Operation Management

Faculty of Management Studies Banaras Hindu University

Tage Nobin

Roll No-48

Inventory Management

• Inventory control is necessary to ensure.

(a) Uninterrupted supply of materials.

(b) Optimal stock. (Not too much, not too little).

(c) Adequate controls over materials un-used, used.

• Inventory acts as buffer between demand and supply.

ABC Analysis

• Always Better Control.

• Pareto principle.

• Method of classifying inventory on the basis of importance and their impact on overall inventory cost.

• Inventories of an organization are not of equal value.

• This analysis is prepared and checked weekly or monthly.

ABC Analysis Table

Category % of Quantity % of Value

A (High Cost) 5-15 70-80

B (Medium Cost) 30 15

C (Low Cost) 50-60 5-10

Higher the value of inventory, the tighter the control.

Steps in ABC Analysis

1. Each item is assigned an annual value.

Annual Value = Unit Cost × Annual Demand

2. Rank all items according to their annual value.

3. Classify all inventory items as either A,B or C.

4. Determine the level of inventory control for each category A, B and C.

The maintenance dept of XYZ Company has responsibility for maintaining an inventory of spare parts for the machinery it services. Details as follows:

PART UNIT COST (Rs.) ANNUAL USAGE

1 60 90

2 350 40

3 30 130

4 80 60

5 30 100

6 20 180

7 10 170

8 320 50

9 510 60

10 20 120

PART TOTAL VALUE (Rs.) % OF TOTAL VALUE % OF TOTAL QUANTITY

9 30,600 35.9 6.0

8 16,000 18.7 5.0

2 14,000 16.4 4.0

1 5,400 6.3 9.0

4 4,800 5.6 6.0

3 3,900 4.6 10.0

6 3,600 4.2 18.0

5 3,000 3.5 13.0

10 2,400 2.8 12.0

7 1,700 2.0 17.0

CLASS ITEMS % OF TOTAL VALUE

% OF TOTAL QUANTITY

A 9, 8, 2 71.0 15.0

B 1, 4, 3 16.5 25.0

C 6, 5, 10, 7 12.5 60.0

Advantages 1. Preference for keeping inventory can be

placed properly after ABC analysis.

2. Store personnel are placed better with this analysis i.e their time can be utilized better.

3. By concerning on ‘A’ category materials it is possible to control inventories and show visible results in a short span of time.

4. Storing, handling and delivery of materials to production department become better.

VED Analysis

• Vital, Essential , Desirable.

• This classification is applicable only for spare parts.

• The stocking policy is based on the criticality of the items.

• This classification is usually applied for spare parts to be stocked for maintenance of machines and equipments based on the criticality of the spare parts.

1. Vital spare parts - at least one number of the vital spare irrespective of the long lead-time required for procurement.

2. Essential spare parts - low inventory.

3. The desirable spare parts - no stock is held usually.

• For V items of A classification a close control should be kept on stock levels, but if it is a C items, than large quantities mat be stored.