing, manufacturing, sales and finance—doesthe whole picture of inventory become clear. No matter the viewpoint, effective inventorymanagement is essential to supply chain competitiveness.Inventory is a list for goods and material, or those goods and materials themselves, heldavailable in stock by a business . Inventory are held in order to manage and hide from thecustomer the fact that manufacture/supply delay is longer than delivery delay, and also to easethe effect of imperfections in the manufacturing process that lower production efficiencies ifproduction capacity stands idle for lack of materials. In other words, Inventory is a quantity orstore of goods that is held for some purpose or use (the term may also be used as a verb,meaning to take inventory or to count all goods held in inventory). Inventory may be kept "in-house," meaning on the premises or nearby for immediate use; or it may be held in a distantwarehouse or distribution center for future use. With the exception of firms utilizing just-in-time methods, more often than not, the term "inventory" implies a stored quantity of goodsthat exceeds what is needed for the firm to function at the current time (e.g., within the nextfew hours).
WHY KEEP INVENTORY?Why would a firm hold more inventory than is currently necessary to ensure the firmsoperation? The following is a list of reasons for maintaining what would appear to be "excess"inventory.MEET DEMAND.In order for a retailer to stay in business, it must have the products that the customer wants onhand when the customer wants them. If not, the retailer will have to back-order the product. Ifthe customer can get the good from some other source, he or she may choose to do so ratherthan electing to allow the original retailer to meet demand later (through back-order). Hence, inmany instances, if a good is not in inventory, a sale is lost forever.KEEP OPERATIONS RUNNING.A manufacturer must have certain purchased items (raw materials, components, orsubassemblies) in order to manufacture its product. Running out of only one item can prevent amanufacturer from completing the production of its finished goods. Inventory betweensuccessive dependent operations also serves to decouple the dependency of the operations. Amachine or work center is often dependent upon the previous operation to provide it withparts to work on. If work ceases at a work center, then all subsequent centers will shut downfor lack of work. If a supply of work-in-process inventory is kept between each work center,then each machine can maintain its operations for a limited time, hopefully until operationsresume the original center.
LEAD TIME.Lead time is the time that elapses between the placing of an order (either a purchase order or aproduction order issued to the shop or the factory floor) and actually receiving the goodsordered. If a supplier (an external firm or an internal department or plant) cannot supply therequired goods on demand, then the client firm must keep an inventory of the needed goods.The longer the lead time, the larger the quantity of goods the firm must carry in inventory.A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintainextremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times perday. However, steel mills may have a lead time of up to three months. That means that a firmthat uses steel produced at the mill must place orders at least three months in advance of theirneed. In order to keep their operations running in the meantime, an on-hand inventory of threemonths steel requirements would be necessary.QUANTITY DISCOUNT.Often firms are given a price discount when purchasing large quantities of a good. This alsofrequently results in inventory in excess of what is currently needed to meet demand. However,if the discount is sufficient to offset the extra holding cost incurred as a result of the excessinventory, the decision to buy the large quantity is justified.SMOOTHING REQUIREMENTS.Sometimes inventory is used to smooth demand requirements in a market where demand issomewhat erratic.There are three basic reasons for keeping an inventory: Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time"
Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, whenhe needs it" principle tends to incur lots of costs in terms of logistics. So Bulk buying, movementand storing brings in economies of scale, thus inventory.
ABC AnalysisThe ABC analysis is a business term used to define an inventory categorization technique oftenused 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 impacton overall inventory cost, while also providing a mechanism for identifying different categoriesof 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 estimatedimportance.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 anappropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.B items are important, but of course less important, than ‘A’ items and more important than‘C’ items. Therefore ‘B’ items are intergroup items.C items are marginally important.ABC analysis categoriesThere are no fixed threshold for each class, different proportion can be applied based on objective andcriteria. ABC Analysis is similar to the Pareto principle in that the A items will typically account for a largeproportion of the overall value but a small percentage of number of items.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 5% of the annual consumption value of the items.
Controlling inventoryInventory management, or inventory control, is an attempt to balance inventory needs andrequirements with the need to minimize costs resulting from obtaining and holding inventory.There are several schools of thought that view inventory and its function differently. These willbe addressed later, but first we present a foundation to facilitate the readers understanding ofinventory and its function. Firms that carry hundreds or even thousands of different partnumbers can be faced with the impossible task of monitoring the inventory levels of each partnumber. In order to facilitate this, many firms use an ABC approach. ABC analysis is based onPareto Analysis, also known as the "80/20" rule. The 80/20 comes from Paretos finding that 20percent of the populace possessed 80 percent of the wealth. From an inventory perspective itcan restated thusly: approximately 20 percent of all inventory items represent 80 percent ofinventory costs. Therefore, a firm can control 80 percent of its inventory costs by monitoringand controlling 20 percent of its inventory. But, it has to be the correct 20 percent.The top 20 percent of the firms most costly items are termed "A" items (this shouldapproximately represent 80 percent of total inventory costs). Items that are extremelyinexpensive or have low demand are termed "C" items, with "B" items falling in between A andC items. The percentages may vary with each firm, but B items usually represent about 30percent of the total inventory items and 15 percent of the costs. C items generally constitute 50percent of all inventory items but only around 5 percent of the costs.By classifying each inventory item as an A, B or C the firm can determine the resources (time,effort and money) to dedicate to each item. Usually this means that the firm monitors A items
very closely but can check on B and C items on a periodic basis (for example, monthly for Bitems and quarterly for C items).Another control method related to the ABC concept is cycle counting. Cycle counting is usedinstead of the traditional "once-a-year" inventory count where firms shut down for a shortperiod of time and physically count all inventory assets in an attempt to reconcile any possiblediscrepancies in their inventory records. When cycle counting is used the firm is continuallytaking a physical count but not of total inventory. A firm may physically count a certain sectionof the plant or warehouse, moving on to other sections upon completion, until the entirefacility is counted. Then the process starts all over again. The firm may also choose to count allthe A items, then the B items, and finally the C items. Certainly, the counting frequency will varywith the classification of each item. In other words, A item may be counted monthly, B itemsquarterly, and C items yearly. In addition the required accuracy of inventory records may varyaccording to classification, with items requiring the most accurate record keeping. Holding costsHolding costs, also called carrying costs, are the costs that result from maintaining theinventory. Inventory in excess of current demand frequently means that its holder must providea place for its storage when not in use. This could range from a small storage area near theproduction line to a huge warehouse or distribution center. A storage facility requirespersonnel to move the inventory when needed and to keep track of what is stored and where itis stored. If the inventory is heavy or bulky, forklifts may be necessary to move it around.Storage facilities also require heating, cooling, lighting, and water. The firm must pay taxes onthe inventory, and opportunity costs occur from the lost use of the funds that were spent onthe inventory. Also, obsolescence, pilferage (theft), and shrinkage are problems. All of thesethings add cost to holding or carrying inventory.
SET-UP COSTSSet-up costs are the costs incurred from getting a machine ready to produce the desired good.In a manufacturing setting this would require the use of a skilled technician (a cost) whodisassembles the tooling that is currently in use on the machine. The disassembled tooling isthen taken to a tool room or tool shop for maintenance or possible repair (another cost). Thetechnician then takes the currently needed tooling from the tool room (where it has beenmaintained; another cost) and brings it to the machine in question.There the technician has to assemble the tooling on the machine in the manner required forthe good to be produced (this is known as a "set-up"). Then the technician has to calibrate themachine and probably will run a number of parts, that will have to be scrapped (a cost), inorder to get the machine correctly calibrated and running. All the while the machine has beenidle and not producing any parts (opportunity cost). As one can see, there is considerable costinvolved in set-up. If the firm purchases the part or raw material, then an order cost, ratherthan a set-up cost, is incurred. Ordering costs include the purchasing agents salary andtravel/entertainment budget, administrative and secretarial support, office space, copiers andoffice supplies, forms and documents, long-distance telephone bills, and computer systems andsupport. Also, some firms include the cost of shipping the purchased goods in the order cost. PURCHASING COSTPurchasing cost is simply the cost of the purchased item itself. If the firm purchases a part thatgoes into its finished product, the firm can determine its annual purchasing cost by multiplyingthe cost of one purchased unit (P) by the number of finished products demanded in a year (D).Hence, purchasing cost is expressed as PD.
Now total inventory cost can be expressed as: Total = Holding cost + Set-up/Order cost + Purchasing cost or Total = H(Q/2) + S(D/Q) + PD If holding costs and set-up costs were plotted as lines on a graph, the point at which they intersect (that is, the point at which they are equal) would indicate the lowest total inventory cost. Therefore, if we want to minimize total inventory cost, every time we place an order, we should order the quantity (Q) that corresponds to the point where the two values are equal. There are a number of assumptions that must be made with the use of the EOQ. These include: Only one product is involved. Deterministic demand (demand is known with certainty). Constant demand (demand is stable through-out the year). No quantity discounts. Constant costs (no price increases or inflation).While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it isrelevant for items that have independent demand. This means that the demand for the item isnot derived from the demand for something else (usually a parent item for which the unit inquestion is a component). For example, the demand for steering wheels would be derived fromthe demand for automobiles (dependent demand) but the demand for purses is not derivedfrom anything else; purses have independent demand.Recent industry reports show that inventory costs as a percent of total logistics costs areincreasing. Despite this rise, many organizations have not taken full advantage of ways forlowering inventory costs. There are a number of proven strategies that will provide payoff inthe inventory area, both in client service and in financial terms. Some of these strategies forlowering inventory costs involve having less inventory while others involve owning less of the
inventory you have. Regardless of which techniques you employ, proactive inventorymanagement practices will make a measurable difference in your operations. Multi Item Joint Replenishment Many studies have shown that the total cost of employing joint replenishment for correlated items is less than the total cost of using single-item replenishment. Savings increase dramatically when the demand between items is closely related. Although the benefits of joint replenishment are significant ,it is difficult to define the demand correlation among items, especially when the number of items increases. A large number of items reduces the efficiency and advantage of the multi-item inventory control. To over come this difficulty, an association clustering algorithm this paper proposes to evaluate the correlated demands among items. The proposed algorithm utilizes the support concept in association rule analysis to measure the similarity among items. Based on these measurements a clustering method is developed to group items with close demand in a hierarchal way. The can-order policy is then applied to the optimal clustering result as decided by the proposed performance index. To illustrate the benefits of the proposed association clustering algorithm for replenishment systems, a set of simulations and a sensitivity analysis is conducted. The results of the experiments show that the proposed method out performs several replenishment models. With the increasing complexity of products and services, enterprises are faced with more and more inventory items. To increase their competitive edge and satisfy the customers’ demands, an enterprise must adopt an effective multi-item inventory strategy for managing its inventory. Different researchers have applied different programming methods to solve multi-item inventory problems. People discussed a multi-item inventory system with correlated demands using the base-stock policy in discrete time and obtained bounds for the response distribution. They also investigated
optimization problem for maximizing the service level, subject to an inventoryinvestment budget constraint.A popular management strategy for the multi-item inventory system is jointreplenishment. In this context, the objective is to jointly coordinate item replenishmentssuch that the total relevant cost can be minimized through appropriate tradeoffsbetween major and minor setup costs, inventory holding costs, procurement costs, andtransportation costs. The savings obtained by using these policies are significant,especially when the demand between items is closely related.Joint Replenishment Model is calculated with the help of EOQ, service level and thetotal cost of the company.Formulas used In Multi item joint replenishment modelQ = sqrt((2KD)/h) i.e quantity to be ordered K = ordering cost + item preprationNumber of orders per Year = (Total demand value)/(Total order Value)Time between two orders = 1/ Number of orders per yearAnnual cost of ordering = Number of orders* Total costAnnual Inventory Cost = (Q/2) * Annual inventory level
Advantage of Multi Item Joint ReplenishmentAdvantages of multi item joint replenishment model are : Reduced Shipping Cost Transportation cost is decreased to greater extent. Minimization the total relevant costs for a group of Items jointly Produced or purchased. Reduction of holding costs. Greater Discounts. Helps in Attracting customers through Discount. Question A Garment company takes different products from a major distributor. The major cost associated with it is 75$ per order, and the annual inventory percentage is 15% of the cost of items. Find the EOQ in dollar value and units for all the items.Brand Name Annual Dem Unit Cost Annual Item Prep Order Order Dem Value Quantity Quantity1 5000 5 1000 5 986.75 197.35
2 4000 8 500 5 789.44 98.83 10000 10 1000 8 1973.5 197.354 18000 12 1500 8 3552.35 296.065 1000 20 50 10 197.30 9.8Total 38000 36Q = sqrt(2KD/h) =7499.331)Number of Orders per year = Quantity Demand Value/Quantity order value= 38000/7499.33=5.07 = 5 orders per year2) Time Duration between two orders = 1/N = 1/5 = 0.2 years