Inventory ManagementInventory is an idle stock of physical goods that containeconomic value, and are held in various forms by anorganization in its custody awaiting packing, processing,transformation, use or sale in a future point of time. All organizations engaged in production or sale of products hold inventory in one form or other. Inventory can be in complete state or incomplete state. Inventory is held to facilitate future consumption, sale or further processing/value addition.
The reasons for keeping stock1) Smooth-out variations in operation performances2) Avoid stock out or shortage3) Safeguard against price changes and inflation4) Take advantage of quantity discounts All these stock reasons can apply to any owner or product
Inventory costs 1. Holding or carrying costs:- Interest on Investment. Losses from deterioration and spoilage. Storage-space costs, including Rent, Rates, Taxes, Electricity, etc. Insurance, in addition- fixed costs in form of salaries, wages etc of employees connected with this work in stores and Material handling DepartmentsAnnual holding cost = Order quantity/2 × holding cost per unit per year
Ordering Cost : Preparing purchase or production orders, receiving and preparing and processing related documents. Incremental costs of purchasing or transportation for frequent orders. Out of pocket costs of postage, telephones, telegrams, cost of stationery, traveling etc. Extra costs of numerous small production runs, overtime, setups, training etc. In addition- fixed costs in form of salaries, wages of employees connected with this work in purchasing, receiving, inspection and Material handling Departments.Annual ordering cost = no. of orders placed in a year × cost per order
Techniques of inventory control:1) Economic order quantity (How much to order)2) Reorder level (when to order)3) Minimum inventory or safety stock5) Maximum inventory level
Economic order quantity It is the level of inventory that minimizes total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for his in-depth analysis.Assumptions3) Order arrives instantly4) No stock out5) Constant rate of demand
Example:Cost to Purchase = $4.00 per line item purchasedCost to Carry = $0.30 per dollar of inventory per yearQty Used/Month = 10 pieces per monthCost of item “A" = $1.00 each
Reorder level This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out. The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety stock quantity.Ordering level = Max - daily or weekly or monthly usage × Lead time
Example:Maximum daily requirement 800 unitsTime required to receive emergencysupplies 4 daysAverage daily requirement 700 unitsMinimum daily requirement 600 unitsTime required for refreshsupplies One month (30 days)Calculate: ordering point or re-order level
Minimum Inventory or SafetyStockThe minimum level or minimum stock is that level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies.Minimum level = Re-order level – Average or normal usage × Average lead time
Example:Normal usage 100 units per dayMaximum usage 130 units per dayMinimum usage 70 units per dayRe-order period 25 to 30 daysCalculate Minimum limit or level
Maximum inventory level The maximum stock limit is upper level of the inventory and the quantity that must not be exceeded without specific authority from management. In other words, the maximum stock level is that quantity of material above which the stock of any item should not normally be allowed to go. This level is fixed after taking into account such factors as: capital, rate of consumption of materials, storage space available, insurance cost, risk of deterioration and obsolescence and economic order quantity.Maximum level = Re-order level – (Min- usage × Min- lead time )+ Economic order quantity
Example:Normal usage 100 units per dayMaximum usage 130 units per dayMinimum usage 70 units per dayRe-order period 25 to 30 daysEconomic order quantity 5,000 unitsCalculate: Maximum limit or level.
Danger LevelSome enterprise also calculate danger level. When this level of stock is reached, then emergency steps are taken by the management to acquire material supplies.When danger level is reached, the try is made to purchase materials from the nearest possible source or place so that the workers and plant and machinery may not remain idle due to shortage of materials supplies.Danger level = Average daily usage × Time required to get emergency supply
Example:Normal usage or averagerequirement 700 units per dayMaximum usage 800 units per dayMinimum usage 600 units per dayRe-order period 25 to 30 daysTime required to receiveemergency supplies 4 DaysCalculate danger level.