2. Content:
Purpose of inventories – relevant inventory costs, EOQ
model and assumptions in EOQ. ABC analysis – VED analysis.
Inventory control systems –P–Systems and Q-Systems.
Introduction to MRP, inputs to MRP, Bill of material, JIT
inventory - Kanban system.
3. Meaning of Inventory
Inventory generally refers to the materials in stock. It is
also called the idle resource of an enterprise.
Inventories represent those items which are either
stocked for sale or they are in the process of manufacturing or
they are in the form of materials, which are yet to be utilized.
The interval between receiving the purchased parts and
transforming them into final products varies from industries to
industries depending upon the cycle time of manufacture
4. Meaning of Inventory Control (Management)
Inventory control is a planned approach of determining
what to order, when to order and how much to order and how
much to stock so that costs associated with buying and storing
are optimal without interrupting production and sales.
Inventory control basically deals with two problems:
(i)When should an order be placed? (Order level), and
(ii)How much should be ordered? (Order quantity).
Scientific inventory control aims at maintaining optimum level
of stock of goods required by the company at minimum cost to
the company.
5. Purpose of Inventories(Reasons)
To stabilise production.
To take advantage of price discounts.
To meet the demand during the replenishment period.
To prevent loss of orders (sales).
To keep pace with changing market conditions.
6. Relevant inventory costs
The inventory policies affect profitability, the choice among
policies depends upon their relative profitability. Some of
the costs that determine this profitability are
(1) Ordering costs,
(2) Holding costs, and
(3) Shortage costs.
7. Economic order quantity (EOQ) model
The ‘order quantity’ means the quantity produced or procured
during one production cycle.
Economic order quantity is calculated by balancing the two
costs. Economic Order Quantity (EOQ) is that size of order
which minimizes total costs of carrying and cost of ordering.
i.e., Minimum Total Cost occurs when Inventory Carrying Cost =
Ordering Cost.
9. Determination of EOQ by tabulation (Trial &
Error) method
This method involves the following steps:
1. Select the number of possible lot sizes to purchase.
2. Determine average inventory carrying cost for the lot
purchased.
3. Determine the total ordering cost for the orders placed.
4. Determine the total cost for each lot size chosen which is
the summation of inventory carrying cost and ordering cost.
5. Select the ordering quantity, which minimizes the total cost.
10. The XYZ Ltd. carries a wide assortment of items for its
customers. One of its popular items has annual demand of
8000 units. Ordering cost per order is found to be Rs. 12.5. The
carrying cost of average inventory is 20% per year and the cost
per unit is Re.1.00. Determine the optimal economic quantity
and make your recommendations.
12. • The table and the graph indicates that an order size of 1000 units will
gives the lowest total cost among the different alternatives.
• It also shows that minimum total cost occurs when carrying cost is
equal to ordering cost.
13. Assumptions in EOQ
In order to derive an economic lot size formula following
assumptions are made:
1.Demand is known and uniform.
2.Let D denotes the total number of units purchase/produced
and Q denotes the lot size in each production run.
3.Shortages are not permitted, i.e., as soon as the level of the
inventory reaches zero, the inventory is replenished.
4.Production or supply of commodity is instantaneous.
14. 5.Lead-time is zero.
6.Set-up cost per production run or procurement cost is C3.
7.Inventory carrying cost is C1 = CI
where C is the unit cost and I is called inventory carrying cost
expressed as a percentage of the value of the average
inventory.
15. This fundamental situation can be shown on an inventory-time
diagram, with Q on the vertical axis and the time on the
horizontal axis. The total time period (one year) is d ivided into
n parts.
16. The most economic point in terms of total inventory cost exists
where,
Inventory carrying cost = Annual ordering cost (set-up cost)
Average Average inventory = 1/2 (maximum level + minimum
level)
= (Q + 0)/2 = Q/2
Total inventory carrying cost = Average inventory× Inventory
carrying cost per unit
i.e., Total inventory carrying cost = Q/2 × C1
= QC1/2 …(1)
17. i.e., Total annual ordering costs = (D/Q) × C3 = (D/Q)C3 …(2)
Now, summing up the total inventory cost and the total
ordering cost, we get the total inventory cost C(Q).
i.e., Total cost of production run = Total inventory carrying cost
+ Total annual ordering costs
C(Q) = QC1/2 + (D/Q)C3 (cost equation) …(3)
But, the total cost is minimum when the inventory carrying
costs becomes equal to the total annual ordering costs.
Therefore,
QC1/2 = (D/Q)C3 (or) QC1 = (2D/Q)C3 (or) Q2 = 2C3D/C1
18.
19. An oil engine manufacturer purchases lubricants at the rate of
Rs. 42 per piece from a vendor. The requirements of these
lubricants are 1800 per year. What should be the ordering
quantity per order, if the cost per placement of an order is Rs.
16 and inventory carrying charges per rupee per year is 20 paise.
20. Given,
Number of lubricants to be purchased, D = 1800 per year
Procurement cost, C = Rs. 16 per order 3
Inventory carrying cost, CI = C1
= Rs. 42 × Re. 0.20 = Rs. 8.40 per
year
Then, optimal quantity (EOQ),
21. A manufacturing company purchase 9000 parts of a machine
for its annual requirements ordering for month usage at a time,
each part costs Rs. 20. The ordering cost per order is Rs. 15 and
carrying charges are 15% of the average inventory per year. You
have been assigned to suggest a more economical purchase
policy for the company. What advice you offer and how much
would it save the company per year?
22. Given data are:
Number of lubricants to be purchased, D = 9000 parts per year
Cost of part, Cs = Rs. 20
Procurement cost, C3 = Rs. 15 per order
Inventory carrying cost, CI = C1
= 15% of average inventory per year
= Rs. 20 × 0.15
= Rs. 3 per each part per year.
23.
24.
25. Techniques of Inventory Control
In any organization, depending on the type of business,
inventory is maintained.
When the number of items in inventory is large and then
large amount of money is needed to create such inventory, it
becomes the concern of the management to have a proper
control over its ordering, procurement, maintenance and
consumption.
The control can be for order quality and order frequency.
26. The different techniques of inventory control are:
(1) ABC analysis, (2) HML analysis, (3) VED analysis,
(4) FSN analysis, (5) SDE analysis, (6) GOLF analysis and
(7) SOS analysis.
The most widely used method of inventory control is known as
ABC analysis. In this technique, the total inventory is
categorised into three sub-heads and then proper exercise is
exercised for each sub-heads.
27. ABC analysis (PARETO ANALYSIS)
In this analysis, the classification of existing inventory is based
on annual consumption and the annual value of the items.
Hence we obtain the quantity of inventory item consumed
during the year and multiply it by unit cost to obtain annual
usage cost. The items are then arranged in the descending
order of such annual usage cost. The analysis is carried out by
drawing a graph based on the cumulative number of items and
cumulative usage of consumption cost.
28. Classification is done as follows:
In ABC analysis, the entire lot of inventory is classified into three groups based on their annual
value and not on their individual cost.
29. Procedure Of ABC Classification
• Step 1: List down item- wise annual consumption of inventory with unit price and
determine the annual consumption of each items.
• Step 2: Rewrite the above list in the descending order of money value with
additional column to enter cumulative % value.
• Step 3: From the list prepared , mark the serial number of items against which the
cumulative % value of annual consumption reaches a figure of 70% approximately.
These are called as A items and compute the number of class A items as a percent
of total items. Continue this process down the list and note the serial number of
items against which the cumulative % value reads approx. 90% . These additional
items constitute class B. The remaining items in the list from class C items and
determines quantity in percent of total number of items.
• Step 4: Plot curve with cumulative % of annual usage(no of items) on quantity
items on X- axis and % of usage value(money value) on Y- axis.
31. Once ABC classification has been achieved, the policy control can be
formulated as follows:
(a) A-Item: Very tight control, the items being of high value. The control
need be exercised at higher level of authority.
(b) B-Item: Moderate control, the items being of moderate value. The
control need be exercised at middle level of authority.
(c) C-Item: The items being of low value, the control can be exercised at
gross root level of authority, i.e., by respective user department
managers.
32. Advantages
• Provides a mechanism for identifying items that will have a
significant impact on overall inventory cost.
• It helps in economizing ones effort to achieve greater results.
• It helps to segregating those items which ought to be given
priority to maximize results.
• Proper use of valuable time of store personnel.
• Simple no confusing formulas are involved.
33. Limitations
• When number of items run into several thousands, it is not convenient
to compute and carry out this analysis.
• More chances of deterioration in storage exist since class C are
purchased in bulk and inventory on these piles up.
• Loose control on C may result in shortage.
• ABC focuses on money value and not on functional importance of
such items, resulting in shortages of critical items.
• ABC does not take into account variation of prices of items as time
goes.
• ABC ignores market conditions, market availability, competitions,
seasonal variations etc.
34. VED analysis
• In this analysis, the classification of existing inventory is based
on criticality of the items. They are classified as vital, essential
and desirable items. It is mainly used in spare parts inventory.
• The vital items are stocked in abundance , essential items are
stocked in medium amounts and desirable items we stocked
in small amounts .
• Vital and essential items are always in stock which means a
minimum disruption in the services offered to the people.
35. Advantages
• It is useful for monitoring and control of stores and spares
inventory by classifying them into three categories.
• Determine the criticality of an item and its effect on
production and other services.
• It is useful for controlling and maintain the stock of various
types.
36. MATRIX OF ABC/VED ANALYSIS
• Combination of these two categories ABC and VED in a matrix
can be done.
• This matrix is more relevant in hospitals.
• The AV category becomes the most important for inventory
control because the items are very much cost consuming
being A category and also Vital for uses.
• These items can be controlled by the top-level management.
• The CD category items are not very costly and at the same
time of Desirable category.
• These items are controlled at the lower level.
37. V E D
A AV AE AD
B BV BE BD
C CV CE CD
Category I
Category II
Category III
38. Control Of Items:
• Category I: These items are the most important ones and
require control by the administrator himself.
• Category II: These items are of intermediate importance
and should be under control of the office in charge of
the stores.
• Category III: These items are the least importance which
can be left under the control of the store keeper.
39. • The grouping will essentially depend upon the strategy of management
and the environment of functioning.
• However these simple techniques can be effective techniques can be
effective in material management system.
• Items with high criticality (V) , but required in small quantity (A) should
receive highest priority.
• Items with low criticality (D) and which are required in big quantity should
receive least priority.
EXAMPLE
40. Inventory control systems
The inventory control systems are developed to cope with situation
where the demand and lead time both are fluctuating. The basic
approach to all stock control method is to establish a re-order level
which, when reached would indicate signal for the replenishment action.
Thus the replenishment of inventories means determining the quality to
be ordered and the time of ordering.
In an inventory control system there are two types of replenishment
systems
1. Fixed quantity system.
2. Fixed period system
41. Continuous Review System (Q)/ Fixed quantity system :
A continuous review (Q) system or reorder point (ROP) system or
fixed order-quantity system tracks the remaining inventory of an item
each time a withdrawal is made to determine whether it is time to
reorder.
Periodic Review System (P)/ Fixed period system: With the periodic
review system, you determine the quantity of an item your company has
on hand at specified, fixed-time intervals.
42. Introduction to MRP
The demand for a finished good tends to be independent and
relatively stable. However, firms typically make more than one product
on the same facilities, so production is generally done in lots, e.g., of
different end items or models. The quantities and delivery times for the
materials needed to make those end items are determined by the
production schedule.
Material Requirements Planning (MRP) is a computer-based technique
for determining the quantity and timing for the acquisition of dependent
demand items needed to satisfy the master schedule requirements.
By identifying precisely what, how many, and when components are
needed, MRP systems are able to reduce inventory costs improve
scheduling effectiveness, and respond quickly to market changes.
44. The essential inputs and outputs in an MRP
system are listed below :
Inputs
• MPS of end items required.
• Inventory status file of on-hand
and on-order items, lot sizes,
lead times, etc.
• Product structure (BOM) file of
what components and
subassemblies go into each
end product.
Outputs
• Order release data to CRP for
load profiles.
• Orders to purchasing and in-
house production shops.
• Rescheduling data to MPS.
• Management reports and
inventory updates.
45. Benefits of MRP
Reduced inventories without reduced customer service.
Ability to track material requirements.
Ability to evaluate capacity requirements.
Means of allocating production time.
Increased customer satisfaction due to meeting delivery
schedules.
Faster response to market changes.
Improved labor and equipment utilization.
Better inventory planning and scheduling.
46. Bill of material
A bill of materials (BOM) is a listing of all the materials, components,
and subassemblies needed to assemble one unit of an end item.
Major function of the bill of materials is to provide the product
structure hierarchy that guides the explosion process.
Different methods of describing a BOM are in use.
(a)A product structure tree and
(b)An indented BOM.
47. Both are common ways of depicting the parent-component
relationships on a hierarchical basis. Knowledge of this
dependency structure reveals clearly and immediately what
components are needed for each higher-level assembly. A third
method (c) is to use single-level bills of material.
48. • MRP is a planning system that does not do detailed
scheduling.
• MRP requires fixed lead times which might actually vary
with batch size.
• JIT excels at rapidly moving small batches of material
through the system.
49. JIT inventory
Just-in-Time (JIT) Manufacturing is a philosophy rather than a
technique. By eliminating all waste and seeking continuous
improvement, it aims at creating manufacturing system that is response
to the market needs.
The phase just in time is used to because this system operates with
low WIP (Work-In- Process) inventory and often with very low finished
goods inventory. Products are assembled just before they are sold,
subassemblies are made just before they are assembled and
components are made and fabricated just before subassemblies are
made. This leads to lower WIP and reduced lead times. To achieve this
organizations have to be excellent in other areas e.g. quality.
50. According to Voss, JIT is viewed as a “Production methodology
which aims to improve overall productivity through elimination
of waste and which leads to improved quality”. JIT provides an
efficient production in an organization and delivery of only the
necessary parts in the right quantity, at the right time and place
while using the minimum facilities”.
51. JIT, well known as Toyota Production System was founded by MR.
Taiichi Ohno, a vice president of Toyoto.
Basically implemented in Toyota plant in 1950. It was well established
after 1970.
Later, in 1980 it was adopted by General Electrical in USA.
Some companies referred JIT with different names.
Toyota = Toyota System
IBM = Continois flow msnufacturing.
Heweltt- Packard = Stockless production and repetitive manufacturing
system.
General Electrical = Management by sight.
JIT is used in Mc Donald’s, it doesn’t begin to cook its orders until
a customer has placed a specific order.
52.
53. The most significant benefit is to improve the responsiveness of
the firm to the changes in the
market place thus providing an advantage in competition.
Following are the benefits of JIT:
1. Product cost—is greatly reduced due to reduction of
manufacturing cycle time, reduction of waste and inventories
and elimination of non-value added operation.
2. Quality—is improved because of continuous quality
improvement programmes.
54. 3. Design—Due to fast response to engineering change,
alternative designs can be quickly brought on the shop floor.
4. Productivity improvement.
5. Higher production system flexibility.
6. Administrative and ease and simplicity.
55. Danger of disrupted production due to non arrival/ non
availability of supplies.
Danger of lost sales.
High dependence on suppliers.
Less time for quality control on arrival of materials.
Increased ordering and admin costs.
May lose bulk- buying discounts.
Time consuming.
56. Kanban system / Pull system
• Kanban, also spelt “kamban” in Japanese, that indicates
“available capacity (to work)”. Kanban is a concept related to
lean and just-in-time (JIT) production, where it is used as a
scheduling system that tells you what to produce, when to
produce it, and how much to produce
• Kanban is a visual system for managing work as it moves
through a process. Kanban visualizes both the process and
the actual work passing through that process.
• The goal of Kanban is to identify potential bottlenecks in your
process and fix them so work can flow through it cost-
effectively at an optimal speed or throughput.
57. • A Kanban system ideally controls the entire value chain from
the supplier to the end consumer. In this way, it helps avoid
supply disruption and overstocking of goods at various stages
of the manufacturing process.
• Kanban requires continuous monitoring of the process.
Particular attention needs to be given to avoid bottlenecks
that could slow down the production process.
• The aim is to achieve higher throughput with lower delivery
lead times. Over time, Kanban has become an efficient way in
a variety of production systems.
58. • The Kanban Method is a process to gradually improve whatever you
do – whether it is software development, IT/ Ops, Staffing,
Recruitment, Marketing and Sales, Procurement etc. In fact, almost
any business function can benefit from applying the principles of the
Kanban Methodology.
• At the core of Kanban is the concept of “Flow”. This means that the
cards should flow through the system as evenly as possible, without
long waiting times or blockages. Everything that hinders the flow
should be critically examined. Kanban has different techniques,
metrics and models, and if these are consistently applied, it can lead to
a culture of continuous improvement.
59. In a classic Kanban board model,
there are three columns, as shown
in the picture above:
“To Do”: This column lists the tasks
that are not yet started.
(“backlog”)
“Doing”: Consists of the tasks that
are in progress.
“Done”: Consists of the tasks that
are completed.
