The document describes an inventory control model for managing supply chains effectively. It explains key aspects of the model including types of materials needed, importance of materials, and how the inventory control model operates. The model uses minimum and maximum inventory levels, a reorder point, lead time, and safety stock. It aims to ensure adequate materials are available without overstocking by replenishing inventory as it reaches the reorder point. Factors like consumption rates, order quantities, lead times, and supplier reliability impact the model and may require adjustments.

1. 1
ORDER PROCESSING
&
INVENTORY CONTROL MODEL
FOR EFFECTIVE
SUPPLY CHAIN MANAGEMENT

2. 2
PURCHASINGPROCEDURE

3. 3
TYPES OF MATERIALS REQUIRED
IN AN INDUSTRIAL UNIT
• Raw materials for producing the end product.
• Spare parts for repair and maintenance.
• Consumables for repairs and maintenance of
plant and machinery and also for support
functions necessary to run the organization,
such as cleaning materials for up-keep of the
buildings.
• Chemicals and glassware for testing laboratory
supporting the quality control activities.
• Uniforms and safety gadgets such as helmets,
shoes and goggles etc for safety of persons.

4. 4
IMPORTANCE OF MATERIALS IN
PLANT OPERATIONS
• Materials are used in every activity of the
organization.
• 60% of the cost of the production of the end
product is the cost of materials.
• It is important for continuing operations and
should be available in right time.
• Control on the cost of materials helps to keep
the competitiveness of the organization.

5. 5
INVENTORY CONTROL MODEL
Lead
time
Receipt of
materials
Safety-
stock
Reorder
point
Working
quantity
Minimum
-level
Maximum
-level
InventoryLevel
Time

6. 6
HOW INVENTORY CONTROL
MODEL OPERATES - 1
• In a stabilized production operation inventory
of an item is controlled in such a way that:
– There is a minimum stock at any time.
– That material should never cross the maximum
level.
• These levels are fixed with the help of
operations staff in the plant based on
historical data and the expected
requirements of materials keeping in view
the condition of the plant and machinery.

7. 7
HOW INVENTORY CONTROL
MODEL OPERATES - 2
• Crossing the maximum level means over stocking.
• When the inventory level goes below the minimum level, it
could result in stock out.
• A reorder point is set in between these two set points i.e.
the maximum and the minimum level of inventory.
• Order for material is placed at the reorder point is reached.
• The reorder point is set in such a manner that ordered
material is received before the stock level reach the
minimum stock level.
• An order is placed for the working quantity of the material.
• The working quantity is received at the end of the lead
time, and when the inventory has reached to the minimum
level.
• On receipt of material, the stock level of inventory jumps to
the maximum level.

8. 8
INVENTORY CONTROL
CONCEPT - 1
• Materials kept in the warehouse are known as
inventory.
• These may include raw materials and spare
parts and consumables.
• Materials are issued for use when needed.
• There should not be any shortage of materials
when needed.
• Excess of materials in the stores is also not
desirable.
• Control on the quantity of each item in the
inventory is known as inventory control .

9. 9
INVENTORY CONTROL
CONCEPT - 2
• Inventory control is to maintain inventory items in
such a quantity that the items in the inventory do not
remain in stock for long and has high turnover.
• Inventory should not block the useable financial
resources.
• Inventory items should be in sufficient in quantity:
– so that they are available when needed and do not
results in loss of production
– Do not delay in repair and maintenance of the
machines.
• Cost of inventory is another aspect and is to be kept
low by purchasing right quantity at right price and at
right time.
• Inventory control is used as a tool for cost reduction.

10. 10
ASSUMPTIONS IN INVENTORY
CONTROL MODEL
• The consumption of inventory is at a uniform rate
through out the cycle,
• The order is placed when the inventory level reaches
the reorder point.
• The ordered quantity is received by the time
inventory level reaches to the minimum level.
• The lead time does not change between reorder
point and the point when inventory reaches the
minimum level when fresh quantity is received.
• However, in real life situations there are variations in
each condition due to both internal and external
factors and inventory controller has to review the
situation regularly.

11. 11
ELEMENTS OF INVENTORY
CONTROL
• Minimum stock level.
• Maximum stock level.
• Safety stock level
• Reorder level.
• Lead time.

12. 12
MINIMUM STOCK LEVEL
• It is the level below which the inventory level is not allowed
to fall.
• If the level of inventory is below this level, there are
chances that plant operations are adversely affected.
• As soon as the stock level reaches the minimum level for
any reason:
– The matter is to be reported to the higher management
immediately
– Extra efforts are made or additional resources are
deployed to ensure that the material is received at the
earliest.
What is done?
The item could be received by faster mode of transport
say by air or by courier service in place of sea or rail or
is purchased from any other source even at a higher
cost.
• Minimum level is an indication of the danger and provides
alert for stock out situation.

13. 13
MAXIMUM STOCK LEVEL
• It is the inventory level, beyond which the stock level is not allowed to
exceed.
• The maximum level is used as a control point to avoid any extra
stocks.
• Order quantity for material is controlled in such a way that when the
material is received the inventory level is below the maximum level.
• However, at times the maximum level is crossed:
– To avail benefits of attractive discounts,
– Saving on the transportation/freight charges,
– Due to strategic buying decision.
• The maximum level if crossed with prior evaluation of overall benefits
is a correct approach.
• If it crossed due to lack of control, the matter should be viewed
seriously.
• Failure to control the maximum level may result in non-moving or slow
moving items and in some cases obsolete items.
• Inventory turnover would be adversely affected if maximum level is not
controlled.
• Maximum level is fixed by taking into consideration the lead time for
the item.

14. 14
SAFETY STOCK -1
• Safety stock is the level of inventory which is to be
maintained always to take care of unforeseen factors such
as:
– Delay in ordering,
– Delay in supply by supplier,
– Delay in transportation
– Hindrances' in execution of orders by the supplier,
which may be beyond his control like war, flood or
strike.
• A very high degree of safety would need high level of
inventory,
• A low degree of safety would require low inventory stock.
• Safety stock follows the path of ‘S’curve.

15. 15
S CURVE – PATH OF SAFETY
STOCK
LevelofInventory
Degree of safety

16. 16
SAFETY STOCK -2
• Higher level of inventory is to be maintained
for high level of safety and blocking of
financial resources:
• The safety level is decided depending on:
– The criticality of the stoppage of
operations,
– Reliability of source of supply,
– Location of supplier
– Number of sources of supply.
• The desired safety level of inventory level
then determine the ‘Safety Stock’.
• Normally, most of the organizations maintain
safety stock equal to minimum stock level.

17. 17
REORDER POINT
• Reorder point is important tool for controlling inventory
and to ensure that there is no stock out.
• Reorder point is dependant on lead time.
• It is set in such a manner that if order is placed at reorder
point, the material is received by the time the inventory
level reaches minimum stock level.
• Reorder point shifts with the change in rate of
consumption and is set based on average yearly
consumption.
• The lead time if changes, the reorder point should be
adjusted.
• In practice, the reorder point is established quite correctly
based on:
– Past experience,
– Rate of consumption
– Lead time.
– Reorder point is normally calculated by computer
automatically.

18. CALCULATION OF MAXIMUM, MINIMUM, REORDER
AND AVERAGE STOCK LEVELS
The formulae used for fixing various levels are:
Maximum
level
= Reordering
level
Expected minimum
consumption in
- units during least
time to obtain
delivery
+ Reorder
quantity
Maximum
level
= Reorder
level
- Average usage
per period
x Average time to
obtain delivery
Reorder level = Maximum reorder period x Maximum usage
Maximum level + Minimum level
Average stock level = 2
Reorder Point = Average daily usage x Lead time in days + Safety Stock

19. 19
FACTORS INFLUENCING
INVENTORY CONTROL
• An operating plant faces new problems
every time, which have an impact on
inventory control activities.
• Rate of consumption of materials, order
quantity, reorder point and lead time
undergo changes for one or the other
reasons and disturb the theoretical
inventory control model.

20. 20
EFFECT OF HIGHER RATE OF
CONSUMPTION
Lead
time
Receipt of
materials
Safety
-stock
Reorder
point
Working
quantity
Minimu
m-level
Maximu
m-level
Time
Normal rate of
consumption
Higher rate of
consumption
Need for early
replenishment of
materials
InventoryLevel
The effect of higher rate of consumption of material call
for
replenishment of inventory earlier than schedule

21. 21
EFFECT OF LOWER RATE OF
CONSUMPTION
Scheduled
Lead
time Planned
receipt of
materials
Safety
-stock
Reorder
point
Working
quantity
Minimum-
level
Maximum
-level
Time
Normal rate of
consumption
Lower rate of
consumption
Need for delayed
replenishment of lead time
InventoryLevel
The lower rate of consumption on inventory would generate high inventory
in the stock and therefore call for delay in replenishment of materials

22. 22
INCREASE IN INVENTORY LEVEL DUE TO SHORTER LEAD
TIME THAN THE SCHEDULED LEAD TIME
Scheduled
Lead time
Planned
receipt of
materials
Safety
-stock
Reorder
point
Working
quantity
Minimum
-level
Maximum
-level
Time
Normal rate of
consumption
InventoryLevel
Maximum inventory
level is higher than
the normal level
Shorter lead time
Actual receipt of
material

23. 23
SHORTAGE OF INVENTORY DUE TO LONGER LEAD
TIME THAN THE SCHEDULED LEAD TIME
Scheduled
Lead time
Planned
receipt of
materials
Safety
-stock
Reorder
point
Working
quantity
Minimum
-level
Maximum-
level
Time
InventoryLevel
Longer lead
time
Actual receipt of
material
Order quantity
Shortage of inventory