Inventory

Management

Presented by:

Pratigya

Pankaj

Rajeev

Raj

Robin

Rohit

Supriya

Inventory Management

“Successful inventory management involves creating a

purchasing plan that will ensure that items are

available when they are needed (but that neither too

much nor too little is purchased) and keeping track of

existing inventory and its use”

Raw materials- Inputs in the state in which they arrive at

the firm. This can include raw materials, components and

subassemblies provided by suppliers.

WIP- Product at an intermediate stage of processing-

that is some, but not all, processing has been applied to

raw materials. Raw material that has been released for

processing, product that has had value added in any

way, and semi finished goods kept for later use are all

considered work in process.

Finished goods – Completed products available for sale

to an external or internal customer. They can include

goods manufactured by the firm itself or those purchased

for resale.

Types of Inventories

Functions of Inventory

To meet anticipated demand

To smooth production requirements

To protect against stock-outs

To take advantage of order cycles

To permit operations

Inventory performance measures and levels

Inventory level

Low or high

Customer service levels

Can you deliver what customer wants?

Right goods, right place, right time, right quantity

Inventory turnover

Cost of goods sold per year or Sales/ average inventory

Inventory costs

Costs of ordering & carrying inventories

Inventory Counting Systems

A physical count of items in inventory

Periodic/Cycle Counting System: Physical count of items made at periodic intervals

How much accuracy is needed?

When should cycle counting be performed?

Who should do it?

Continuous Counting System System that keeps track of removals from inventory continuously, thus monitoring levels of each item

Inventory Counting Systems (Cont’d)

Two-Bin System - Two containers of inventory; reorder when

the first is empty

Universal Bar Code - Bar code

printed on a label that has

information about the item

to which it is attached

RFID: Radio Frequency Identification

0

214800 232087768

Key Inventory Terms

Lead time: time interval between ordering and receiving the order,

denoted by LT

Holding (carrying) costs: cost to carry an item in inventory for a length

of time, usually a year, denoted by H

Ordering costs: costs of ordering and receiving inventory, denoted by S

Shortage costs: costs when demand exceeds supply

Effective Inventory Management

A system to keep track of inventory

A reliable forecast of demand

Knowledge of lead times

Reasonable estimates of

Holding costs

Ordering costs

Shortage costs

A classification system

ABC Classification System

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

Importance measure= price*annual sales

A - very important

B - mod. important

C - least important

Annual

$ volume

of items

A

B

C

High

Low

Few Many

Number of Items

Inventory Models

Fixed Order Size - Variable Order Interval Models:

1. Economic Order Quantity

2. Economic Production Quantity

3. EOQ with quantity discounts

4. Reorder point

5. Fixed Order Interval model

EOQ ModelAssumptions:

Only one product is involved

Annual demand requirements known

Demand is even throughout the year

Lead time does not vary

Each order is received in a single delivery

Infinite production capacity

There are no quantity discounts

Use of EOQ

Make-to-stock

Carrying and setup costs are known and relatively stable

Calculating EOQ

Annual holding cost

Annual holding cost = (Average cycle inventory) (Unit holding cost)

Annual ordering cost

Annual ordering cost = (Number of orders/Year) Ordering or setup costs

Total annual cycle-inventory cost

Total costs = Annual holding cost + Annual ordering or setup cost

Deriving the EOQ

Using calculus, we take the derivative of the total cost function and

set the derivative (slope) equal to zero and solve for Q.

The total cost curve reaches its minimum where the carrying and

ordering costs are equal.

Q = 2DS

H =

2(Annual Demand )(Order or Setup Cost )

Annual Holding CostOPT

DSHEOQQ 2)cost( Total

Finding the EOQ, Total Cost, TBO

EXAMPLE

For the bird feeders calculate the EOQ and its total annual cycle-

inventory cost. How frequently will orders be placed if the EOQ is used?

SOLUTION

Using the formulas for EOQ and annual cost, we get

EOQ = =2DS

H= 74.94 or 75 units2(936)(45)

15

Managerial Insights

Parameters Movement Impact on EoQ

Annual demand Up Up

Holding cost Up Down

Ordering cost Up Up

2. Economic Production Quantity

Production done in batches or lots

Capacity to produce a part exceeds the part’s usage or demand

rate

This corresponds to producing for an order with finite production

capacity

Types of inventories (stocks) by function

Deterministic demand case

Anticipation stock- For known future demand

Cycle stock- For convenience, some operations are performed

occasionally and stock is used at other times

Pipeline stock or Work in Process- Stock in transfer, transformation.

Necessary for operations

Stochastic demand case

Safety stock- Stock against demand variations

4. When to Reorder with EOQ Ordering

Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered. We call it.

Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time. We call it.

(lead time) Service Level - Probability that demand will not exceed supply during lead time. We call this cycle service level.

Reorder Point

The reorder point (ROP) is the level of inventory which triggers

an action to replenish that particular inventory stock. It is

normally calculated as the forecast usage during the

replenishment lead time plus safety stock

1. Determine the demand during lead time probability distribution

2. Determine the safety stock and reorder point levels

Continuous Review Systems

Time

On

-hand invento

ry

TBO1TBO2 TBO3

L1 L2 L3

R

Orderreceived

Q

Orderplaced

Orderplaced

Orderreceived

IP IP

Q

Orderplaced

Q

Orderreceived

Orderreceived

0

IP

Figure 12.7 – Q System When Demand Is Uncertain

Periodic Review System (P)

Fixed interval reorder system or periodic reorder system

Four of the original EOQ assumptions maintained

No constraints are placed on lot size

Holding and ordering costs

Independent demand

Lead times are certain

Order is placed to bring the inventory position up to the target inventory level, T, when the predetermined time, P, has elapsed

Periodic Review System (P)

P P

T

L L L

Protection interval

Time

On-

hand

inv

ent

ory

IP3

IP1

IP2

OrderplacedOrderplaced

Orderplaced

Orderreceived

Orderreceived

Orderreceived

IP IPIP

OH OH

Q1

Q2

Q3

Figure 12.10 – P System When Demand Is Uncertain

Comparative Advantages

Primary advantages of P systems

Convenient

Orders can be combined

Primary advantages of Q systems

Review frequency may be individualized

Fixed lot sizes can result in quantity discounts

Lower safety stocks

Safety Stock

LT Time

Expected demand

during lead time

Maximum probable demand

during lead time

ROP

Qua

ntity

Safety stock

Determinants of the Reorder Point

The rate of demand

The lead time

Demand and/or lead time variability

Stock out risk (safety stock)

5. Fixed-Order-Interval Model

Orders are placed at fixed time intervals

Order quantity for next interval?

Suppliers might encourage fixed intervals

May require only periodic checks of inventory levels

Items from same supplier may yield savings in:

Ordering

Packing

Shipping costs

May be practical when inventories cannot be closely monitored

6. Single Period Model

Single period model: model for ordering of perishables and other

items with limited useful lives

Shortage cost: generally the unrealized profits per unit, We call this

underage.

Excess cost: difference between purchase cost and salvage value of

items left over at the end of a period, We call this overage.

Operations Strategy

Too much inventory

Tends to hide problems

Easier to live with problems than to eliminate them

Costly to maintain

Wise strategy

Reduce lot sizes

Reduce safety stock

Video

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