1. The document discusses various inventory management concepts including economic order quantity, reorder level, safety stock, average inventory, and ABC analysis. 2. It also covers inventory classification methods like ABC analysis and different inventory management approaches including fixed order quantity, min-max, MRP, JIT, and DRP. 3. The key goals of inventory management are to increase profitability, minimize costs while meeting customer requirements, and effectively balance supply and demand.

1. 1. Inventory and Inventory management 2. Lead time 3. Reserve stock and safety stock 4. Reorder level 5. Economic order quantity 6. Trade off between total costs of inventory and order quantity 7. Customer Service levels 8. Average inventoryvbnovvkhbifyt 9. Selective Inventory Control 10. Pareto’s rule

2. Quadrant technique Non-Performing Asset 13. ABC analysis 14. Vendor managed Inventory 15. Inventory Turn Over Ratio 16. Review Period

3. What is Inventory?

5. A list of items being held in stock An asset not participating in conversion or not getting sold Any NPA, considered to be an asset & part of working capital

6. Why do we have inventory? Due to mindset - reluctance to dispose off Consequence of redundancy of products Built-up as a means of customer satisfaction, as a cushion against uncertainties To overcome disadvantages of poor infrastructure 9 to 12 months of sales in India, a few days in Japan and a month in US/Europe

7. Importance of Inventory Decades of 1980 & 1990 brought inventory in focus Why? Emergence of Japan as a economic super power in 1980s Visual evidence of success of Japanese systems Ford Motors carried 15 times more WIP inventory than what Toyota did! A benefit Toyota enjoyed over Ford in cost management Impact on product cost, 5 to 35% of product cost are logistical costs & 35% of logistical costs are inventory costs

8. Effect on product quality & cost Has a major impact on product cost - a source of cost and bad quality Problem to source traceability is lost due to inventory Defects (problems) are hidden Facilitates production Protects the conversion process from uncertainties of market Measure of managerial performance Inventory turns, small volume and high turns

9. Signs of poor inventory management An increase in back orders Rising inventory investments High customer turn over Increase in order cancellation Insufficient storage space Increase in rupee value & number of obsolete products

10. Objectives of Inventory Management To increase corporate profitability To anticipate impact of corporate policies on inventory levels and act proactively To minimize logistical costs while meeting customer service requirement Functions of Inventory [Rationale for Inventory] Overcomes geographical separation Decoupling internal process – reducing dependence

11. Balancing supply and demand Buffers uncertainties of lead time, demand and poor infrastructure Acts like a cushion against unusual events like strike or war Technical requirement of batch production Facilitates price discounts

12. Inventory related costs Procurement Costs - management and staff time, order preparation and dispatch, follow up, transport from vendor, receiving, handling storage Carrying Costs - capital, opportunity, space, tax, security, insurance, spoilage and preservation, obsolescence Out of stock costs - emergency transport, lost sale, lost customer

13. Types of Inventory Location inventory-Inventory at a fixed location In transit inventory[pipeline inventory]-Being transported and or waiting to be transported Manufacturing inventory R/M, components, WIP, F/G [Maintenance, repairs and operating supplies] Risk due to commitment of resource to manufacturing is deep and long.

14. Wholesale inventory Stock of large quantities and sold in small quantities to retailers Stock of seasonal products, products to satisfy assorted, small and urgent needs of retailers Generally risk is narrow & deep, when the product line expands risk is wider and deeper. Retailers inventory Variety of products to satisfy demand Retailers push the inventory backwards to wholesalers and reduce the depth of risk although the risk is wide

15. Average inventory Average level of inventory in the organization R/M, parts, WIP, finished goods Following inventory concepts are used in calculating average inventory 1. Cycle inventory: result of replenishment process, also known as base stock or lot size stock, (eoq/2) 2. Safety stock Inventory: Stock held to safe guard against variations in lead-time & or consumption 3. Transit Inventory: Either moving or awaiting movement

16. Economic order quantity Assumptions of Wilson’s Lot size formula or Classical EOQ model Demand is at a known constant rate and continuous Lead time is known and constant Demand is fully satisfied, no shortages are allowed All costs are time invariant Quantity discounts are not considered Replenishment is instantaneous, there is no transit inventory

17. Process is continuous No constraints are imposed on quantities ordered, storage capacity, budget etc. EOQ derivation All assumptions in tact EOQ= √2AO/cc*u (annual dd, ordering cost per order, carrying cost per unit, total units) Limitations of classical EOQ model- major limitations are the assumptions made If the concept of EOQ is applied without taking into account the limitations, results can be disastrous

18. Adjustments to EOQ EOQ model does not consider economics of transportation Transportation costs are sensitive to weight of consignment Quantity discount - Quantity discounts can upset the benefit of EOQ if we don’t evaluate the situation from total cost perspective

19. Other EOQ adjustments Production lot size: Mi s match between buyer’s EOQ and supplier’s Economic Batch Quantity. Some adjustment is needed. Multiple items purchase Combination of products are sourced from a supplier Quantity discounts and transportation costs of individual items may be different Individual item as per EOQ may not be feasible with respect to total cost So adjustment is required to EOQ of various items

20. Limited capital Significant role of budgetary allocation Budget has to satisfy the requirement of entire product line EOQ of various items requires adjustment Private trucking Getting a full truck (FTL) becomes significant from cost perspective as against EOQ Standard package Available standard package and EOQ

21. Inventory Classification Ranking of Inventory to facilitate selective management control Pareto’s rule: 80-20 rule, separate vital few from trivial many ABC Analysis 20% 80% 80% Trivial many Vital few 20% Inventory Items Inventory Value

22. An example of ABC analysis Logistics Perspective of selective management control ABC analysis has one chosen parameter like cost or value in focus ‘ A’ category is priority from the perspective of this particular parameter Prioritization in inventory management has to consider other factors as well VED Analysis FSN Analysis HML

23. SDE [Scarce, Difficult to procure, Easy to procure] SOS [Seasonal Off Seasonal] GOLF [Government, Open market, Local & Foreign Source] XYZ analysis Quadrant technique

24. Stock out Risk Value or Profit potential

25. Fundamental approaches to managing inventory Traditional approach has been deciding when to order? But challenge of today - to find answers to the questions where to stock the material?, how much? and when? Modern challenge is high customer satisfaction at minimum inventory

26. Fixed Order Quantity Approach (condition of certainty) How much to order & when to order? The order quantity is fixed at EOQ (discussed already) When to order is decided by Re Order Level (ROL or ROP) which triggers ordering ROL is fixed by calculating lead time consumption Inventory cycles can be conceptualized by looking at the figure drawn in the class

27. ROL LEAD TIME CONSUMPTION Q Lead Time Lead Time Lead Time INVENTORY CYCLE TIME INVENTORY CYCLE TIME INVENTORY CYCLE TIME INV D Q - MODEL Q = EOQ = √2AD/h ROL = LEAD TIME CONSUMPTION

28. Salient Features of the above approach 1. Widely used technique 2. Requires constant monitoring of stock levels 3. Combines the concepts of push & pull 4. Limited by the assumptions made Cost of in-transit inventory Transportation costs Stock depletion is at a specific rate ‘D’ during replenishment cycle. In reality stock depletions can be steep & high

29. Min-Max Approach a modification to EOQ model Order is released when ROL is reached Actual order quantity should be the sum of EOQ and the difference between ROL and actual stock on hand at the time ROL occurs.

30. ROL LEAD TIME CONSUMPTION Q Lead Time Lead Time Lead Time INVENTORY CYCLE TIME INVENTORY CYCLE TIME INVENTORY CYCLE TIME INV D Q - MODEL Q = EOQ + (ROL – ACTUAL) = √2AD/h + (ROL – ACTUAL) ROL = LEAD TIME CONSUMPTION ACTUAL INV LEVEL

31. ROL LEAD TIME CONSUMPTION Q Lead Time Lead Time Lead Time INVENTORY CYCLE TIME INVENTORY CYCLE TIME INVENTORY CYCLE TIME INV D SAFETY STOCK 1 Q - MODEL SAFETY STOCK 2 Fixed Order Quantity Approach (condition of uncertainty) When demand and lead time vary

32. Fixed Order Interval Approach Decisions about review period T & S Optional replenishment Approach Decisions about review period, S and s

33. Lead Time Lead Time Lead Time INVENTORY CYCLE TIME INVENTORY CYCLE TIME INVENTORY CYCLE TIME INV D P - MODEL ‘ S’ MAX STOCK I 2 INVENTORY LEVEL I 1 INVENTORY LEVEL ‘ s’ MIN STOCK (S – I 1 ) =

34. Some Inventory related definitions 1. Inventory policy: 5W-1H questions about buying and controlling inventory. What to stock? How much? When? Where? What method? Approach? Centralized or decentralized control 2. Service levels: performance objectives of inventory function Order cycle time: release of a purchase order & receipt of the shipment at customer’s place

35. Case fill rate: percentage of cases deliverable against the number of cases customer ordered in one order Line fill rate: product lines fully delivered to the product lines ordered is the line fill rate. Order fill rate: percentage of orders completely fulfilled to orders received Average inventory a. Cycle inventory b. Safety stock Inventory c. Transit Inventory also known as Pipe Line Inventory

36. Inventory Strategy – a long term plan to control inventory What is controlled? Selective management control, quadrant approach When do we move inventory? Kanban system in JIT, DRP, MRP Where and at how many places? Centralized or decentralized? Warehouse location, square root law Why? Customer satisfaction at minimum cost

37. How do we manage? Inventory approaches, push methods? pull methods? How do we measure performance? Inventory turns, fill rates, perfect orders

38. Inventory management methods [Bowersox pages 287……] Reactive methods (Pull methods) Planning methods (Push methods) Other methods (Modern methods) 07/07/11

39. Reactive methods or pull systems Reactive methods or systems respond to customers pull ‘ Q’ Model ‘ P’ Model Optional replenishment Two bin system Limitations Smooth demand patterns are assumed Unlimited production & supply facilities Inability to handle multiple facilities Needs manual intervention to prevent shortages 07/07/11

40. 07/07/11 I 50 ROP 50 OQ 200 D 5 I 80 ROP 75 OQ 200 D 14 I 250 ROP 200 OQ 400 WHOLESALER A WHOLESALER B REACTIVE INVENTORY ENVIRONMENT DISTRIBUTION CENTER

41. Planning methods [push or proactive methods] Fair Share Allocation Allocate an amount of inventory to a warehouse based on The past consumption pattern Current stock Minimum inventory level at the plant warehouse. 07/07/11

42. 07/07/11 Plant warehouse Inventory 600 units Distribution Center 1: Inventory 50 units Daily use 10 units Distribution Center 2: Inventory 100 units Daily use 50 units Distribution Center 3: Inventory 75 units Daily use 15 units

43. 07/07/11 Then a common day’s supply, DS, for distribution center inventories is, A + ∑I DS = -------------- ∑ D 500 + ∑ 50 + 100 + 75 DS = -------------------------- ∑ 10 + 50 + 15 = 9.67days. Now amount of inventory allocated to distribution center 1 is [9.67 – 50/10]X10 = 4.67X10 = 46.7 units, say 47 units. Similarly we can find allocations for distribution centers 2 & 3

44. Fair share allocation method doesn’t take into account Lead times EOQ Safety stock Other approaches to inventory management Just In Time [Bowersox pages 490………….] The time based approach - Toyota Motors Company & concept of kanban in 1950 Reduction in WIP quantities tying the inventory closely to the demand from subsequent process or internal customer 07/07/11

45. Kanban is conceptually a two bin system leading to concept of stockless production JIT embraced a variety of manufacturing concepts like SMED, group technology, TPM and quality circles. American disappointment with the attempts to incorporate Japanese methods lead to other concepts like vendor managed inventory (JIT II) & DRP 07/07/11

46. QR, CR, AR, response based techniques Quick response (QR) On receiving order supplier with the help of EDI [Electronic data interchange] finalizes the delivery details and communicates them to the customer in advance This facilitates scheduling labor and other facilities This reduces inventories as uncertainties are reduced and total cost resulting into better performance. 07/07/11

47. Continuous Replenishment strategy Also known as vendor managed inventory (JIT II) Need for placing an order is eliminated A supply chain relationship is established that ensures continuous replenishment of stock at customers place by the vendor. 07/07/11

48. There are three basic needs in CR Effective communication system to provide key information between customer and supplier Sufficiently large volumes to make transportation viable Finally customer should honor the shipment from the supplier for payment 07/07/11

49. Automatic or profile Replenishment (AR) Supplier anticipates the customers’ requirement for making replenishment The responsibility for inventory management is placed squarely on the supplier Information flow between customer & supplier ensures visibility of Inventory Customers order position Effective management to reduce total costs 07/07/11

50. MRP [Materials Requirement Plan] Popular concept in 1960&1970 Consists of a computer system & a manufacturing information system Does production scheduling and materials planning MRP system MRP systems compute Net requirements for each inventory item Time-phase them Determine their proper coverage

51. SUB ASSEMBLY II SUB ASSEMBLY II SUB ASSEMBLY I C2 C5 B2 A5 D5 C3 D1 D2 D3 D4 A1 A2 B1 C1 C4 A3 A4 MAJOR ASSEMBLY

52. Objectives Ensure the availability of materials (components & products) for planned production and customer delivery Maintain the lowest possible inventory level Plan Manufacturing activities Delivery schedules And purchasing activities

53. Scope MRP System covers inbound logistical area Key elements of MRP system Master Production Schedule Bill of Materials Inventory Status Files MRP Program Outputs & Reports Development First phase is called MRP I [Materials Requirement Planning] Second phase is called MRP II [Manufacturing Resources Planning]

54. MRP I [soft ware] is restricted to materials resource only Attempts to minimize inventories Maintain adequate materials for production process. MRP II includes all resources required in planning and control of production

55. Process of MRP I MRPI starts with, customer’s demand [independent demand] and explodes the time and need for components based on the demand for end product

56. Customers orders inventory transactions Forecasts Engineering changes Inventory status file [finished items, WIP, planned orders Master production schedule [which product to produce, in what quantity & when] Bill of materials file [product structure and routing] MRP I SYSTEM PLANNED SCHEDULES AND VARIOUS OTHER REPORTS

57. When does it get applied? The process follows an intermittent system Demand is dependent Purchasing dept., their suppliers and company’s own manufacturing system is flexible enough to handle deliveries on weekly basis Advantages of MRP I Improved business results [ROI, profits] Improved manufacturing results Better manufacturing control Less inventory

58. Time phased ordering of materials Less materials obsolescence Higher reliability More responsiveness to market demand Reduced production costs Disadvantages of MRP I Due to small lot purchases high material acquisition costs and high ordering costs Stock out costs are more as safety stock protection is low

59. A limitation of software as adapting to specific situations is difficult. So modification of the software is necessary MRP II MRP I is updated and expanded to include Financial, marketing and logistics elements Entire set of activities involved in planning and control of production It consists of variety of functions like Production planning

60. Resource requirements planning Master production scheduling Materials requirement planning [MRP I] Shop floor control Purchasing

61. Orders [production plan] Bill of materials Inventory records Material requirement planning [MRP] Capacity requirement planning [CRP] Realistic? Execute capacity plans Execute materials plan yes No

62. Benefits of MRP II Inventory reductions of one fourth to one third Higher inventory turn over Improved consistency in on-time customer delivery Reduction in purchasing costs due to less urgent purchases Minimization of workforce overtime

63. DRP is a technique of Distribution Management DRP concept has evolved in two phases, DRPI (Distribution Requirement Planning) & DRP II (Distribution Resources Planning) DRP I deals with inventory planning DRP II covers all resources relevant to distribution Warehouse space Man power levels Transport capacity [eg. trucks, rail cars] Financial flows

64. DRP I Applicable to outbound logistics Determination of inventory requirement at points of consumption for short spans of time Plan to move inventory in the distribution channel in response to the above It is a time phased plan, dynamic and flexible in nature Customer dependent planning, depends on the changing market environment Not organization dependent

65. Coordination responsibility once the finished goods are produced Planning is realistic as it is closer to real time Overall inventory levels are low Response time to real time market requirement is low

66. DRP II Distribution Resource Planning [DRP II ]is an extension of DRP I DRP II applies the time phased logic of DRP I to replenish inventories in multi echelon warehousing systems DRP II extends DRP I to include the planning of key resources in a distribution system –ware house space, man power levels, transport capacity [eg. trucks, rail cars] and financial flows

67. As an extension of DRP I, DRP II uses the needs of distribution to drive the master schedule, controlling the materials planning DRP PROCESS Planning tool for DRP is schedule Schedule for each SKU at each distribution facility on daily, weekly or monthly basis Integration of the above schedules and overall requirement planning for the regional warehouse and central supply facility

68. Marketing benefits Increased service levels - improved OTD, reduced Customer Complaints Effective new product introduction plans Ability to anticipate shortages Improved inventory coordination Logistics benefits Reduced distribution costs Reduced inventory levels Decreased warehouse space requirement as inventory levels are low Lesser back orders

69. Improved inventory visibility & co-ord. between manufacturing and logistics Constraints Needs accurate forecast Sources of errors in the system Inaccuracy in forecast quantity Inaccuracy in forecast location Inaccuracy in forecast time Variable performance cycles System nervousness-frequent rescheduling causing confusion Uncertainty buffers

70. How does a DRP system work? Consider a distribution net work with three distribution centers catering to the needs of the market One central facility that supplies inventory to three distribution centers Central facility is supplied by the production facility planned as per MRP DRP modifies the MRP to the advantage of the organization

71. DRP & MRP LINK DISTRIBUTION CENTER I LEAD TIME IS 2 WEEKS, SAFETY STOCK IS 55, ORDER QUANTITY 500 WEEKS Order to Central Supply Facility Arrival From Central Supply Facility DETAILS 0 1 2 3 4 5 6 7 8 WEEKLY REQ - 50 50 60 70 80 70 60 50 STOCK 352 302 252 192 122 542 472 412 362 WHEN & HOW MUCH? 500 500

72. DISTRIBUTION CENTER II LEAD TIME IS 2 WEEKS, SAFETY STOCK IS 40, ORDER QUANTITY 150 WEEKS Order to Central Supply Facility Arrival from Central Supply Facility DETAILS 0 1 2 3 4 5 6 7 8 WEEKLY REQ - 20 25 15 20 30 25 15 30 STOCK 140 120 95 80 60 180 135 145 110 WHEN & HOW MUCH? 150 150

73. DISTRIBUTION CENTER III LEAD TIME IS 2 WEEKS, SAFETY STOCK IS 115, ORDER QUANTITY 800 WEEKS Order to Central Supply Facility Arrival from Central Supply Facility DETAILS 0 1 2 3 4 5 6 7 8 WEEKLY REQ - 115 115 120 120 125 125 125 120 STOCK 1020 905 790 670 550 425 300 175 855 WHEN & HOW MUCH? 800 800

74. TO MRP SCHEDULE LEAD TIME IS 3 WEEKS, SAFETY STOCK IS 287, ORDER QUANTITY 2200 CENTRAL SUPPLY FACILITY From I & II From III FROM PRODUCTION WEEKS DETAILS 0 1 2 3 4 5 6 7 8 WEEKLY REQ - - - 650 - - 800 - - STOCK 1250 1250 1250 600 600 600 2000 2000 2000 WHEN & HOW MUCH? 2200 2200