production & operation mgmt, ppt
TRANSCRIPT
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PRESENTATION ON
INVENTORYMANAGEMENT
:BY PALLAVI VARSHNEY AND
PRASHANT TIWARI
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INVENTORY
Inventory:inventory constitutes one of the most importantelements of any system dealing with the supply, manufacturingand distribution of any goods and services. inventory is the stockof any material or finished goods on hand at a given time
The term inventory can be used to mean several different thingssuch as:vThe stock on hand of materials at a given time;vAn itemized list of all the physical assets;vTo determine the quality of items on hand;vThe value of the stock of goods owned by an organization at aparticular time
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SURVEY BASED INFORMARTION:
qPractical example for effective inventory improvementsystem:Ina study entitled, Retailed and Consumer Packaged GoodsInventory Trends , ARCHSTONE consulting give followingtrends:
after a period of improvement in retailinventory productivity gains have increased from 2006 to 2007.q
q
q
qWal Marts recent inventory productivity gains kept pace with
those of last four years ,but didnt perform as per retailersexpectations in just few years ago.
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Classification of inventory
NATURE OF MATERIALFUNCTIONAL CLASSIFICATION ON BASIS OF UTILITY
USES OF MATERIAL
roduction inventoryRO inventory
n-process inventoryinished goods inventory
Working stockSafety stockAnticipation stockPipeline stockDecoupling stockPsychic stockDead stock
Transaction inventorySpeculative inventoryPrecautionary inventory
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INVENTORY Consists of.
INVENTORY
Raw-Material Work-in-Progress
FinishedGoods
Consumables& Spares
RM: Physical Resources tobe converted into FG
WIP: Semi-Processed RM,which still requires someoperations
FG: Final Items waiting inwarehouse as a buffer, tobe supplied
C&S: Consumable itemsother than RM whichhelps in production andessential parts ofmachines & equip
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INVENTORY Basic Problem
Managing the level of inventory is likemaintaining the level of water in a bath tubwith an open drain.
The water is flowing in and out continuously.
If water let in two slowly the tub will be empty
soon, if the water let in is too fast the tuboverflows.
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Costs Associated with Inventory
Purchase Cost or Capital Cost
Ordering Cost / Setup Cost
Carrying Cost / Holding Cost
Stock-Out Cost
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qPurchase Cost or Capital CostqNominal Cost of Purchasing or ProducingqPrice x Quantityq
qOrdering Cost or Setup CostqCost of Planning & Placing an Order
qSalary of related StaffqRent of the BuildingqCost of miscellaneous office items like stationery,
postage, telephone, internet etc.
qCarrying Cost or Holding CostqCosts associated with maintaining inventory
qRent of warehouse or storage placeqCost of capital tied up in inventoryqExpenses of the warehouse like electricity,
telephone, insurance, security etc.qCost of damages & Obsolescence
qStock-Out CostqIndirect Cost of not serving the customers
qIdle time for Machine and ManpowerqDelay in work (production) leads to penaltiesq
Loss of Sale (Profits)qDissatisfaction of customers & Loss of Goodwill
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Inventory Control / Management
qA process of finding a balance between:
qMinimum Cost in Inventory andqAvoiding Stock-Outsq
q
qBy using scientific methods and techniques.
qPurpose is that to keep the stock in such a way thatneither there is overstocking nor under stocking
qFor proper management of inventory level, two issues needattention And analysis:q ORDER QUANTITY: how much to order of each materialwith either outside suppliers or production dept. withorganization.q ORDER POINTS: when to place the orders. It is also calledreorder level points.
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Objective Inventory Control
vTo ensure smooth supply of materialsvTo avoid both over stocking and under stocking
vTo maintain investment in inventories at optimum level asrequiredvTo keep materials cost under control so as to reduce cost ofproductionvTo eliminate duplication in ordering or replenishing stocks
vTo minimize losses through deterioration ,pilferage, wastagesand damagesvTo design proper organization for inventory management.vTo ensure perpetual inventory control so that materials shownin stock ledgers lying in stores.vTo ensure right quality goods at reasonable prices.vTo facilitate furnishing of data for short term and long termplanning and control of Inventory.v
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Techniques of Inventory Control
1.Fixed Order Quantity System (Q System)2.
3.Fixed Order Period System (P System)4.
5.Economic Order Quantity Model (EOQ Model)6.
7.ABC Analysis8.
9.VED Analysis10.
11.FSN Analysis12.
13.SDE Analysis
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1. Fixed Order Quantity System (Q System)
Various levels of inventories are decided based onConsumption of MaterialAvailability of materialLead Time
Different Levels of Inventories are:Reorder LevelMinimum Level (Safety Level)
Maximum Level
Minimum Level (Safety Level)That quantity which must always be in
stockTo counter with uncontrollable factorsCalculated based on past and current
factors
Maximum LevelLevel above which inventory should never
be maintainedBased on ast ex erience and stora e
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Reorder LevelLevel (point) at which if stock in store
reachesImmediate Order should be placed
Reorder Level depends on these factorsMaximum Consumption Per dayLead Time (Time Gap b/w Order and
Receipt)Pre-Decided Safety Stock
REORDER LEVEL = Maximum Usage (Per Day) X Lead Time +
Safety Stock
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1. Fixed Order Quantity System (Q System)
Time
Inven
tory
Le
vel
O1 S1 O2 O3S2 S3
Maximum Level
Safety Level
Re-Order Level
T1 T2 T3
LT1 LT2 LT3
Q1Q2
Q3
O
An order of pre-decided quantity is given to thesupplier as soon as re-order level comes.
Q1 = Q2 = Q3 T1 # T2 # T3
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2. Fixed Order Period System (P System)
Position of Inventory is reviewed after fixed point of time Any Shortfall is ordered to make it near to Max Level
T1 = T2 = T3 Q1 # Q2 # Q3
Time
Inve
ntory
Le
vel
Maximum Level
Safety Level
T1 T2 T3
Q1Q2 Q3
O
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2. Fixed Order Period System (P System)
Time
Invento
ry
Leve
l
Maximum Level(5000)
Safety Level(500)
T1 = 30
O
4000
3000
2000
1500
1000
Q1 = 4000
5000
4000
3000
2000
Q2 = 3000
1500
Q3 = 3500
T2 = 30 T3 = 30
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3. Economic Order Quantity (EOQ Model)
Another approach to control the inventoryby answering two questions
How many times (in a year) Order should be
placed? (Ordering Cost)
Each order should be of what quantity?(Holding/Carrying Cost)
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3. Economic Order Quantity (EOQ Model) -
Factors
Once again to remind. Ordering Cost are:
Cost of Planning & Placing an Order Salary of related Staff
Rent of the Building Cost of miscellaneous office items like stationery,
postage, telephone, internet etc.
Holding/Carrying Costs are: Costs associated with maintaining inventory
Rent of warehouse or storage place Cost of capital tied up in inventory Expenses of the warehouse like electricity,
telephone, insurance, security etc. Cost of damages & Obsolescence
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3. Economic Order Quantity (EOQ Model) -
Problem
Suppose, Total Consumption of a RM is 5000 units in a year.
Order can be placed in form of 1 Order of 5000 units
5 Orders of 1000 units 10 Orders of 500 units 20 Orders of 250 units
As we increase the no. of orders, Total Ordering Cost willincrease
With increase in no. of orders, quantity to be hold will
decrease, will reduce the holding cost.
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3. Economic Order Quantity (EOQ Model) -
Problem
Invento
ry
Leve
l
O1
4000
3000
2000
2500
1000
0
5000
Time
Average Inventory(2500)
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3. Economic Order Quantity (EOQ Model) - Problem
Invento
ry
Leve
l
O1
500
0
1000
TimeO2
1000
O3
1000
O4
1000
O5
1000
500500
0
500
0
500
0 0
Average Inventory(500)
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3. Economic Order Quantity (EOQ Model) -
Problem
Invento
ry
Leve
l
O1
250
0
500
Time
Average Inventory(250)
0
250
0
250
O2
500
O3
500
O4
500
O50 0
O6 O7 O8 O9 O10
0000
250 250 250 250 250 250
500 500 500 500 500
0
500
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3. Economic Order Quantity (EOQ Model) -
Problem
Inverse Relationship b/w ORDERING COST & CARRYING COST.
If we select 1 Order of 5000 units Ordering Cost will be very Low of 1 Order
Carrying Cost will be very high of 2500 units If we select 20 Orders of 250 units
Carrying Cost will be very Low of 125 units Ordering Cost will be very high of 20 Orders
Therefore, Solution lies in minimizing the sum of both the cost.
A combination which minimizes total cost I.e. OC + CC will be optimumsolution I.e. EOQ(Economic Order Qty.)
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3. Economic Order Quantity (EOQ Model) -
Solution
Suppose in the current example Ordering Cost (O) is Rs.100/- per order Carrying Cost (C) is Rs.1/- per unit
Different O+C combinations can be:
Order Size (Q) 5000 1000 500 250
No. of Orders (A/Q) 1 5 10 20
Average Inventory (Q/2) 2500 500 250 125
Annual Carrying Cost (C x Q/2) 2500 500 250 125
Annual Ordering Cost (O x A/Q) 100 500 1000 2000
Total Annual Cost (Rs.) 2600 1000 1250 2125
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3. Economic Order Quantity (EOQ Model) -
Solution
Quantity
Cost(Rs.)
OrderingCostCarrying
Cost
Total Cost
EOQ
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3. Economic Order Quantity (EOQ Model) -
Solution
Mathematical Formula for calculating EOQ
CCADOCEOQ = 2
unitsEOQ 10001
50001002=
=
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3. Economic Order Quantity (EOQ Model) -
Limitations
Not exact as Demand for FP is generally not constant
Lead time can not be predicted exactly
It is also difficult to calculate exact carrying cost and ordering Cost
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4. ABC Analysis - Concept
If we generalize this concept, we will find out
Small no. of items in small quantities contribute
maximum value
Large no. of items in large quantities contributes lessvalue
Therefore, Much greater control is required on smallno. of items contributing large value.
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4. ABC Analysis - Working
Under this analysis, we divide inventory in 3 categoriesi.e. A, B & CA 15% inventory 70% Value
B 30% inventory 20% ValueC 55% inventory 10% Value
Focus on inventory control is given accordingly.
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4. ABC Analysis Graphically
Percenta
ge
of
Value
Percentage ofUnits
70 %
90 %
100 %
15 % 45 % 100 %
A
B
C
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5. VED Analysis - Concept
Like ABC Analysis
ABC is as per consumption value
VED is as per items criticality.
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6) FSN ANALYSIS
qWhen analysis is carried out on the basis of the rate ofmovement of materials in the stores or on the basis of
consumption pattern of consumption ,it is known as FSN analysis.
qThe three letters stand for Fast moving , Slow moving , andNon-moving Items.
q
The demand for fast moving items is generally high. Thusspecial care should be taken in respect of these items ,otherwisethe production may be interrupted due to shortage of suchmaterials. Inventories which have only a low turnover arebrought under the category of slow moving items. These itemsare not issued at frequent intervals
qqThe items with almost nil consumption are brought under thecategory of non moving items .All obsolete inventories constitutethis category.
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7) SDE ANALYSIS
qThe SDE analysis is generally done on the basis of the problem
faced in procurement of an items. These letter stand for scarceitems, those which are difficult to obtain and those which arefairly easy to obtain.q
qA scarce item might be an item which is not easily available in
the market and might require source development. A difficultitem on the other hand might be an item which is intricate tomanufacture.q
qThe easy classification covers those items which are readilyavailable.
q
qA purchase department usually adopts the SDE analysis todetermine the method of buying and to fix the responsibilities ofbuyers.
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