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Inventory managment


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a clear explaination on inventory management and its optimum solution

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Inventory managment

  1. 1. 1
  3. 3. Inventory Definition A stock of items held to meet future demand Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. 3
  4. 4. Introduction Constitute significant part of current assets On an average approximately 60% of current assets in Public Limited Companies in India A considerable amount of fund is required Effective and efficient management is imperative to avoid unnecessary investment Improper inventory management affects long term profitability and may fail ultimately 10 to 20% of inventory can be reduced without any adverse effect on production and sales by using simple inventory planning and control techniques 4
  5. 5. Work in processVendors Raw Work in Finished Customer Materials process goods Work in process 5
  6. 6. Nature of Inventories  Raw Materials – Basic inputs that are converted into finished product through the manufacturing process  Work-in-progress – Semi-manufactured products need some more works before they become finished goods for sale  Finished Goods – Completely manufactured products ready for sale  Supplies – Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment. 6
  7. 7. Objective of Inventory Management  To maintain a optimum size of inventory for efficient and smooth production and sales operations  To maintain a minimum investment in inventories to maximize the profitability  Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality 7
  8. 8. An effective inventory management should  Ensure a continuous supply of raw materials to facilitate uninterrupted production  Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes  Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service  Minimize the carrying cost and time  Control investment in inventories and keep it at an optimum level 8
  9. 9. An optimum inventory level involvesthree types of costsOrdering costs:- Carrying costs:- Quotation or tendering  Warehousing or storage Requisitioning Order placing  Handling Transportation  Clerical and staff Receiving, inspecting and storing  Insurance Quality control Clerical and staff  InterestStock-out cost  Deterioration,shrinkage, Loss of sale evaporation and Failure to meet delivery commitments obsolescence  Taxes  Cost of capital 9
  10. 10. Dangers of Over investment  Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity cost  Excessive carrying cost  Risk of liquidity- difficult to convert into cash  Physical deterioration of inventories while in storage due to mishandling and improper storage facilities 10
  11. 11. Dangers of under-investment Production hold-ups – loss of labor hours Failure to meet delivery commitments Customersmay shift to competitors which will amount to a permanent loss to the firm May affect the goodwill and image of the firm 11
  12. 12. Classification of inventory• ABC Classification• HML Classification• XYZ Classification• VED Classification• FSN Classification• SDF Classification• GOLF Classification• SOS Classification 12
  13. 13. ABC Classification• In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity.• A typical manufacturing operation shows that the top 15% of the line items, in terms of annual rupees usage, A represent 80% of total annual rupees usage.• Next 15% of items reflect 15% of annual rupees• Next 70% accounts only for 5% usage B C 13
  14. 14. XYZ Classification On the basis of value of inventory stored Whereas ABC was on the basis of value of consumption to value. X – High Value Y – Medium value Z – Least value Aimed to identify items which are extensively stocked. 14
  15. 15. HML Classification On the basis of unit value of item There is 1000 unit of Q @ Rs. 10 and 10,000 units of W @ Rs. 5. Aimed to control the purchase of raw materials. H – High, M- Medium, L - Low 15
  16. 16. VED Classification• Mainly for spare parts because their consumption pattern is different from raw materials.Therefore V items has to be stocked more• Raw materials on market demand • Spare parts on performance of plant and machinery. • and D Items has to be less stocked V – Vital, E – Essential, D – Desirable 16
  17. 17. FSN Classification According to the consumption pattern To combat obsolete items F – Fast moving S – Slow moving N – Non Moving 17
  18. 18. SDF & GOLF Classification Based on source of procurement S – Scarce, D- Difficult, E- Easy. GOLF G – Government, O – Ordinary, L – Local, F – Foreign. 18
  19. 19. SOS Classification Raw materials especially for agriculture units S – Seasonal OS – Off seasonal 19
  20. 20. EOQ – Three ApproachesTrial and Error methodOrder-formula approachGraphical approach 20
  21. 21. EOQ & Re-order pointEOQ – gives answer to question “How much to Order”Re-order point – gives answer to question “when to order” 21
  22. 22. Trial & Error Method Assumptions:- Annual requirement (C)=1200 units Carrying cost (I) = Rs.1 Ordering cost (O) =Rs.37.5 Order size Q 1200 600 400 300 240 200 150 120 100 Average inventory Q/2 600 300 200 150 120 100 75 60 50 No. of orders C/Q 1 2 3 4 5 6 8 10 12 Annual carrying cost 600 300 200 150 120 100 75 60 50 I* Q/2 Annual ordering cost 37.5 75 112.5 150 187.5 225 300 375 450 O*C/Q Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500 22
  23. 23. Order- Formula approach 1/2 EOQ =(2CO/I)C = Annual demandO = Ordering cost per orderI = Carrying cost per unit 1/2EOQ =(2*1200*37.5/1) = 300 units 23
  24. 24. Graphical method to findEOQ Cost in RS. 0 EOQ Order quantity 24
  25. 25. A Review So we have dealt with 1. EOQ model 2. Its extension 3. And now we will be dealing with special inventory models 25
  26. 26. Special inventory model  Non – Instantaneous replenishment  Quantity Discount  One – period decision 26
  27. 27. Special inventory model Non – Instantaneous replenishment Capacity 10 units A B C D Thus the inventory is replenished gradually than in lotsParticularly in situation were manufacturers use continuesproduction processe.g. FACT makes Ammonium on a continual basis27
  28. 28. Special inventory model Discount Quantities  If discount increases with the order quantity, then the price of inventory is no more constant Hence a new approach is needed to find the best lot size Total Annual holding Annual Annual cost of cost = cost + ordering cost + materials 28
  29. 29. Special inventory model One period decisions The newsboy problem  If a newspaper seller does not buy enough papers to resell on the street corner, sales opportunity is lost. If the seller buys too many, the overage cannot be sold because nobody wants yesterdays newspaper. Applicable to fashion goods, seasonal goods and due to change in technology 29
  30. 30. Inventory management under uncertainty1. Option price model2. Risk adjusted discount cash flow (DFC) Model3. Dynamic inventory model 30
  31. 31. Option price model Option is a contract that gives the holder a right to acquire or sell certain things at a predetermined price without any obligation. Calculated by integrating the market information and inventory control. 31
  32. 32. Risk adjusted discount cash flow (DFC) Model • Inventory control problem is converted to capital budget problemBeneficial afor projects like to hold an • Suppose television dealer decides oil drilling were the additional inventory of 1000 television per month. Thebenefit of holding inventory is spread overtime. cost is acquired only after a long time butonce Inflows = struck the additional expanse is covered. • oil is no: of units × probability × present value 32
  33. 33. Dynamic inventory model1. Uncertain variables are identified2. Probability associated with them is taken3. Simulation techniques are applied 33
  34. 34. Emerging trends in inventorymanagement• Entering into log term contract at a fixed price to reduce uncertainties• Just-in-time• Kanbans – Japanese technique (Only produce when demand comes)• Internet based ordering system• Vendor development• Investment in plant and machinery• Continuous-flow manufacturing• Visual control• Supply chain management 34
  35. 35. Theories under Supply chain Managment  Resource-based view (RBV)  Transaction Cost Analysis (TCA)  Knowledge-Based View (KBV)  Strategic Choice Theory (SCT)  Agency Theory (AT)  Institutional theory (InT)  Systems Theory (ST)  Network Perspective (NP)  Materials Logistics Management (MLM)  Just-in-Time (JIT)  Material Requirements Planning (MRP)  Theory of Constraints (TOC)  Performance Information Procurement Systems (PIPS)
  36. 36.  Performance Information Risk Management System (PIRMS) Total Quality Management (TQM) Agile Manufacturing Time Based Competition (TBC) Quick Response Manufacturing (QRM) Customer Relationship Management (CRM) Requirements Chain Management (RCM) Available-to-promise (ATP) and many more 36
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