inventory final

8/8/2019 Inventory Final

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Inventory Management

Presentation

on



Manjiri B 09025

Biswajit S 09026

Akshay G 09027

Harsha S 09028

Irfanul Haq 09029 Ashwini A 09030

Group member:



Definitions Inventory-A physical resource that a firm holds

in stock with the intent of selling it ortransforming it into a more valuable state.

Inventory System- A set of policies and controlsthat monitors levels of inventory and determineswhat levels should be maintained, when stock

should be replenished, and how large ordersshould be



MEANING - INVENTORY

A physical resource that a firm holds instock with the intent of selling it or

transforming it into a more valuable state. Raw Materials

Works-in-Process

Finished Goods

Maintenance, Repair and Operating (MRO)



Inventory Positions in the

Supply Chain

Raw

MaterialsWorks

in

Process

Finished

Goods

Finished

Goods

in Field



determine requirements by forecastingdemand for the next production run orpurchase

establish current on-hand quantities add appropriate safety stock based on

desired stock availability levels anduncertainty demand levels

determine how much new production orpurchase needed (total needed - on-hand)

Role of inventory in

increasing productivity.



Role of inventory inincreasing customersatisfaction. Quality - inventory can be a “buffer” against poor quality;

conversely, low inventory levels may force high quality

Speed -location

of inventory has gigantic effect on speed Flexibility - location, level of anticipatory inventory both

have effects



Cost - direct: purchasing, delivery, manufacturing

indirect: holding, stock out.

HR systems may promote this-3 year postings

Maximize the level of customer service by

avoiding under stocking.

Promote efficiency in production and purchasing by minimizing the cost of providing an adequate

level of customer service.



Reasons for Inventories Improve customer service

Economies of purchasing

Economies of production

Transportation savings

Hedge against future

Unplanned shocks (labor strikes, natural disasters,surges in demand, etc.)

To maintain independence of supply chain



Reasons Against Inventory Non-value added costs

Opportunity cost

Complacency

Inventory deteriorates, becomesobsolete, lost, stolen, etc.



Zero Inventory? Reducing amounts of raw materials and

purchased parts and subassemblies byhaving suppliers deliver them directly.

Reducing the amount of works-in process by using just-in-time production.

Reducing the amount of finished goods byshipping to markets as soon as possible.



Inventory Costs Procurement costs

Carrying costs Out-of-stock costs



Procurement Costs Order processing

Shipping

Handling

Purchasing cost: c(x)= $100 +$5x

Mfg. cost: c(x)=$1,000 +$10x



Carrying Costs Capital (opportunity) costs

Inventory risk costs

Space costs

Inventory service costs



Typical Inventory Carrying CostsTypical Inventory Carrying Costs

Housing cost:

Building rent or depreciation Building operating cost Taxes on building Insurance

Material handling costs: Equipment, lease, or depreciation Power Equipment operating cost

Manpower cost from extra handling and supervision

Investment costs: Borrowing costs Taxes on inventory Insurance on inventory

Pilferage, scrap, and obsolescence

Overall carrying cost

6%

(3% - 10%)

3% (1% - 4%)

3% (3% - 5%)

10% (6% - 24%)

5% (2% - 10%)

(15% - 50%)

Costs as % of

Inventory Value



Out-of-Stock Costs Lost sales cost

Back-order cost



Methods of Inventory

Planning The Basic Stock Method

The Percentage Variation Method

The Week’s Supply Method

The Stock / Sales Ratio Method



Independent Demand Independent demand items are finished

products or parts that are shipped as

end items to customers.

Forecasting plays a critical role

Due to uncertainty- extra units must becarried in inventory



Dependent Demand Dependent demand items are raw

materials, component parts, or

subassemblies that are used to produce

a finished product.

MRP systems.

I d d t D d t



Independent vs. DependentDemand

A

Independent Demand(finished goods and spare parts)

B(4) C(2)

D(2) E(1) D(3) F(2)

Dependent Demand(components)

I d d t



Independent versusDependent Demand

Dependent demandWork in progressComponents and raw materials

Time

D e m

a n

d / u

s a g e

Independent demand- finished goods- spare parts

Time

D e m a n

d / u

s a

g e



Independent Vs DependentDemand System

Example- Pharmaceutical Firm.

Based on forecasting

Components, materials



Q-system control is periodic review method

Q-system - each stock item reordered at

different times - complex, no economies of scope or common prod./transport runs

P-system - inventory levels for multiple stockitems reviewed at same time - can bereordered together

higher carrying costs - not optimum, but morepractical

Q-System P-System

Periodic Review Method



audit inventory level at interval (T) quantity to place on order is difference

between max. quantity (M) and amounton hand at time of review management task - set optimal T and M

to balance stock availability and cost

In ABC analysis, which items would use P-system???

Using P-System



changing lead times changing demand Uncertainty creeps in:

Plug in safety stock Safety stock - allows manager to determine

the probability of stock levels - based ondesired customer service levels

Planning for

Uncertainty



replenishment, production, or purchases of

stock are made only when it has been

signaled that there is a need for productdownstream

requires shorter order cycle time, often more

frequent, lower volume orders

determine stock requirements to meet only

most immediate planning period (usually

about 3 weeks)

Response-Based

System



Calculating Minimum Stock

Level

Maximum lead time = 2 weeks

Maximum usage/wk = 3 kits

Minimum stock level = 2 x 3 = 6 kits

When only 6 kits are left, place an order

= Maximum leadtime in weeks

X Maximum Usage

MinimumStock Level



Economic Order Quantity

EOQ = Square root of (2as/i)

Where,

a = annual demandS = Ordering Cost

i = Inventory carrying cost



Economic Order Quantity

(EOQ) Models

EOQ optimal order quantity that will

minimize total inventory costs

Basic EOQ model

Production quantity model



Assumptions of Basic

EOQ Model

Demand is known with certaintyDemand is known with certainty

and is constant over timeand is constant over time No shortages are allowed No shortages are allowed Lead time for the receipt of ordersLead time for the receipt of orders

is constantis constant Order quantity is received all atOrder quantity is received all atonceonce



Balancing Carrying againstOrdering Costs

Annual Cost ($)Annual Cost ($)

Order QuantityOrder Quantity

MinimumMinimum

Total AnnualTotal Annual

Stocking CostsStocking Costs

AnnualAnnualCarrying CostsCarrying Costs

AnnualAnnualOrdering CostsOrdering Costs

Total AnnualTotal AnnualStocking CostsStocking Costs

Smaller Smaller Larger Larger

L o w e

r

L o w e

r

H

i g h

e r

H

i g h

e r

EOQEOQ



Classifying Inventory

Items ABC Classification (Pareto Principle)

A Items: very tight control, complete

and accurate records, frequent review B Items: less tightly controlled, good

records, regular review

C Items: simplest controls possible,minimal records, large inventories,periodic review and reorder



Inventory control

TechniqueABC Analysis

inventory classification systems help allocate time

and money in inventory management and allowfirms to deal with multiple product lines and

multitude of stock-keeping units (SKU).

ABC analysis is an inventory classification

technique in which the items in inventory are

classified according to the dollar volume (value)

generated in annual sales (Fuerst, 1981).



ABC analysis



VED analysis

Vital

Essential

Desire



Why We Do Not Want to Hold

Inventories Certain costs increase such as

carrying costs

cost of customer responsiveness cost of coordinating production cost of diluted return on investment

reduced-capacity costs large-lot quality cost cost of production problems



Why We Want to Hold

Inventories Improve customer service

Reduce certain costs such as ordering costs

stock out costs

acquisition costs

start-up quality costs

Contribute to the efficient and effectiveoperation of the production system



Contd…. Finished Goods

Essential in produce-to-stock positioning strategies Necessary in level aggregate capacity plans Products can be displayed to customers

Work-in-Process Necessary in process-focused production May reduce material-handling & production costs

Raw Material Suppliers may produce/ship materials in batches Quantity discounts and freight/handling $$ savings

inventory final

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