Unit-3

Inventory Control

Introduction to Inventory
Inventory is defined as the list of movable goods which helps directly or indirectly in the production of goods for sale. Inventory is service to production. Inventory may also be defined as a comprehensive list of movable items which are required for manufacturing the products and to maintain the plant facilities in working conditions.

Inventory Definition
A stock of items held to meet future demand

It can be defined as the stock of goods, commodities or other resources that are stored at any given period of future production

Types of Inventory
Inputs
Raw Materials Purchased parts Maintenance and Repair Materials

Process

Outputs
Finished Goods Scrap and Waste

(in warehouses, or in transit)

In Process
Partially Completed Products and Subassemblies

(often on the factory floor)

Classification Of Inventories
Inventory can be classified as: 1.Direct inventories:- which play a direct role in the
manufacture of a product and becomes an integral part of the finished product are called direct inventories.

2.Indirect inventories :- are those materials which

help the raw materials to get converted into the finished products, but do not become an integral part of the finished products.

Direct Inventories
1. Raw Materials :- are those basic materials from which
components, parts & products are manufactured by the company.

2. In Process Inventories( work in progress):the semi-finished goods at various stages of manufacture.

are

3. Purchase parts
4. Finished goods

Indirect Inventories
1. Tools:- various tools like Standard tools , Hand tools
2. Supplies :- it includes materials used in running the plant
but do not go into the product . Supplies include :miscellaneous consumable stores such as brooms, cotton waste, vim powder . General office supplies such a s candles , pencils , pens etc. Ledgers & journals , Electric supplies etc.

Inventory Control
Inventory control refers to the process whereby the investment in materials & parts carried in stock is regulated within predetermined limits set in accordance with the inventory policy established by the management. Inventory control aims at maintaining the values of the inventories at the lowest possible level at the same time seeing that the required inventories are available at all items.

Reasons To Hold Inventory

Meet variations in customer demand:
Meet unexpected demand Smooth seasonal or cyclical demand

Pricing related:
Temporary price discount Take advantage of quantity discounts

Process & supply surprises

Internal upsets in parts of or our own processes External delays in incoming goods

Transit

Reasons To NOT Hold Inventory

Increases Carrying cost
Financially calculable

Takes up valuable factory space

Especially for in-process inventory

Inventory covers up problems Wastage of materials Increase in Maintenance cost

Determining Inventory Level

1. 2. 3. 4. Order quantity Lead time Safety stock Reorder point

Re-order Point
It is pre-known that it takes days between initiating the order & receiving the required quantity. Ex:-1 month is required for delivery of the 500 units (order quantity) & then the item is used at a rate of 200 units per month . As a result, 200 units will be used during the procurement period. Suppose, the company does not want the inventory to drop below 100 units, an order must be placed when the inventory level reaches ___units. Reorder point = min. inventory + Procurement time*consumption rate. We can say that the min. inventory will be 100 units & the order quantity will be 500 units . Since these 500 units are expected to be received when the inventory reaches to 100 units. The maximum inventory on hand at any one time will be equal to order quantity + minimum inventory.

Lead Time
There is always some interval between the time the need for the material is determined & the time the material is actually received . This period is known as lead time . It consists of requisition. It consists of Requisition time ( Rt )+ Procurement time(Pt). Requisition time consists of time required to prepare purchase requisition & placing the order to a selected vendor. Procurement time consists of time to deliver purchase order to the seller, time for the seller to get or prepare the inventory for dispatch & time for inventory to be dispatched from the supplier & to reach the customer.

Safety stock
If the use rate & lead time could be predicted correctly, it would be possible to limit maximum inventory of items to the order quantity . In this case the maximum inventory would be equal to the order quantity Q. The average inventory would be equal to q/2, and min inventory would be zero. In practice this cannot be done because:1. Supplier may fail to keep delivery promises. 2. The forecast of use rate mat be inaccurate. Therefore, extra inventory is needed to protect against unreliable forecast & protection against stock outs . This extra inventory is known as reserve stock , safety stock, base stock or buffer stock. In this case the max inventory is equal to the order quantity + safety stock & min inventory is equal to the safety stock.

Average Inventory Level

Average stock level=( max level + min level) / 2 Or
Average stock level=min level + ( re-order quantity)/2

Inventory Order Cycle

Order quantity, Q Inventory Level

Demand rate

Reorder point, R

Lead
time Order Order placed receipt

Lead time Order Order placed receipt

Time

Inventory costs
Inventory analysis identifies 4 major cost components: 1.Purchase cost 2.Ordering cost 3.Carrying cost Direct & Indirect cost 4.Stock out cost

Purchase cost This refers to the nominal cost of inventory. It is the purchase price for the items that are bought from outside sources, and the production cost if the items are produced within the organization

Ordering Cost/ setup Cost Ordering cost is incurred whenever the inventory is replenished. It includes costs associated with the processing & chasing of the purchase order, transportations, inspection for quality, expediting overdue orders & so on. It is also known as procurement cost

Carrying cost
Direct Cost
Capital costs Storage costs Service costs Risk costs

Indirect Cost
Business risks Opportunity Costs Incremental increase in infrastructure Costs

Stock-out costs
Stock out cost means the cost associated with the not serving the customers . Stock out implies shortages . Other types of cost in inventory control are Warehousing Costs Damage & obsolescence cost

Inventory models
Economic lot size of an item depends on the following:1. Possibility of placing the repeat orders 2. Nature of demand 3. Availability of discount 4. Single or multiple product manufacture.

Inventory models considering the above aspects can be classified as under:A. Static Inventory Models B. Dynamic Inventory Models

1. Static Inventory Models

Only one order placed to meet the demand Repeat orders are either impossible or too expensive E.g.:-Perishable goods like bread, vegetables; Seasonal Products like coolers, umbrellas, crackers, sweaters, rain coats, etc.

2. Dynamic Inventory Models

Applicable for items where repeat orders can be placed

2.1 Deterministic Models Based on following assumptions: The demand & lead time of the item is known exactly for a given period The demand of the item occurs uniformly over a period of time Orders are received instantaneously The items can be purchased freely, i.e. ,there are no restrictions of any kind The item has fairly long shelf life. There is no fear of deterioration or spoilage The cost of placing an order is fixed. It does not vary with the lot size 2.2 Probabilistic Models

Take into account the variations in demand and lead time of an item

Economic Order Quantity

It is the size of the lot to be purchased which is economically viable

This is the quantity of materials which can be purchased at minimum costs

Generally, economic order quantity is the point at which inventory carrying costs are equal to order costs In determining economic order quantity it is assumed that cost of managing inventory is made up solely of two parts i.e., ordering costs and carrying costs

Assumptions of EOQ
Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once No safety stocks as average inventory is Q/2 A= Annual Usage in units (Quantity) S= Cost of placing the order (Ordering Cost) P= Price of material per unit (Price) C= Cost of storage of material (Carrying Cost)

EOQ =

2AS PC

Limitations of EOQ models

Erratic Usages Faulty basic Information Costly Calculations No formula Substitute for Commonsense EOQ Ordering must be tempered with Judgment

Inventory Control Techniques

ABC Classification
Class A
5 15 % of units 70 80 % of value

Class B
30 % of units 15 % of value

Class C
50 60 % of units 5 10 % of value

ABC Classification
One of the most important considerations of control is the value of annual consumption of inventory items in a year. Only a small number of inventory items consume a very large share of inventory consumption during the year. A little larger number of inventory items covers a moderate share of annual inventory consumption. A very large number of items just cover a very small share of annual inventory consumption. These facts gave birth to the concept of ABC analysis.

ABC Classification
It has been observed that in an industrial unit only 10% of items have 70% of the annual inventory consumption,

20% of the items have 20% of annual inventory consumption, and

70% of the items have only 10% of the annual inventory consumption. Since 70% of the annual consumption of inventory is covered by only 10% of the items in the inventory, these items deserve highest attention and are classified as A items.

Similarly 20% of the items covering 20 % of the inventory investment are B class items
Balance 70% of the inventory items are termed as C class items.

Introduction to Supply Chain Management

Supply chain management refers to the coordination of activities involved in making and moving a product. It is the network of businesses and business processes involved in the creation and selling of a product, from suppliers that procure raw materials through retail outlets and customers.

Supply Chain process is divided into 2 parts:

Upstream and Downstream

The upstream portion of the supply chain includes : the organization's suppliers and the processes for managing relationships with them.
The downstream portion consists of the organizations and processes for distributing and delivering products to the final customers. The manufacturer also has internal supply chain processes for transforming the materials and services furnished by suppliers into finished goods and for managing materials and inventory.

Goal of SCM
Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed: In the right quantities To the right locations At the right time In order to Minimize total system cost Satisfy customer service requirements

Inefficiencies in the supply chain : could include parts shortages, underutilized plant capacity, excessive inventory, or runaway transportation costs, Which are caused by inaccurate or untimely information and can waste as much as 25% of operating costs. Uncertainties also arise because many events cannot be foreseenproduct demand, late shipments from suppliers, defective parts or raw material, or production process breakdowns.

Drivers of Supply Chain Performance

Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites Inventory raw materials, WIP, finished goods within a supply chain inventory policies Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance

Classification of supply chain s/w

a)Supply chain planning system:

1) Generate demand forecasts for a product. 2) Develop sourcing and manufacturing plans for that product 3) Make adjustments to production and distribution plans, and 4) Share information with relevant supply chain members. One of the most important supply chain planning functions is demand planning, which determines how much product a business needs to make to satisfy all of its customers' demands.

b) Supply chain execution system:

Physical flow of products through distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner.