INVENTORY

Need of Inventory
Economic motives - Speculative - Transaction - Precaution Reduction in materials costs without imparing operational efficiency

Classification of Materials
Basis of I. Stage of conversion process (i) Direct materials raw materials, work-in-process, finished parts / goods (ii) Indirect materials II. Nature of materials (i) Raw materials direct and indirect (ii) Consumables (iii) Chemicals (iv) Inflammable items (v) Furniture (vi) Perishable materials (vii) Packaging (viii) Empties (ix) Supplies
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Classification of Materials (Contd.)

III. Usability of Materials (i) Serviceable and Unserviceable (ii) Semi-Finished and Finished (iii) Dead Stock Items (iv) Obsolete Items

Types of Inventory
Raw materials & Production MRO Maintenance, Repairs & Operation In-process Goods-in-Transit Finished goods Lot-size Fluctuation Anticipation
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Costs Associated with Inventory

Holding (Carrying) cost Storage facilities, handling, insurance, pilferage, obsolesces, breakage, depreciation etc. Setup (Production) cost Materials, equipments, required papers etc. Ordering cost Managerial & clerical costs to prepare purchase/production orders, system to track orders etc. Shortage cost
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Economic Order Quantity (EOQ)

Concept Basic decision of determining the quantity to order investment in inventories depends upon the quantities in which the items are ordered for replenishment General rule C-category procured in bulk without tying up much capital A-category low stocking, ordering frequently

Economic Order Quantity (EOQ)

Costs associated with order quantity i. Procurement cost Annual = No. of orders x Procurement Procurement Cost cost per order i. Inventory carrying cost Annual Inventory = Average Inventory x Inventory Carrying Cost Investment Carrying Cost Both costs are opposite to each other When these costs are properly balanced, the total cost is minimum & the resultant quantity is termed as Economic Order Quantity (EOQ).
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EOQ Models
Basic assumptions of Wilson formula: 1. Replenishment of stock is instantaneous 2. No shortage/back ordering is allowed 3. Price/unit is fixed, independent of the order quantity Types I. Basic (Wilson) EOQ Model infinite replenishment rate II. EOQ Model with finite replenishment rate III. EOQ Model with planned backlogging IV. EOQ Model with quantity discounts
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Basic (Wilson) EOQ Model

Assumptions 1. Demand occurs uniformly over the period at the known rate 2. Replenishment of stock is instantaneous 3. Lead time is zero 4. Cost to place an order & process the delivery is fixed 5. Price /unit is fixed, independent of order size 6. Inventory carrying charges vary directly with size of the inventory 7. Desired quantity can be procured without restriction of any kind 8. Item has fairly long shelf life
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Basic (Wilson) EOQ Model (Contd.)

Symbols used in EOQ model Annual consumption of item (units) Price per unit (Rs.) Procurement cost per order (Rs.) Inventory carrying cost (decimal) Order quantity (units) Economic Order Quantity : : : : : : S Cu Cp i q qo

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