inventory mgmt
TRANSCRIPT
Inventory Management
:STOCK, STOCK, BEAUTIFUL STOCK:PILES ON THE SHOP FLOOR and
in WARE-HOUSE and MORE IN THE DOCK:SOME OF IT ANICIENT, SOME OF IT NEW:ALAS and TOMORROW ANOTHER LOT
IS DUE….-- UNKNOWN AUTHOR
Functions of Inventory
• Decouple components of the operations and distribution
• Uncertainties/variations in demand
• Flexibility in production smoothing
• Economies of scale in purchase and mfg
• To help hedge against price increases
• To take advantage of order cycles
Supply
Sources:plantsvendorsports
RegionalWarehouses:stocking points
Field Warehouses:stockingpoints
Customers,demandcenterssinks
Production/purchase costs
Inventory &warehousing costs
Transportation costs Inventory &
warehousing costs
Transportation costs
Departmental Orientation Towards Inventory
• Marketing– Sell the product– Good customer service– Large inventory
Departmental Orientation Towards Inventory
• Production– Make the product– Efficient lot sizes– Large inventory
Departmental Orientation Towards Inventory
• Purchasing– Buy the required materials– Low cost per unit– Large inventory
Departmental Orientation Towards Inventory
• Finance– Provide working capital– Efficient use of capital– Low inventory
Departmental Orientation Towards Inventory
• Engineering– Design the product– Avoiding obsolescence– Low inventory
Inventory Hides Problems Areas
Work inprocess queues(banks)
Changeorders
Engineering designredundancies
Vendordelinquencies
Scrap
Designbacklogs
Machine downtime
Decisionbacklogs
Inspectionbacklogs
Paperworkbacklog
Tip of the Iceberg Analogy
Goals of Inventory Management
• Maximize customer service (this requires carrying substantial inventory).
• Minimize inventory investment (this requires carrying little inventory).
• Customer service takes absolute precedence. – Customer service must be a strategic issue.
– Leading edge discussion now centers on types of customer service
• Shortened delivery time
• Speed to market
• Design flexibility
Types of Inventories
• Raw materials• Components• Work-in-process• Finished goods • Vendor inventories• Non-moving/slow moving stock• Safety stock• In-transit inventories• Service parts/Consumables
Inventory Costs
• Holding cost
• Ordering cost
• Setup cost
• Shortage costs
Holding Cost
• Cost of storage facilities• Handling cost• Taxes• Insurance• Deterioration• Obsolescence• Shrinkage• Cost of capital
Ordering Costs
• Preparation of purchase requisition/order• Mail• Expediting, including fax, telephone• Transportation• Receiving• Put away• Updating inventory records• Paying invoice
Setup Costs
• Order preparation• Stock picking• Setup• Inspection• Waiting/Queue-time• Order close out• Updating inventory records
Inventory Control Systems
• How often should the assessment of stock on hand be made?
• When should a replenishment order be placed?
• What should be the size of the replenishment order?
Inventory Counting Systems• Periodic System
Physical count of items made at periodic intervals
• Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item
Inventory Control Systems•Fixed order quantity model (continuous review)
•Fixed time period model (periodic review)
•Visual system
Two-bin system
Single bin system
•ABC classification system
The Inventory Order Cycle
Demand rate
0 TimeLead time
Lead time
Order Placed
Order Placed
Order Received
Order Received
Inve
nto
ry L
eve
l
Reorder point, R
Order qty, Q
EOQ Model Cost Curves
Slope = 0
Total Cost
Ordering Cost = (D/Q)S
Order Quantity, Q
Annualcost (Rs)
Minimumtotal cost
Optimal order Qopt
Carrying Cost = (Q/2)H
Notation
• D = annual demand• C = per-unit cost• h = inventory holding rate (%)• S = order cost• Q = order quantity• R = reorder point• SS = safety stock• LT = lead time
EOQ Model
• Balance holding cost against ordering costs
• Calculate the optimal EOQ:
•No of orders per year = D/Q*•Time between orders = Q*/D
Fixed Order Quantity Model
Reorder = Expected demand + Safetypoint during lead time stock
Fixed Order Quantity Model
Reorderpoint, R
Q
0
Inve
ntor
y le
vel
L LTime
Safety stock
Fixed Time Period Model
• Reviewed at fixed specified time interval.• Place an order for a quantity that, when added
to the quantity on hand, will equal a predetermined maximum level.
• Independent demand is the usual situation.• Difficult to record withdrawals and additions
from stock.• Groups of items are purchased from a common
supplier.• Items that have limited shelf life.
Fixed Time Period Model
• Small tools, manufacturing supplies.
• Common commercial parts such as nuts, bolts, washers.
• Office supplies.
• Perishable items such as dairy products, fruits and vegetables.
• Chemicals, solvents used in the manufacturing process.
Fixed Time Period Model
0
Inve
ntor
y le
vel
L LTime
Safety stock
Review Time
Two-Bin System
• Special case of fixed order quantity model.
• Amount of stock equivalent to the order point is physically segregated into a second bin and is then sealed.
• When all the open stock has been used up, the sealed bin is opened and a new order is placed.
• Practical method for keeping control of low-value items.
• Without adequate training this system can be abused.
• Quantity in the second bin should be reviewed from time to time.
Single-Bin System
• Stock is periodically checked and each item is ordered to a pre-established stock level.
• Works well on floor stocks located near the point of use, like large grocery stores.
ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
AA - very important
BB - mod. important
CC - least important
Annual Rs volume of items
AA
BB
CC
High
Low
Few ManyNumber of Items
ABC Analysis
• Pareto noted that many situations are dominated by a relatively few vital elements.
• Controlling the relatively vital few will go a long way toward controlling the situation.
• Applying the ABC principle to inventory management involves:– Classifying the inventory items on the basis of relative
importance.
– Establishing different controls for different classifications with the degree of control being commensurate with the ranked importance of each classification.
Inventory Turnover and Service Levels
Inventory turnover is the measure of how well the business is managing its inventory. It shows how many times a year the inventory is turning(or moving) through the organisation. The higher the turnover,the better.However there is a larger probability
That stock may not be available when the customer needs it.
Inventory Turnover …..
• Inventory turnover in a Retail business
Total sales/Actual inventory
• Inventory turnover in a Manufacturing business
Cost of Goods sold/Actual inventory
Simple physical techniques may provide more economical
control of inventories.