Inventory

Inventory or stock refers to the

goods and materials that
a business holds for the ultimate
purpose of resale (or repair)
Types of inventories

Raw materials: Raw materials, required for production
of finished products are one of the basic components
of inventory for a manufacture. Shortage of raw
materials can cause production stoppage or change in
production Schedule which in turn may result in a
shortage of finished goods. Thus sufficient quantities of
raw materials need to be stored to cope with uncertain
situations. However, where shortage of raw materials
can disrupt normal manufacturing operations,
excessive inventories can increase inventory carrying
costs and reduce profitability.

Cont..
Finished Goods: Finished goods are another
important part of inventories, especially for
the wholesalers and manufacturers. While
holding finished goods inventory, it is
important to have a adequate and not excess
stock of inventories as they may incur cost as
well as loss if the excess inventory is not sold
out in time.
Cont..
W.I.P.: Work In Progress (W.I.P.) inventory is
often maintained between manufacturing
operations within a plant to avoid production
hold ups in case a critical machine or
equipment were to breakdown and also to
equalize production flow, since not all
manufacturing units produce at the same rate.
Cont
Spare parts: Spare part inventories are mainly
held for purpose of coping up with untimely
breakdowns in machinery and facilities. This
may form a minor part of the inventory,
however are as necessary as holding raw
materials inventory.
Cont..
Buffer inventory: also referred to as safety
inventory, its purpose is to compensate for
unexpected fluctuations in supply and
demand.
Cycle inventory: occurs because one or more
stages in the process cannot supply all the
items it produces simultaneously. This type of
inventory only results from the need to
produce products in batches and the amount
of it depends on volume decisions.

Cont..
De-coupling inventory: inventory that is used
to allow work centres or processes to operate
relatively independently.
Anticipation inventory: inventory that is
accumulated to cope with expected future
demand or interruptions in supply.

Economic Ordered Quantity
An inventory-related equation that
determines the optimum order quantity that a
company should hold in its inventory given a
set cost of production, demand rate and other
variables. This is done to minimize variable
costs.
EOQ=
Where U= total demand
O= ordering cost
I= Inventory holding cost
EOQ
EOQ model 1

EOQ model 2

EOQ model 3
Production Order Quantity
Production Order Quantity (POQ) is a model
that answers how much to produce and when
to order. In this model, the materials produced
are used immediately and hence lowering the
holding cost that in Economic Order Quantity
(EOQ).
Inventory Control Criterions
ABC analysis in selective inventory control

HML Analysis:The items under this analysis
are classified into High, Medium and Low
price according to their unit price .To Classify
the items are listed according to the
descending order of their unit price .The cutoff
is then fixed for each category.

Cont..
VED Analysis:
The analysis classifies the items into three
categories as Vital , Essential and Desirable
.Vital category items are those items for which
the production may stop .Essential are those
items whose stock outs may cost us very high
and Desirable are those items that do not
cause any loss to the production .

SOS Analysis:
SOS analysis is based on seasonality of items
and it classifies all the items into two
categories Seasonal And Off seasonal

Cont..
Cont..
FSN Analysis
Based on Fast moving, Slow moving and Non
moving parts.
Bull Whip Effect
A series of events that leads to supplier demand
variability up the supply chain.
Trigger events include the frequency of orders, varying
quantities ordered, or the combination of both events
by downstream partners in a supply chain.
As the orders make their way upstream, the perceived
demand is amplified and produces what is known as
the bullwhip effect.
Examples of Bullwhip Effect
Procter & Gamble
Procter & Gamble was faced with a substantial degree
of variability in orders from its retailers, and this
variance was amplified further up its supply chain of
Pampers to its own suppliers.
Procter & Gamble discovered that the primary causes
of the bullwhip effect were the demand signalling from
its distributors; order batching, when distributors
would order on an infrequent basis; changes in prices
by the manufacturer; and distributors placing multiple
orders.
Procter & Gamble now employs vendor-managed
inventory (VMI) in its diaper supply chain, starting with
its supplier, 3M, and its customer, Wal-Mart.
Hewlett & Packard Example
HP had to relied on the sales orders from the
resellers to make product forecasts, plan
capacity, control inventory, and schedule
production.
Order swings exaggerated by the resellers
relative to their sales in turn, created
additional exaggerations of order swings to
suppliers.
Cont
Hewlett-Packard warned of possible shortage
of supply of its best-selling LaserJet printer.
This resulting in retailers artificially inflating
their orders to compensate.
Sales forecasts went up by a correspondingly
greater amount, and the orders from the HP
printer division to the HP integrated circuit
division went up by even more.
Safety Stock
It is a term used by logisticians to describe a level of
extra stock that is maintained to mitigate risk of stock
outs due to uncertainties in supply and demand.
To calculate the safety stock, first calculate the
standard loss function, designated as L(z). This function
is dependent on the values of the desired fill
rate f, the demand and its standard deviation
, the time between orders p, and the replenishment
lead time l : L(z) = ( 1 f ) p / ( p + l )
1/2
. Once L(z)
is known, z can be found in a look-up table and the
safety stock can be calculated by:
Safety Stock = z ( p + l )
1/2

Thank You!