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![Cost Structure In Inventory
Ordering Cost.
a) cost of ordering excess.
b) cost of ordering too less.
[cost of ordering excess + cost of
ordering too less =Total stocking cost]
Example :Transportation cost ,Salary of
purchase demand ,Loading & unloading
charge etc.](https://image.slidesharecdn.com/chapter6inventorymanagement-250807144013-d3f65626/85/Chapter-6-Inventory-Management-production-management-pptx-25-320.jpg)
Chapter 6 Inventory Management production management.pptx
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- 2. Content: 1. Inventory:- Stockof items kept to meet future demand. 2. Types of Inventory:- Raw materials, Purchased parts and supplies,Work-in- process (partially completed) products (WIP), Items being transported,Tools and equipment 3. Two forms of Demand:- dependent and independent. 4. Functions of inventory. 5. Inventory Control.
- 3. 11. Types ofOrdering System. ◦ Periodic inventory system. ◦ Perpetual Inventory System 12. Methods of Inventory Control. ◦ Deterministic Methods ◦ Probabilistic Methods 13. Economic Order Quantity (EOQ). 14. Example of EOQ. 15. Case Study on AMAZON INDIA.
- 4. Inventory Management Inventories today:a curse, a blessing, a must..?
- 5. What is inventory? Stock ofitems kept to meet future demand Purpose of inventory management how many units to order when to order
- 6. INVENTORY The inventory maybe defined as the physical stock of good, units or economic resources that are stored or reserved for smooth, efficient and effective functioning of business. Inventories are referred to : Raw materials, Finished goods, Castings, and Consumable goods.
- 7. Types of Inventories Rawmaterials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment
- 8. Two Forms ofDemand Dependent Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item Independent Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory
- 9. Distribution of Inventory Account Raw Materials WIP Inventory Finished goodsat factory Finished goods at distribution Capital goods 60% 20% 20% 00% Garment industry 30% 55% 5% 10% Consumer product 5% 10% 30% 55%
- 10. WHY DO WEKEEP INVENTORIES Financial Objectives. To create a buffer stock b/w the input and output. To ensure against delay in deliveries. To allow for a possible increase in output if so required. To ensure against scarcity of material in the marked. To make use of quantity discounts. To utilize to advantage price fluctuations.
- 11. FUNCTIONS OF INVENTORY The primary function of inventory is to use marketing and production to increase profitability, to get the maximum amount for the business investment. Balancing supply and demand. Safety stock. Geographical specialization. CENTRAL (Warehouse) Retailer 1 Retailer 2 Retailer 3 Retailer 4
- 12. INVENTORY CONTROL OBJECTIVE: (a)To minimize capital investment. (b)To ensure availability of needed inventory for uninterrupted production and for meeting consumer demand. (c)To provide scientific basis for planning of inventory needs. (d)To tiding over the demand fluctuation.
- 13. SCOPE OF INVENTORYCONTROL Determination of inventory policies. Determining various stock levels Determining economic order size Safety or buffer stock Determining lead time Examining the work of inventory policy Scope of Inventory Control
- 14. ADVANTAGES AND DISADVANTAGES OFINVENTORY CONTROL ADVANTAGES Ensures smooth production. Regular and timely supply. Protects the firm against variation in raw materials delivery time. Avoid shortage of material. Minimize loss by damage, deterioration. DISADVANTAGES Reduce but can’t eliminate business risk. Control of inventory is complex. Expensive software and technology. It requires constant attention.
- 15. TERMINOLOGY USED ININVENTORY MAXIMUM LIMIT : Upper limit to which the stock of an inventory item shall be allowed. MINIMUM LIMIT : Lower limit to which the stock can be allowed to fall in the course of replenishment of the stock of an item. SAFETY STOCK : Stock to counter the variation in demand of an item. DEMAND OR USAGE :Average quantity of an item consumed in a particular period of time. LEAD TIME : It is the total time taken from the day procurement action has been initiated to the day the stock is replenished. Thus; Total Lead time (LT) = Internal Lead time + External Lead time.
- 16. Inventory Control Policyof an Organization This article throws light upon the four main factors affecting inventory control policy of an organization. The factors are: 1. Manufacturing Characteristics. 2. Amount of Protection against Shortages. 3. Organizational Factors. 4. Miscellaneous Factors.
- 17. 1. Manufacturing Characteristics: Thenature of the manufacturing process, product development & design, process planning, production planning, layout design has significant impact on inventory control policy. Some of these factors are: a) Degree of specialization and processing stages of the product. b) Process capability and flexibility. c) Production Capacity and Storage Facilities. d) Quality requirements, obsolescence risk and shelf life of the product. e) Number of Production Stages.
- 18. 2.Amount of Protectionagainst Shortages: The variation in demand and supply is a routine phenomenon.The protection against such unpredictable variations is possible by providing safety or buffer stocks. The factors responsible for such variations are: a) Changes in Size and Frequency of Orders. b) Unpredictable Sales. c) Physical and Economical Structure of the Distribution Pattern. d) Cost of Shortages. e) The Accuracy of Demand Forecasts: f) Protection against interruptions in production process.
- 19. 3. Organizational Factors: Thereare some factors related to the policies, traditions and working Environment of any organization/enterprise. Some of these are listed as follows: a) Human relations policies of the organization b) Amount of capital available for inventory purposes and c) Rate of returns on un-invested capital or if capital is invested somewhere else.
- 20. 4. Miscellaneous Factors: Theseare the factors related with the overall business environment of the region or area like: a) Inflation rate. b) Wars or some unforeseen natural calamities, floods, earthquakes etc. c) Uncertainties in communication facilities.
- 21. ABC analysis ABC(Always BetterControl) Group A : Group A consist of costly items which are 10% to 20% of the total items and may account for about 50% of the total values of the store. Group B : Group B consist of 20% to 30% of the store items and represent about 30% of the total value of stores. Group C: Group C consists of 70% to 80% of the items covered costing about 20% of the total value of the store.
- 22. Graph for ABCAnalysis
- 23. Advantages of ABCAnalysis It provides better control over the costly items in which a large amount of capital is invested. It ensures considerable reduction in the storage charges. It help in maintaining enough safety stock of ‘C’ category of items.
- 24. Example : ABCanalysis is used to maintain the inventory of Raw Material. Category Volume Range Cost Range Example A <5% 70 – 90 % Engine B 5 – 20 % 10 – 20 % Tires C 60 – 80 % <10% Nut & Bolt A B C Cost InventoryVolume (Q)
- 25. Cost Structure InInventory Ordering Cost. a) cost of ordering excess. b) cost of ordering too less. [cost of ordering excess + cost of ordering too less =Total stocking cost] Example :Transportation cost ,Salary of purchase demand ,Loading & unloading charge etc.
- 26. Carrying Cost. a)Inventory Storage Cost b) Cost of Capital Example : Space Rent , Refrigeration Cost, Salary of store department Insurance Cost.
- 27. Shortage ofstock out Cost & Cost of Replenishment. a) Cost of Loss, pilferage, shrinkage and obsolescence etc. b) Cost of Logistics c) Sales Discounts,Volume discounts and other related costs.
- 28. Types of InventorySystem constant amount ordered when inventory declines to predetermined level Continuous system (fixed- order-quantity) order placed for variable amount after fixed passage of time Periodic system (fixed-time- period)
- 29. A) Periodic Inventory System Underthis method, the merchandise company does not maintain a detailed record of inventory for the result the cost of goods sold is calculated at the end of the accounting period (periodically).
- 30. Characteristics Easier tooperate in relatively small firms. Lack of control over inventory. Less cost to handle the method. Does not keep inventory record up-to- date. The system applies to those concerns usually that sell low-value items (such as stationery items) in large quantity.
- 31. Example Hallmark may followthis inventory method because they sell low-value items at a large quantity.They need not maintain a record of inventory each a purchase or sales is made. Under the periodic inventory system, we must have good concepts of the following: Opening inventory (At the beginning of the accounting period) Net purchase cost and Ending inventory (At the end of the accounting period)
- 32. B) Perpetual Inventory System Under this method, a detailed record of the cost of inventory is maintained each time a purchase or a sale is made. As a result, the system consciously shows the up-to-date record of inventory that should be on hand.The cost of goods sold is calculated each time a purchase or a sale is made, not at the end of an accounting period.
- 33. Characteristics It requiresmore efforts to maintain inventory under this method. Close control over inventory The method is comparatively costly Keeps inventory record up-to-date and decent. The method applies to those concerns usually that sell high-value items (Such as car, personal computer, equipment etc.) not at a large quantity as compared to items under the periodic system.
- 34. Example Volvo Car OverseasCorporation AB Sells Volvo car in Bangladesh. It needs to maintain inventory record each time the car is sold to a customer
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- 37. Deterministic Model MODEL: 1(THE EOQ MODEL ORWILSON MODEL OF INVENTORY) Assumptions: • Annual demand is deterministic (known) • No – shortage allowed • Infinite replenishment or supply rate • Lead Time is also constant • Fixed quantity order • Consumption rate is constant with time • No discount on bulk purchase
- 38. GRAPHICAL REPRESSENTATION OF THEMODEL IS SHOWN IN FIRGURE
- 39. TERMS USED ININVENTORY ANALYSIS D : Annual demand (units per year) Co : Ordering cost (Rs./order) Ch : inventory Carrying Costs or holding costs(Rs./unit/unit time) Q : Order Quantity Q* : Economic order Quantity N : number of orders placed per annum Tc : Total cost per annum
- 40. Holding cost/ CarryingCost (Cc) Space rent Refrigeration cost Salary of store department Insurance cost
- 41. Ordering (Co) A confirmedrequest by one party to another to buy sell deliver or receive goods Examples Transportation Cost Loading &unloading charge Salary of purchase demand
- 42. As shown infigure. Average inventory level =Q/2 Total holding cost/year = Ch*Q/2 Total cost of inventory per year T.C./year= ordering cost/year + Holding cost/year + material Cost/year T.C./year = Co*D/Q +Ch*Q/2 +Cu*D d(T.C.)/dQ = -Co*D/Q2 +Ch/2 +0 For Economic Quantity order (EQO) d(T.C.)/dQ= 0
- 43. QEOQ = 2CoD/Ch No of Economic order placed /year = D/ QEOQ Inter order time = QEOQ /D
- 44. MODEL : 2(Economic order Quantity when Stock Replenishment is Non Instantaneous (production Model) Assumptions All assumption as per model (1) Expect Infinite replenishment rate
- 46. TERMS USED INANLYSIS OF MODEL :2 P = procurement rate tp = procurement time P-C = Inventory build –up C = Consumption rate Q = Quantity order =P*tp Q` = Maximum inventory level Q`= (P-C)*tp
- 47. QEOQ = 2CoD/Ch* P/(P-C) T.C./year = 2CoChD * (P- C)/P
- 48. MODEL 3: Assumptions Allassumption as per as Model (1) expect shortage allowed
- 49. Graphical representation ofmodel 3
- 50. TERMS USED INANLYSIS OF MODEL :3 Cs = Shortage Cost (Stock out cost) per unit per period S = Balance units after back order are satisfied Q-S = number of Shortages per order t1 = Time Period during which inventory is positive t2 = Time during which shortage exists T = Time between the receipt of order
- 52. MODEL 4: (Discountavailable on bulk purchase) When items are bought in large quantities the supplier often gives discounts. However , if the material is purchased to take advantage of discount, the average inventory level and so the inventory carrying costs will increase
- 53. PRICE DISCOUNT MODEL D = Annual Consumption (Demand) C1 = is the price per unit (Basic price) C2 = is the discounted price price per unit Co = is the ordering cost I = is inventory carrying cost expressed as a percentage of average inventory investment Qb = be the price break quantity
- 54. PROCEDURE (Decision Rules) Calculate Q2(Economic order Quantity at Discounted Price (C2)) Compare Q2 with Qb (price break Qty.) If Q2 > Qb , order Quantity Q2 If Q2 < Qb Compute Q1 (Economic order Qty. at basic price C1 )and Calculate
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- 56. Example: Given D= 10000 Co = 100 Cc = 25% of Cu Order Quantity Rs Cu < 500 10 >500 9 Solution QEOQ = 2CoD/Cc T.C./year = Co*D/Q + Cc*Q/2 + CuD
- 57. Step 1 CalculateEOQ at least Cu Price QEOQ =94.28 Step 2 Compare QEOQ with Qb (price break Qty.) Step 3 QEOQ < 500 Step 4 Again find QEOQ at next higher Cu QEOQ = 89.44 Step 5 Now findT.C./year as under (T.C./year) at 89.44 = 101241 (T.C./year) at 500 = 92062
- 58. Step 6: QEOQis given by minimum T.C./ year QEOQ = 500
- 59. B) Probabilistic Methods The probabilistic method employs the known economic, geological and engineering data to produce a Collection of approximate stock reserve quantities and their related probabilities.
- 60. CASE STUDY:AMAZON TODAY Oneof the first shopping site launched in year 1995 Initially started as online book store, later added considerable items to consolidate its position On an average, added a new product once in every six week (from year 1999).
- 61. Inventory Management atAMAZON Company was negative on spending time in opening stores and warehouse Later started maintaining its own warehouse Each ware house establishmen t cost was estimated to be $50 million Established 10 warehouse in U.S.A by making its bonds worth $2 billion public
- 62. Innovative Inventory Management Inearly 2001, Amazon decided to outsource its inventory management . The step was in order to increase the profit margin. Stocked only popular items and request less popular item to dealer
- 63. Distributer shipped the item ordered tothe company. Received goods are packed and shipped to the corresponding customer. Thus Amazon started acting as trans shipment company.
- 64.