Inventory Management

Inventory comprises of StockRM,WIP,FG,Stores & Spares,Packing Materials, Consumables. Needed for uninterrupted flow of production at each stage of manufacture and distribution Inventory is needed due to time lag in procurement, mfg.cycle time etc.

Factors affecting inventory

Demand fluctuation Production cycle time variation Variation in procurement lead times Demand and capacity constraints Penalty cost of shortages and delays Inventory acts as cushion between successive stages of value chain or supply chain

Cost of Inventory
HOLDING COST
ORDERING COST / SET UP COST SHORTAGE COST

Holding Cost
Cost of funds locked up Cost of warehouse space Cost of damage/ loss on storage Cost of pilferage Holding costs listed above vary directly with average quantity stored . Lesser the average Qty stored , lesser the holding cost.

Ordering cost
Cost of tendering Evaluating offers Placing order Expediting Receiving Inspection Since this is more or less same for all orders, this will vary inversely with quantity ordered.

Economic Order Quantity

EOQ Formula q = (2AO/CuI)1/2 A = Annual Consumption, (units ) O = ordering cost , (Rupees per order) Cu = unit cost of item ,( rupees) I = Inventory Carrying Cost ( % of inv.cost) Inv.Carrying cost / yr = (q/2)*Cu*I At EOQ, Ord.Cost = Inv. Carrying cost Hence, (A/q )*O = (q/2)*Cu*I ; Solving Ordering Cost per yr = (A/q )*O the above equation, q = (2AO/CuI)1/2

How Many to Order: Order Quantity with Quantity Discounts

Step-by-step: EOQ with quantity discounts
Compute basic EOQ. It will fall within one of the price ranges specified by the supplier. If the EOQ falls within the cheapest price range, the EOQ is the optimal order quantity If the EOQ does not, all price ranges having lower prices than the range the EOQ falls in must be evaluated. The optimal quantity will be at the lowest allowable quantity of a price range. For each quantity, compute the total cost (carrying, order, and purchase price) for the quantity at each price break.

Calculate total annual cost for different order quantities

Total Cost = D/Q(O) + Q/2(i) + DP Where D = annual demand or A annual usage Q = order quantity O = ordering cost per order i = carrying cost for one unit for 1 year P = price per unit

Example
Given the following information, compute the low-cost order quantity 1- 80 units: Rs.400 each 81- 160 units: Rs.390 each 161-300 units: Rs.375 each > 300 units : Rs.360 each Order cost: Rs.1000 per order Carrying cost: 20% per year. (as percentage of inventory cost) Annual demand: 480 units What would the low-cost order quantity be?

Reordering Systems q system - ROP

Safety Stock under q system depends on service level desired

Calculation of ROP
ROP = d LT + Z * sd LT ROP = Reorder Point (i.e., quantity at which more inventory is ordered) d LT= Average demand during replenishment lead time SDLT= Standard deviation of demand during replenishment lead time Z= Number of standard deviations above the average demand during replenishment time required for desired service level.

Average demand = 120 , Sd = 12, ROP for 99% conf. level is 148

Example
Lead time is 2 weeks, Average weekly demand is 62,Weekly standard deviation is 13,Compute a reorder point with a 95% service level Solution: Average demand during lead time = 2*62 = 124 Standard deviation of demand during the lead time = 18.38

Weekly Standard Deviation = 13

Therefore, weekly variance = 132 = 169 Therefore, two week variance = 2*169 = 338

Therefore, two week standard deviation = 3380.5 = 18.38

ROP = 124 + 1.645 * 18.38 = 155 units. Z for a (approximate) 95% service level is 1.645

Periodic Review System p - system

An independent demand management system that orders inventory on fixed time intervals.
If the timing cannot vary, the order quantity must vary to meet demand Used when user needs to order at periodic intervals because of supplier shipment schedules, or needs to combine orders for different products to save on transaction costs

P - system
Order quantity should cover expected demand during the order interval and replenishment lead time plus safety stock, less inventory on hand. Order Quantity = Average Demand (order interval + lead time) + Safety Stock Inventory o n Hand

Q dOILT d Z OI LT A
d OI+LT = average demand during the order and lead time intervals d = standard deviation of daily demand during the order and lead time intervals Z = number of standard deviations required for the necessary service level OI = number of days in the order interval LT = replenishment lead time A = quantity of inventory on hand when the order is placed

Determining the Order Quantity

Step-by-Step:
Based on the average daily demand, determine the expected demand during the order interval Based on the average daily demand, determine the expected demand during the replenishment lead time Identify the Z value from tables for the desired service level Determine the amount of inventory on hand currently Use the formula to compute the order quantity

Example p system
A local sporting goods store has located a supplier of athletic socks. The manager must place an order every Wednesday. Store is open every day.
Average daily demand is 3.6 units Lead time is 2 days Standard deviation (over order interval and lead time): 1.4 Inventory on hand: 5 units Service level desired: 99% Order interval: 7 days

Solution to example- p system

Average daily demand: 3.6 units Lead time: 2 days Standard deviation of demand for order interval and lead time: 1.4 units Inventory on hand: 5 units Service level desired: 99% ( z = 2.33 for 99% confidence level) Order interval: 7 days

Q 9(3.6) 1.4 * 2.33 * 9 5

Q 32.4 9.786 5 37.186 38

Economic Batch Size

This model is used where there is simultaneous production and consumption Used in cases where there is in house production of components Make or Buy decisions are often made in Engineering industries Producing a variety of products that use a common component

Manufacturing model
D = annual Demand in units S = Cost of set up , Rupees per set up Ci = cost of holding 1 unit for 1 year , Rs. Per unit p = rate of production d = rate of consumption EBQ = Economic Batch Size, in units EBQ = {2DS /Ci (1-d/p)}^0.5

Inventory Control Techniques

ABC Analysis VED analysis FSN Analysis Stock Verification Inventory Turn Over Safety Stock

 KY Constructions buy special door handles from Godrej , who have offer the following price schedule: Order Quantity (nos) Price/ unit(Rs) 1 to 99 Rs. 50 100 to 499 Rs.45 500 and above Rs. 40 Annual requirement is 2000 units , ordering costs are Rs.30 per order and inventory carrying costs are 25%.Find the optimum order quantity?

Inventory problems
Bharati Cables produces cables at the rate of 5000 metres per hour. The cable is used in other products made by Bharati at the rate of 20000 metres per day( 8 hrs).Cost of cable is Rs.5 per metre.ICC is 25%, Sep up cost is Rs.4050 per set up.Compute the optimal number of cycles required in a year for manufacture of this cable

Inventory - problems
Daily usage of a drug follows a Normal Distribution with a mean of 500 gms and SD of 50 gms.Lead time of procurement is 7 days. Drug store wants a risk level of 2% only.Determine Re order Point and Safety Stock.( Value of z corresponding to area 0.98 is 2.05)

Inventory- problems
The average demand rate for a particular raw material for a company is estimated to be 1000 units per month., with an SD of 200 units.Lead time for procurement is found to be normally distributed with a mean of 3 months and SD of 1 month.If service level of 95% is desired, determine safety stock when, a)Lead time is constant at 3 months and demand is varying as given above.b) demand is constant at 1000 units per month and LT varies.c) When both demand and LT vary.

 A flower mill buys wheat for its operations. Demand for wheat is forecast at 1500 bags in April 2005.A 5 month moving average is used for forecasting.Mean Absolute Deviation based on previous data (i.e.. Forecasted against actual) is 200 bags. A service level of 95% is desired.Procurement lead time is 15 days. If QSystem of inventory control is used , Determine Reorder point and Safety stock.

Inventory control- exercise

A company buys an item for its assembly. Usage pattern of this item follows a normal distribution with a mean of 1000 items and standard deviation of 200.Buying process takes one week.Inventory holding cost is Rs.5 per unit per year and cost of ordering is Rs.200 per order.The company allows for only 2 stock out situations in a year. Compute the safety stock required.

Inventory Control- Ex.1

ABC Corporation has got demand for a particular part at 10000 units a year.Cost per unit is Rs.20.Ordering cost is Rs.400 per order. Inventory Carrying Cost is 16%%. Find EOQ Number of orders to be placed per year Total cost of inventory per year

Inventory Control- Ex.2

Usha Corp. follows the following inventory policy. Number of orders per yr = 8. Ordering Cost = Rs .750. Order quantity 250. Unit cost = Rs.1250 ; Inv.Carrying Cost = 40%. Find the cost under present policy? What is EOQ ? What is the cost under EOQ policy

Inventory Control - Exercise

Annual Usage is 9500 units.Unit price is Rs 27. ICC is 25%. OC is Rs.100 per order.Lead time for supply is 10 calendar days.Working days 6 days per week.,52 weeks a year.Service level required is 95%.Find Reorder point and EOQ under Q system.Compute target level and reorder cycle under P system. SD of daily demand is 10 units.

Inventory Control Exercise3

A company buys an item for its assembly. Usage pattern of this item follows a normal distribution with a mean of 1000 items and standard deviation of 200.Buying process takes one week.Inventory holding cost is Rs.5 per unit per year.and cost of ordering is Rs.200 per order.The company allows for only 2 stock out situations in a year. Compute the safety stock required.

EOQ under inflation

EOQ = [2*A*O ( 1+ i/2 ) / Cu ( Ch i )]0.5 i = inflation rate Sunny Ltd. Buys 1000 mt of oil annually. Each order costs Rs.10000. Cost of holding is 30% . Oil costs Rs.10000 per mt. Price may go up due to inflation by 15%. Find optimal order qty. ( Ans.119.72 mt = 120 mt)

Exercise - inventory
Annual usage is 9500. unit price is Rs.27 Inventory carrying cost is 25 %. Ordering cost is Rs.100 per order. Procurement Lead time is 10 days . No of working days per week is 6. (52 weeks in a yr) If service level of 95% is desired, find ROP and EOQ. SD of daily demand is 10 units. (z = 1.645 for 95% service level)

Exercise - inventory
Demand = 90 units per month. Carrying cost is Rs.250 per unit per yr. OC = Rs. 200 per order.LT of procurement is one month SD of demand during LT is 30. Stock out cost is Rs.500 per unit. Find reorder point under Q system for the optimum level of stock out risk.

Exercise - Inventory
A company uses 1000 units per month of a raw material.SD of demand is 200 units. Avg Lead time of procurement is 3 months with SD of 1 month .If service level is to be 95%, What should be the Safety Stock when LT is const. at 3 months and demand varies Demand is const and LT varies Both LT and demand vary

Inventory - Exercises
Fast food restaurant makes Monda which sells fast. Past records show that demand follows the following pattern Demand(nos) 400 500 600 700 800 900 1000 Probability 0.05 0.1 0.2 0.3 0.2 .01 0.05 Selling price is 0.8 a piece, unsold mondas are sold next day as double fried at 0.4 a piece Cost of making one monda is 0.55. What is optimum stocking policy?