INVENTORY MANAGEMENT

Inventory of Stocks Stock Cycle Inventory Management Why Hold Inventory Types of Stock Stocks in the Supply Chain Strategic Role of Stock Costs Associated with Holding Stock Pareto Analysis

Inventory or Stocks ?
Stock consists of all the goods and materials that are stored by an organisation. It is a store of item that is kept for future use. An Inventory is a list of the items held in stock.

Item or Unit ?
An item is a single type of product which is kept in stock: it is one entry in the inventory. A unit is the standard size or quantity of a stock item.

Stock Cycle
Stock Cycle is the sequence of Stock Replenishment and Reduction to meet demand, that is repeated continuously.
Date 01/01/12 03/01/12 5/01/12 9/01/12 12/01/12 15/01/12 18/01/12 23/01/12 Received 100 100 Issued 10 5 20 25 10 15 10 15 Balance 90 85 65 40 30 15 5 90 Order Placed 100 -

Inventory Management
Inventory Management is the function responsible for all decisions about stock in the organisation. It makes decisions for policies, activities, and procedures to make sure the right amount of each item is held in stock.

Why Hold Inventory ?

For giving a buffer or cushion between SUPPLY and DEMAND.

SUPPLIES With variation and uncertainty in quantities and timing

Stock giving a buffer between supply and demand

DEMAND With variation and uncertainty in quantities and timing

Types of Stock
Raw materials Components and sub-assemblies which have been purchased or bought in Work in progress Finished goods stocks Consumables (tolls, lubricants etc.) Spares for maintenance or machinery

Cycle Stock Safety Stock Seasonal Stock Pipeline Stock

OR

Stocks in the Supply Chain

A Supply Chain consists of a series of activities and organisations that materials move through on their journey from initial suppliers to final customers.

 AJT Transport of Karachi is planning to increase its services to Punjab and Pakhtoonkhwa. It currently has 12 depots with aggregate stock valued at Rs. 12 million and plans to expand to 16 depots. With carrying costs being 20% of value a year, what is the likely cost of this change? N1 = 12 depots N2 = 16 depots AS(N1) = Rs. 12 million AS(N2) =

N1=Number of existing facilities N2= Number of planned future facilities AS(Ni) = Aggregate Stock with Ni facilities

Strategic Role of Stock

Quarter
Sales Percentage Change Production Percentage Change Change in Stock

1
70 100 +30

2
110 +57 105 +5 -5

3
120 +9 105 0 -15

4
105 -4 95 -10 -10

5
90 -14 95 0 +5

6
80 -11 95 0 +15

Stocks allow production to remain fairly constant

CMJ Constructors Ltd. Currently has sales of 20 million a year, with a stock level of 25% of sales. Annual holding cost for stock is 20% of the value. Operating costs are 15 million a year and other assets are valued at 30 million. What is the current return on assets? How does this change when stock levels are reduced to 20% of sales?

Taking costs over a year, the current position is: Cost of Stock = amount of stock x holding cost Total Cost = operating cost + Cost of Stock

Profit = Sales Total Costs

Total Assets = other assets + stock Return on Assets = profit/total assets AFFECTS OVERALL FINANCIAL PERFORMANCE OF ORGANISATION

Costs Associated with Holding Stock

Unit Costs Reorder Costs Holding Costs
o o o o o o Interest costs Opportunity costs Costs of obsolete stock Costs of stock deterioration Insurance costs Storage costs

Shortage costs

 19th Century Italian economist 80% of wealth in the hands of 20% of the people 80% of the Inventory Value is tied up in 20% of the stock ABC Analysis
o o o A 20% - 80% B 30% - 15% C 50% - 5%

Pareto Analysis

 (1) Calculate the estimated annual spend for each item. (2) Sort these annual spends in descending order. (3) Calculate the total annual spend for all items, calculate the % spend for each item and then the % cumulative annual spend. (4) Calculate the cumulative % for each item in descending order. In the example the item with the top annual spend represents 5% of the items, the second item 10% and so on. (5) Determine the split between A, B and C class items.
Part No. Unit Cost Est. Annual Usage 2050 1560 600 2100 2600 500 800 800 250 160 Part No. Unit Cost Est. Annual Usage 2.30 2.25 3.00 1.80 4.90 9.75 6.40 2.80 11.50 1.20 85 350 190 250 560 1540 900 200 1560 1300

B399 A267 C487 D475 D636 D721 E413 F598 G877 H177

7.90 12.30 1.60 10.90 0.55 2.20 2.50 4.85 1.50 2.50

K091 J199 P640 R768 R922 S122 S822 V663 X411 Y546

Part No.

Unit Cost

Est. Annual Usage

Est. Annual Spend (1) + (2)

% Total Annual Spend (3) 20.08 16.83 15.74 14.21 13.17 5.05 3.40 2.41 1.75 1.37 1.25 0.96 0.84 0.69 0.50 0.49 0.40 0.35 0.33 0.17 100.00

Cum. % Annual Spend (3) 20.08 36.91 52.65 66.86 80.03 85.08 88.48 90.89 92.64 94.01 95.26 96.22 97.07 97.76 98.26 98.75 99.15 99.50 99.83 100.00

Cum. % items (4) 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

D475 A267 X411 B399 S122 S822 F598 R922 E413 Y546 D636 D721 C487 J199 P640 V663 R768 H177 G877 K091 Total

10.90 12.30 11.50 7.90 9.75 6.40 4.85 4.90 2.50 1.20 0.55 2.20 1.60 2.25 3.00 2.80 1.80 2.50 1.50 2.30

2100 1560 1560 2050 1540 900 800 560 800 1300 2600 500 600 350 190 200 250 160 250 85

22890 19188 17940 16195 15015 5760 3880 2744 2000 1560 1430 1100 960 787.5 570 560 450 400 375 195.5 114000