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Inventory management

V
vimal raj

Inventory, Management, EOQ model

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INVENTORY MANAGEMENT
1
By
Vimal Raj K
DEFINITION
INVENTORY is the stock of any item
or resource used in an organization.
It may consists of Raw materials,
Spare parts/consumable, and Finished
Goods.
2
INVENTORY TYPES
 Movement Inventories
 Buffer Inventories
 Anticipation Inventories
 Decoupling Inventories
 Cycle Inventories
3
MOVEMENT INVENTORY
 Inventory is moved from one location to
another.
 Transportation time is involved in
transferring substantial amount of
resources.
 Example : Coal is transported from the
coal fields to an industrial town by trains.
 It is also called as transit or pipeline
inventories
4
COAL TRANSPORTATION
5
BUFFER INVENTORY
 Protect against the uncertainties of
demand and supply.
 Actual demand may not exactly
match the average and could well
exceed it.
 Also known as Safety stock.
 Idea of keeping buffer stock is to
render high level of customer service
and consequently reduce number of
stockouts and back-orders.
6

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Inventory management

  • 2. DEFINITION INVENTORY is the stock of any item or resource used in an organization. It may consists of Raw materials, Spare parts/consumable, and Finished Goods. 2
  • 3. INVENTORY TYPES  Movement Inventories  Buffer Inventories  Anticipation Inventories  Decoupling Inventories  Cycle Inventories 3
  • 4. MOVEMENT INVENTORY  Inventory is moved from one location to another.  Transportation time is involved in transferring substantial amount of resources.  Example : Coal is transported from the coal fields to an industrial town by trains.  It is also called as transit or pipeline inventories 4
  • 6. BUFFER INVENTORY  Protect against the uncertainties of demand and supply.  Actual demand may not exactly match the average and could well exceed it.  Also known as Safety stock.  Idea of keeping buffer stock is to render high level of customer service and consequently reduce number of stockouts and back-orders. 6
  • 7. ANTICIPATION INVENTORY  Anticipation inventories are held for reason that a future demand for the product is anticipated.  Underlying idea is to smoothen the production process for a longer duration on a continuous scale rather than operating with excessive over time in one period. 7
  • 8. DECOUPLING INVENTORY  Idea of the decoupling inventories is to decouple, different parts of the production system.  Inventory shared by two operations to prevent breakdown or unevenness for machines.  Provides a cushioning effect in the face of varying work-rates, and machine breakdowns and failures. 8
  • 9. CYCLE INVENTORY  Purchase are usually made in lots rather than for the exact amounts which may me needed at a point of time.  If all purchase are made exactly, then there is no use of cycle inventory. 9
  • 10. INVENTORY COST  Purchase cost  Ordering cost / Setup cost  Carrying cost  Stockout cost 10
  • 11. PURCHASE COST  Purchase price – items that are bought from outside sources.  Production cost – items that are produced with in the organisation.  This cost may be constant per unit, or it may vary as the quantity purchased/produced increases or decreases.  Also known as nominal cost of inventory. 11
  • 12. ORDERING COST / SETUP-COST  Ordering cost is incurred whenever the inventory is replenished.  It includes cost associated with the processing (setup cost) and chasing of the purchase order, transportation, inspection for quality, expediting overdue orders, and so on.  Also known as procurement cost. 12
  • 13. CARRYING COST  Cost associated with storing an item in inventory.  Carrying cost includes – cost of capital invested in the stock, costs directly associated with storing goods, deterioration costs, general insurance, etc.  Also known as holding cost or storage cost. 13
  • 14. STOCKOUT COST  Stockout imply shortages.  If stock out is internal, it would imply that some production is lost.  If stock out is external, it would result in a loss of potential sales and loss of customer goodwill. 14
  • 15. ECONOMIC ORDERING QUANTITY The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs. 15
  • 18. TYPES OF MODEL IN EOQ  Purchase model without shortage  Manufacture model without shortage  Purchase model with shortage  Manufacture model with shortage 18
  • 19. PURCHASE MODEL WITHOUT SHORTAGE 19
  • 20. ASSUMPTIONS  Demand is known and uniform  Purchasing at equal interval  Zero lead time  No shortages  Instantaneous replenishment. 20
  • 22. ASSUMPTIONS  Demand is at a constant rate (D).  All cost coefficients (C1, C2, C3) are constants.  There is no shortage cost.  The replacement rate is finite and greater than the demand rate. This is also called replenishment rate or manufacturing rate, denoted by R. 22
  • 23. PURCHASE MODEL WITH SHORTAGE 23
  • 25. SELECTIVE APPROACHES  ABC analysis  VED analysis  HML analysis  SDE analysis  S-OS analysis  FSN analysis  XYZ analysis 25
  • 26. ABCANALYSIS  The inventory items in an organization are classified on the basis of their usage in monetary terms.  A – high consumption value items.  B – moderate consumption value items.  C – low consumption value items.  By plotting the usage value of the items to obtain the ABC distribution curve. 26
  • 28. VEDANALYSIS  The items are classified on the basis of their criticality to the production process.  V – vital items with out which production process would come to a standstill.  E – essential item whose stock out would adversely affect the efficiency of the production system.  D – desirable item which are required but do not immediately cause a loss of production. 28
  • 29. HML ANALYSIS  The items are classified on the basis of the unit cost.  H – high rate.  M – medium rate.  L – low rate. 29
  • 30. SDE ANALYSIS  The items are classified based on the availability.  S – scarce items which are in short supply.  D – difficult items means that might be available in the indigenous market but cannot be procured easily.  E – easily available items which are from local markets. 30
  • 31. S-OS ANALYSIS  Analysis is based on the nature of supplies.  S – seasonal items.  OS – off seasonal items. 31
  • 32. FSN ANALYSIS  Based on the consumption pattern the items are classified in this analysis.  F – fast moving items.  S – slow moving items.  N – non moving items.  This classification helps in the arrangement of stocks in the stores. 32
  • 33. XYZ ANALYSIS  In this analysis the classification is based on the closing inventory value of different items.  X – item with high investment.  Z – item with low investment.  Y – item with moderate investment. 33
  • 34. 34