Inventory mgmt


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Inventory mgmt

  1. 1. Inventory Management
  3. 3. Functions of Inventory • Decouple components of the operations and distribution • Uncertainties/variations in demand • Flexibility in production smoothing • Economies of scale in purchase and mfg • To help hedge against price increases • To take advantage of order cycles
  4. 4. Supply Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Production/ purchase costs Inventory & warehousing costs Transportation costs Inventory & warehousing costs Transportation costs
  5. 5. Departmental Orientation Towards Inventory • Marketing – Sell the product – Good customer service – Large inventory
  6. 6. Departmental Orientation Towards Inventory • Production – Make the product – Efficient lot sizes – Large inventory
  7. 7. Departmental Orientation Towards Inventory • Purchasing – Buy the required materials – Low cost per unit – Large inventory
  8. 8. Departmental Orientation Towards Inventory • Finance – Provide working capital – Efficient use of capital – Low inventory
  9. 9. Departmental Orientation Towards Inventory • Engineering – Design the product – Avoiding obsolescence – Low inventory
  10. 10. Inventory Hides Problems Areas Work in process queues (banks) Change orders Engineering design redundancies Vendor delinquencies Scrap Design backlogs Machine downtime Decision backlogs Inspection backlogs Paperwork backlog Tip of the Iceberg Analogy
  11. 11. Goals of Inventory Management • Maximize customer service (this requires carrying substantial inventory). • Minimize inventory investment (this requires carrying little inventory). • Customer service takes absolute precedence. – Customer service must be a strategic issue. – Leading edge discussion now centers on types of customer service • Shortened delivery time • Speed to market • Design flexibility
  12. 12. Types of Inventories • Raw materials • Components • Work-in-process • Finished goods • Vendor inventories • Non-moving/slow moving stock • Safety stock • In-transit inventories • Service parts/Consumables
  13. 13. Inventory Costs • Holding cost • Ordering cost • Setup cost • Shortage costs
  14. 14. Holding Cost • Cost of storage facilities • Handling cost • Taxes • Insurance • Deterioration • Obsolescence • Shrinkage • Cost of capital
  15. 15. Ordering Costs • Preparation of purchase requisition/order • Mail • Expediting, including fax, telephone • Transportation • Receiving • Put away • Updating inventory records • Paying invoice
  16. 16. Setup Costs • Order preparation • Stock picking • Setup • Inspection • Waiting/Queue-time • Order close out • Updating inventory records
  17. 17. Inventory Control Systems • How often should the assessment of stock on hand be made? • When should a replenishment order be placed? • What should be the size of the replenishment order?
  18. 18. Inventory Counting Systems • Periodic System Physical count of items made at periodic intervals • Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
  19. 19. Inventory Control Systems •Fixed order quantity model (continuous review) •Fixed time period model (periodic review) •Visual system Two-bin system Single bin system •ABC classification system
  20. 20. The Inventory Order Cycle Demand rate 0 TimeLead time Lead time Order Placed Order Placed Order Received Order Received InventoryLevel Reorder point, R Order qty, Q
  21. 21. EOQ Model Cost Curves Slope = 0 Total Cost Ordering Cost = (D/Q)S Order Quantity, Q Annual cost (Rs) Minimum total cost Optimal order Qopt Carrying Cost = (Q/2)H
  22. 22. Notation • D = annual demand • C = per-unit cost • h = inventory holding rate (%) • S = order cost • Q = order quantity • R = reorder point • SS = safety stock • LT = lead time
  23. 23. EOQ Model • Balance holding cost against ordering costs • Calculate the optimal EOQ: * 2DS Q Ch = •No of orders per year = D/Q* •Time between orders = Q*/D
  24. 24. Fixed Order Quantity Model Reorder = Expected demand + Safety point during lead time stock
  25. 25. Fixed Order Quantity Model Reorder point, R Q 0 Inventorylevel L L Time Safety stock
  26. 26. Fixed Time Period Model • Reviewed at fixed specified time interval. • Place an order for a quantity that, when added to the quantity on hand, will equal a predetermined maximum level. • Independent demand is the usual situation. • Difficult to record withdrawals and additions from stock. • Groups of items are purchased from a common supplier. • Items that have limited shelf life.
  27. 27. Fixed Time Period Model • Small tools, manufacturing supplies. • Common commercial parts such as nuts, bolts, washers. • Office supplies. • Perishable items such as dairy products, fruits and vegetables. • Chemicals, solvents used in the manufacturing process.
  28. 28. Fixed Time Period Model 0 Inventorylevel L L Time Safety stock Review Time
  29. 29. Two-Bin System • Special case of fixed order quantity model. • Amount of stock equivalent to the order point is physically segregated into a second bin and is then sealed. • When all the open stock has been used up, the sealed bin is opened and a new order is placed. • Practical method for keeping control of low-value items. • Without adequate training this system can be abused. • Quantity in the second bin should be reviewed from time to time.
  30. 30. Single-Bin System • Stock is periodically checked and each item is ordered to a pre-established stock level. • Works well on floor stocks located near the point of use, like large grocery stores.
  31. 31. ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. AA - very important BB - mod. important CC - least important Annual Rs volume of items AA BB CC High Low Few Many Number of Items
  32. 32. ABC Analysis • Pareto noted that many situations are dominated by a relatively few vital elements. • Controlling the relatively vital few will go a long way toward controlling the situation. • Applying the ABC principle to inventory management involves: – Classifying the inventory items on the basis of relative importance. – Establishing different controls for different classifications with the degree of control being commensurate with the ranked importance of each classification.
  33. 33. Inventory Turnover and Service Levels Inventory turnover is the measure of how well the business is managing its inventory. It shows how many times a year the inventory is turning(or moving) through the organisation. The higher the turnover,the better.However there is a larger probability That stock may not be available when the customer needs it.
  34. 34. Inventory Turnover ….. • Inventory turnover in a Retail business Total sales/Actual inventory • Inventory turnover in a Manufacturing business Cost of Goods sold/Actual inventory
  35. 35. Simple physical techniques may provide more economical control of inventories.