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TYPES OF INVENTORY
Manufacturing Inventory
• Raw Material
• Work-In-Process
• Saleable Spares
Echelon Inventory
Factory
Plant Plant Plant Plant
Echelon
Lead time
FPS
Factory
Echelon
Depot Depot Inventory
Echelon Lead time
Depot
MULTI-ECHELON INVENTORY Echelon Inventory
INVENTORY MANAGEMENT
Inventory Management Comprises
Inventory Planning
Inventory Control
Finished Goods – End Product of the Production Process Ready for Sale Held at
Factory/ Central Warehouse
Distribution Inventories – Stocked in Various Points in the Distribution System
Maintenance, Repair & Operational Supplies (MRO) – Items that Support the
Production Process But Do Not Become Part of Product – Hand Tools/ Machine
Spares/ Lubricants/ Cleaning Supplies
C
Warehouse U
Supplier S
Raw Materials Work Finished T
Supplier Purchased Parts In Goods Warehouse O
Sub-Assemblies Process M
E
Supplier Warehouse
R
Inventories/ Flow of Materials S
FUNCTIONAL VIEW OF INVENTORY
Anticipation Inventory
In Anticipation of Future Demand Ahead of Peak Selling Season/ Sales
Promotion/ Vacation Shutdown/ Threat of Strike
Hedge Inventory
Inventory Procured To Take Benefit of Low Prices When Supply More Than
Demand in Global Markets
Such Products Normally are Minerals/ Grains/ Animal Products
Delivery of goods from a supplier is in transit for ten days. If the annual
demand is 4, 200 Units, what is the Average Annual Inventory in Transit?
2. If Transit Time is eleven days and the Annual Demand for an item is
10, 000 Units. What is the Average Annual Inventory in Transit?
Average Annual Inventory in Transit, I = TA/ 365
= (11×10000)/365=301.36 Units
Seasonal Demand
Production
INVENTORY COSTS
Item Cost/ Landed Cost
Purchased Item=Purchase Price+Transportation Cost+Insurance+Customs Duties
Manufactured Item= Direct Material + Direct Labour + Factory Overhead
Risk Costs: Normally Low Value But 100% of Item Value for Perishable Items
• Obsolescence-Loss of Product Value Due to Model/ Style/ Technology Change
• Damage – Product/ Packaging Damage in Store/ Transit
• Pilferage – Goods Lost/ Stolen
• Deterioration – Rots/ Dissipates in Storage/ Limited Shelf Life
Stock-Out Costs
When Demand During Lead Time of Supply Exceeds Forecast Stock- Out
Costs Increases due to
• Back-Order Costs
• Lost Sales
• Lost Customers
Carrying Extra Inventory Protects Against Stock Outs
Capacity-Associated Costs
When Output Levels Need To be Changed Cost incurred in Overtime/ Hiring/
Training/ Running Extra Shifts / Layoffs
Costs Can be Avoided By Leveling Production & Producing at Same Rate During
Slack Times for Sale During Peak Periods
Production Leveling Builds Inventory During Slack Periods
EXAMPLE
Calculate average cost of placing one order with the annual costs given
below:
• Production Control department salaries= Rs60,000
• Supplies & operational expenses for PC department= Rs15,000
• Cost of setting up work centres for an order= Rs120
• Orders placed each year= 2,000
Average cost of One order= Fixed Cost/ No. of orders + Variable Cost
= (60000+15000)/2000 + 120= Rs157.50
Annual purchasing salaries are $65,000, operating expenses for the purchasing
Department are $25,000 and inspecting & receiving costs are $25/ order. If the
purchasing department places 9,000 orders a year, what is the average cost of
ordering? What is the annual cost of ordering?
Average cost of One Order= Fixed Cost/ No. of Orders + Variable Cost
= 40 × 5000=$200,000
EXAMPLE
A company makes and sells a seasonal product. Quarterly Sales forecasts
for the product are 2,000, 3,000, 6,000, 5,000 Items for the next year.
Calculate level production plan, quarterly ending inventory and average
quarterly inventory.
If inventory carrying costs are $3 per unit per quarter, what will be the
annual cost of carrying inventory? Assume opening and closing inventories
as zero.
Q1 Q2 Q3 Q4 Total
Sales Forecast 2000 3000 6000 5000 16000
Production Plan 4000 4000 4000 4000 16000
Ending Inventory 0 2000 3000 1000 0
Average Inventory 1000 2500 2000 500
Inventory Cost ($3/Unit) 3000 7500 6000 1500 18000.00
Q1 Q2 Q3 Q4 Total
Sales Forecast 1000 2000 3000 2000 8000
Production Plan 2000 2000 2000 2000 8000
Ending Inventory 0 1000 1000 0 0
Average Inventory 500 1000 500 0
Inventory Cost($3/ Unit) 1500 3000 1500 0 $6,000
Q1 Q2 Q3 Q4 Total
Sales Forecast 5000 8000 8000 10000 31000
Production Plan 7750 7750 7750 7750 31000
Ending Inventory 0 2750 2500 2250 0
Average Inventory 1375 2625 2375 1125
Inventory Cost $6 8250 15750 14250 6750 $45,000
75% of Items
75 C - 10% of Value
A–Frequently Monitored+
Lower Safety Stock
To Avoid Stock Outs
C– Least Frequently
Monitored+
Highest Safety Stock
10 25 100
A B C % Items
EXAMPLE
A 1100 2 2200
A company manufactures a
B 600 40 24,000 line of 10 items. Their usage
and unit cost are shown in
C 100 4 400
the accompanying table
D 1300 1 1,300 along with annual Rupee
value usage of each.
E 100 60 6,000
Group items into ABC
F 10 25 250 Classification.
G 100 2 200
H 1500 2 3000
I 200 2 400
J 500 1 500
SOLUTION
A-Class Items
High Priority Items Represent About (10-15)% of Items that Account
for About 70-80% of Value
Tight Control on Inventory
• Keep Complete & Accurate Records
• Regular + Frequent Review of Demand Forecasts
• Close Follow-Up + Expediting Supplies To Reduce Lead Time
B-Class Items
Medium Priority Items Represent About (10-15)% of Items that Account
for About (10-15)% of Value
Normal Control on Inventory
• Keep Good Records
• Regular Attention To Demand Forecasts
• Normal Processing
C-Class Items
Lowest Priority Items Represent About (70-50)% of Items that Account
for About (10-15%) of Value
Simplest Possible Control On Inventory - Stock Large Quantities
• Simple Records with Periodic Review of Stocks
• Order Large Quantities & Carry Safety Stocks
H-M-L ANALYSIS
H - Category of Items
High Priced Items
• Tight Control on Consumption
• More Frequent Verification of Stocks
• Purchase Policies for Closer Control on Purchase
• Higher Storage Security (Locked in Steel Cupboards)
M - Category of Items
Medium Priced Items
• Medium Control on Consumption
• Frequent Verification of Stocks
• Medium Control on Purchase
• Medium Security of Storage
L - Category of Items
Low Priced Items
• Less Control on Consumption
• Less Frequent Verification of Stocks
• Less Stringent Control on Purchase
• Standards Security Provided
F-S-N ANALYSIS
Used in Controlling Stock Obsolescence
Last Date of Receipt/ Issue Considered To Calculate Period When
Stocks Did Not Move for Classifying Items
F: Fast Moving
S: Slow Moving
N: Non-Moving
S & N Category of Items Further Analyzed Conducting Ageing
Analysis To Decide on Appropriate Ways of Disposing Stocks
X-Y-Z ANALYSIS
Used to Review Inventories & Consumption at Scheduled Intervals
Based On Value of Stocks in Stores
X Items: High Value of Inventory
Y Items: Moderate Value of Inventory
Z Items: Low Value of Inventory
INVENTORY CONTROL IN COMBINATION
X-Y-Z Analysis Used Along with ABC/ FSN Analysis Helps
To Identify Few Items Comprising Large Value Locked Up in Inventory
Indicate Actions Need to be Taken for Improving Company’s Stock Profile
Class of Items A B C
X Work to Reduce Work to Convert Dispose Off
Stocks To Z category To Y Category Surplus Stocks
Y Convert To Z category Tighten Control
Z Review Stock Levels More Often
Class of Items F S N
X Tighten Control Reduce Stocks Dispose Off
To Low Levels at Optimum Prices
Y Reduce Stocks Dispose Off Earliest
Z Lessen Control Dispose Off Even
To Reduce Admin Costs At Lower Prices
INVENTORY CONTROL
Days of Supply
Financial Measure of Equivalent Number of Days of Inventory On Hand
Based on Daily Usage Rate
Inventory On Hand
Inventory in Days of Supply=
Average Daily Usage
Stock-Out Costs
EOQ
Quantity
2 × 900 × 36
EOQ = = 120 Units
0.18 × 25
ASSUMPTIONS IN EOQ MODEL
Annual Demand is Known & Remains Constant
No Stock-Outs Allowed
Supplier’s Offer:
Order Qty. of Soccer Balls Price ($) Customer Data:
Below 1, 000 5.00 Ordering Cost = $40
Between (1, 001 – 2, 000) 4.50 Annual Demand = 15, 000
Above 2, 000 4.00 Carrying Cost = 25%
Order Point System Works Well With Steady & Continuous Demand
INVENTORY MODELS
Q - Fixed Order Quantity
L – Lead Time of Supply
FOQ Model
Quantity Maximum Level
Q Q Q Q
Average Level
Reorder Level
L
Buffer
Time
P - Fixed Review Period
FRP Model L – Lead Time of Supply
Order Up to Level
Quantity
L Buffer
P P P P Time
INVENTORY COMPOSITION
Cycle Stock
EOQ × ½
Seasonal Stock
To Counter Predictable Demand Variability