STOCK – TIME DIAGRAM

• LT-2 = LT-1 + 2Cycle Time [ LT-2 > LT-1, LT-2>Cycle Time]

STOCK
Maximum Level

Buffer Stock Reordering Level

Minimum Level

Reserve Stock Danger Level

Safety Stock
LT-1 LT-2
0

LT-2 LT-2 TIME

LT-1
Cycle Time
◙ TYPE OF INVENTORY
A) MATERIAL BASED (based on nature of Material) :
1) Production Inventory : Raw materials and
Components / Parts required processing and
assembly work, for the purpose of production.
2) MRO Inventory (Maintenance, Repair & Operating
supplies) : Maintenance Spare parts and
Consumables (Lubricating oil, grease, cotton waste,
Electrodes, Cleaning & Protecting chemicals, etc).
3) WIP Inventory ( Work-in-process or Work-in-
progress) : Sub-assemblies and components already
produced (waiting for final assembly) or all semi-
finished work in the production-process line.
4) Finished Goods Inventory (final Products) :
Completed or finished or assembled final products,
(after final quality-inspection and labeling) ready for
delivery (shipment).
B) PURPOSE BASED :
1) Cycle Inventory : Material procurement in cycle, repeated
manner and in batches / lots with Min. Inventory Level at Zero
(nil) and Max. Inventory Level at Order Quantity (Q). Here, there
is every chance of Stock-out condition.
2) Safety Stock Inventory : Material procurement in cycle and in
batches with Min. Inventory Level at Safety Stock but not at Zero
(nil) to avoid chances of Stock-out condition.
3) Anticipation Inventory : Bulk quantity (more than the normal
quantity) of stock is maintained purposefully for
a) Anticipated price rise of materials of the stock
b) Anticipated Scarcity of Raw Materials, Components, etc
c) Anticipated Seasonal rise of demand of final product
d) Anticipated sudden rise of demand of final product
4) Pipe- line Inventory : For WIP or sub-assemblies, between
operations/processes, and for raw material or components
between supplier and plant inventory (supplier Warehouse),
and for final products, products under movement between
plant’s finished-product- Ware-house and distributors or
customers warehouses.
C) Based on the Inventory-Replenishment Type
1) Single-Period Inventory : Purchasing through only one
ordering opportunity . (A very special occasion or situation when the
procurement will not repeat any more). It is applicable to products
having a very short Life Cycle.
Example :
(1) Inventory of a Retailer to sell to the public the t-shirts like the
jersey of Indian team in the World Cup Cricket to be held in India,
mainly during the tournament.
(2) The inventory for a marriage ceremony in a family and
arranged by the family.
(3) Calendars or Greeting-cards for specific occasion (or with
specific purpose),
purpose having year and date printed on them.
(4) Order for Electronic Voting Machines, in India to Bharat
Electronics Ltd. and Electronic Corporation of India Ltd.
# Seeks efficient estimation of accurate quantity of stock in inventory to
avoid
(i) Over-stock to reduce loss due to waste in disposing surplus, and
also
(ii) Under-stock (stock-out) to reduce chances of foregoing profit
through sales.
2) Multi-Period Inventory : Material procurement is repeated in
batches / lots, having Inventory-Control system maintaining different
Inventory Levels.
Example : All manufacturing units, Retail outlets, Distributors, etc.
 ◙ The basic Costs of Inventory
Basic Costs of Inventory for a certain period (say,
annually) include :
1) Cost of the material :
Procured Quantity of Material during the period x
Price (ie Unit Cost of material)
material
= (D x P)
2) Total Cost of Ordering and Procurement :
No. of Ordering for procurement of Material during the
period x Ordering Cost /Order
= (N x Co) = (D/Q) x Co
3) Total Inventory Carrying Cost ( Inventory maintenance
Cost or Inventory Holding Cost) :
Average Value of the Stock during the period x Rate
of Inventory Carrying-Cost (%)
= ½ x Value of Ordering Quantity x Cc
= ½ x (Q x P) x Cc
Cost Components of Inventory Carrying Cost or
Holding Cost
1. INTEREST on the INVESTMENT on Stock of Material in
Inventory
2. Cost of INSURANCE of the Stocked Material
3. Cost of INVENTORY SPACE and Warehouse/ shed/ room
4. Cost of MAINTENANCE of Inventory including :
(i) Stock keeping Arrangement (Rack or Trays or Bins
or Tanks or Silo, etc
(ii) In-plant Material Handling,
(iii) Protecting Stock from damage, spoilage, pilferage
(iv) Infrastructures in Stores (light, water, fan, AC, etc)
(v) Accounting and Records Keeping for Stock.
5. Cost of MANPOWER ( for receiving, keeping, issuing,
maintaining of materials and Cleaning & Maintenance of stores
room, ),
6. Cost of (Loss due to) SPILLAGE and SPOILAGE (Damage) of
material
7. Cost of OBSOLESCENCE,
OBSOLESCENCE if any.
 ECONOMIC ORDERING QUANTITY
(EOQ)
Let, D = Annual Demand (or requirement or consumption or
procurement) of material
Q = Ordering Quantity or size (Quantity per order)
P = Unit cost of material (effective price)
Co = Ordering Cost per Order
Cc = Carrying Cost of Inventories in % on the value of
Average Stock, or
CH = Holding / Carrying Cost of Inventories in Rs per unit
Quantity (per piece or MT or Cu M) of Average Stock
[ie CH = Cc x P]
[Average stock = Q/2, in case of Cycle Inventory , where Min. Level is 0]
Total Annual Cost of Inventory,
Ct = Annual Cost of the material +
(Annual Cost of Ordering + Annual Carrying Cost)
 EOQ (contd.)
Ct = (D x P) + (D/Q) x Co + ½ (Q x P) x Cc
To find out the most economic ordering quantity, Ct will be minimum, and thus
at the minimum condition
the first differentiation, Ct’ = d(Ct) = 0
dQ
 d(D X P) + d[(D/Q) x Co] + d[(Q x P x Cc) / 2 ] = 0
dQ dQ dQ
 0 + ( - D/ Q 2 ) x Co + (P x Cc) / 2 = 0
 Q* = √ [ (2 x D x Co) / (P x Cc)]
= √ [ (2 x D x Co) / CH)]

- W I L S O N’ S F O R M U L A
Now, the second differentiation of Ct ,
Ct” = (2D/Q3) x C0 + 0 > 0 ie Positive,
Positive
This indicates that “First differentiation, Ct’ = 0” is for the minimum Ct and thus
Q* is the Order quantity for minimum Total Inventory Cost .
 EOQ (contd.)

◙ COST TRADE-OFF of inventory

Total Annual Cost Total Cost = Inv Carrying Cost +
Ordering Cost

Inv. Carrying
Cost
½ (Q x P) x Cc = ½ (Q x CH)

2(D/Q) x Co =
(Q x P) x Cc (D/Q) x Co
Ordering Cost

Order
Q* Qty (Q)

From Cost Trade-off of inventory, it is noted that

at Q*, Total Inventory Carrying Cost = Total Ordering Cost
Prob-1) Omega Manufacturing Co. procures 40,000 pcs of bushes
quarterly. Procurement Cost per order is Rs 800/-, Inventory Carrying
Cost is 10% half yearly on the value of average stock maintained, Unit
price of the bush is Rs 20/-, Lead Times of various suppliers are 3, 4,
and 5 days.
Determine, (1) EOQ, (2) No. of Orders per year, (3) Spacing between
Two consecutive orders, if the Co. operates 360 days in a year,
(4) Total Cost tied up with the present inventory,
(5) Saving Inventory-Cost with proposed EOQ.
Soln :

D = 40,000 per quarter = 160,000 pcs per year, P = Rs 20,

Cc = 10% half yearly = 20% yearly = 0.2, Co = Rs 800,
No. of working days in a year, d = 360
Av. Lead Time = (3+4+5) / 3 = 4 days
Q* = √ [ (2 x D x Co) / (P x Cc)] = √ [ (2 x 160,000 x 800) / (20 x 0.2)]
= 8000
No. of Orders per year = D/ Q* = 160,000 / 8000 = 20
 Problem-1 (contd.)
Space between consecutive orders = 360 / 20 = 18 days
Present Total Inventory Cost
= (D x P) + (D/Q) x Co + ½ (Q x P) x Cc
= 160,000 x 20 +(160,000/40,000)x800 +(40,000 x 20 x 0.2) /2
= 3,200,000 + 3,200 + 80,000 = Rs 3,283,200/-

Total Inventory Cost with EOQ

= (D x P) + (D/Q) x Co + ½ (Q x P) x Cc
= 160,000 x 20 + (160,000/8000) x 800 + (8000 x 20 x 0.2) /2
= 3200,000 + 16,000 + 16,000 = Rs 3,232,000/-

Cost saving with EOQ = 3,283,200 - 3,232,000

= Rs 51,200/-
 Economic Production
Quantity (EPQ)
EPQ

Production
Production

& Usage
& Usage

Usage Usage
Quantity
Production / Order Quantity. (Q)
Max Inv Level (Qmax )
Demand/Consumption
Production
Production (Supply) rate =p
Demand (Consumption) rate =d
Production (Supply) time, t1 = Q/p
Qmax = (p – d) x t1 = (p – d) x Q/p

p Total Holding Cost = (Qmax / 2) x CH

d
= (p – d) x (Q/ 2p) x CH
Time
t1 t2
Total Inventory Cost, Tc = Holding Cost + Ordering Cost
Tc = (p – d) x (Q/ 2p) x CH + (D/Q) x Co
For minimizing the Total Inventory Cost, Tc d (Tc) =0
dQ
(p – d) CH / 2p – (D/Q2) x Co = 0 _____________________
 Q2 = 2p . => Q = (2D.Co) x ( p .)
D. Co (p – d) . CH √ CH p-d
 Reordering Point when both
demand and lead time vary
ROP  d  L T  z L T   d  2
d
2 2
LT

• Example
– Average Usage = 12 order forms/day; σd = 3
– Average Lead time = 7 days; σLT = 1
– ROP = (12)(7) + 1.96[(7)(9) + (144)(1)] = 84 +
1.96(14.4) = 84 + 27.7 = 112
– Reorder when 112 order forms are left
2)(P-System) Fixed-Time Period Model with Safety Stock
1) REVIEW PERIOD, R = Annual period / Annual No. of Order
= Annual period / (Annual demand / EOQ) ,
2) TARGET Inventory Level, QT = Buffer Stock + Safety stock
QT = d x (R + L) + Z x σ R+ L where σ R+ L = σd √(R+L)
3) ORDER QUANTITY, Q = QT - I , Where,
σR+ L = Standard Deviation of demand during (Review Period + Lead
Time)
σd = Standard Deviation of weekly demand.
Q = Quantity to be ordered (Ordering Quantity)
d = Estimated Normal Rate of demand (i.e. Av. Consumption Rate)
Rate
Z = Service Level Constant = Factor corresponding to specified
“SERVICE LEVEL”
LEVEL
R = Review Period = Time gap between consecutive reviews /
Ordering
L = Lead time
I =Current inventory level (includes items on order) i.e. Stock-in-hand
Example-6 :
The normally distributed weekly demands of an item has the mean
value 18 units per week with a standard deviation of weekly dema nd
of 5 units. The Lead Time being 5 weeks, EOQ with Q -system 75 units
and Service Level is 90%.
Design P-system for Inventory Management.

- Annual demand, D = Mean Weekly Demand (d) x Weeks/year

(where, mean demand, d = 18 ) = 18 x 52 = 936 units
No. of orders per year = Annual Demand / EOQ = 936 ÷ 75 (as EOQ=75)
Review Period, R = Total Period / no. of order = 52 weeks ÷ (936 / 75)
= (52 x 75) ÷ 936 weeks = 4.2 weeks ≈ 4 weeks
Standard Deviation of demand during (Lead Time + Review Period),

σ σd .√(R+L) = 5 . √(4+5) = 5 . √9 = 15 units

R+L =

where, σd is Standard Deviation of weekly demand, (σd = 5).

Now, for 90% of service level,
Service-Level Constant, Z = 1.28 (from the table)
Safety Stock = Z x σ R+L = 1.28 x 15 = 19.2 units =19 units
(say)
Buffer Stock = d .(R+L) [where, mean demand, d =18 /week ]
= 18 x ( 4+5) = 162 units
Target Inventory Level = Buffer stock + Safety Stock
= 162 + 19 = 181 units
Answer :
1. At the interval of 4 weeks (Review Period), review of the
Actual Stock is done and the Actual Stock position is
compared with the Target Inventory Level.
2. If the Actual Stock is at or above the Target Inventory
Level,
Level skip Reordering till next Review Period.
Period
3. If the Actual Stock is below the Target Inventory Level,
Level
Place Order and order a quantity is equal to
difference between Target Inventory and Actual
Stock.
 INVENTORY CONTROL TECHNIQUES
ABC : Cumulative Cost basis : A –Highest cost, B –Medium cost,
C –Lowest cost
HML : Unit Cost basis : H – High price, M – Medium price, L – Low price
===========================================================
VED : Requirement Criticality basis : V – Vital, E – Essential, D – Desirable
===========================================================
FSN : Consumption rate basis : F – Fast moving, S – Slow moving,
N – Non-moving
============================================================
SDE : (Procurement) Availability basis : S –Scarcely available, D –Difficultly
available, E – Easily available
or SAP : S – Scares, A – Available, P - Plenty
GOLF : Procurement Source basis : G – Govt. quota (priority), O – Ordinary,
L – Local, F - Foreign
 ABC (Always Better Control or PARETO Analysis)
Cumulative Cost in % of
Total Material Cost

100 C 10%
90 B
20%
70 A : cost = 70%, qty = 10%
B : cost = 20%, qty = 15%
A C : cost = 10%, qty = 75%
70%

Quantity
10% 25% 100% (in % of Total Qty)
Example-6 : Show ABC Analysis for the inventory in one unit of M/s
Pop Bazar, if their inventory item details is as given below,

Item Unit Price (Rs) Consumption Qty (Units/year)

A 100 100 10,000
B 200 300 60,000
C 50 700 35,000
D 300 400 120,000
E 500 1000 500,000
F 3000 30 90,000
G 1000 100 100,000
H 7000 500 3,500,000
I 5000 105 525,000
J 60 1000 60,000
Item Annual Cost (Rs) Annual Cumulative Value (Rs)
H 3,500,000 ^ 3,500,000 :: 70% A
----------------------------------------------------------------------------------------------
I 525,000 ^ 4,025,000
E 500,000 ^ 4,525,000 :: 90% B
----------------------------------------------------------------------------------------------
D 120,000 ^ 4,645,000
G 100,000 ^ 4,745,000
F 90,000 ^ 4,835,000
B 60,000 ^ 4,895,000
J 60,000 ^ 4,955,000
C 35,000 ^ 4,990,000
A 10,000 ^ 5,000,000 :: 100% C
=======================================================
Classification :
Item H is class A, Items I & E are class B,
Items D,G,F,B,J,C & A are class C