PRESENTATION ON INVENTORY MANAGEMENT

BY:

PALLAVI VARSHNEY AND PRASHANT TIWARI

INVENTORY
Inventory:inventory constitutes one of the most important elements of any system dealing with the supply, manufacturing and distribution of any goods and services. inventory is the stock of any material or finished goods on hand at a given time The term inventory can be used to mean several different things such 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 a particular time

SURVEY BASED INFORMARTION:

qPractical example for effective inventory improvement system: Ina study entitled, Retailed and Consumer Packaged Goods Inventory Trends , ARCHSTONE consulting give following trends: after a period of improvement in retail inventory 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 retailers expectations in just few years ago.

Classification of inventory

NATURE OF MATERIAL FUNCTIONAL CLASSIFICATION ON BASIS OF UTILITYOF MATERIAL USES

Production inventory MRO inventory n-process inventory Finished goods inventory

Working stock Safety stock Anticipation stock Pipeline stock Decoupling stock Psychic stock Dead stock

Transaction inventory Speculative inventory Precautionary inventory

INVENTORY Consists of.

RM: Physical Resources to be converted into FG WIP: Semi-Processed RM, which still requires some operations FG: Final Items waiting in warehouse as a buffer, to be supplied C&S: Consumable items other than RM which helps in production and essential parts of machines & equip

Raw-Material Work-in-Progress

INVENTORY

Finished Goods

Consumables & Spares

INVENTORY Basic Problem Managing the level of inventory is like maintaining the level of water in a bath tub with 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 tub overflows.

Costs Associated with Inventory

Purchase Cost or Capital Cost Ordering Cost / Setup Cost Carrying Cost / Holding Cost Stock-Out Cost

qPurchase Cost or Capital Cost

qNominal Cost of Purchasing or Producing qPrice x Quantity q

qOrdering Cost or Setup Cost

qCost of Planning & Placing an Order qSalary of related Staff qRent of the Building qCost of miscellaneous office items like stationery, postage, telephone, internet etc.

qCarrying Cost or Holding Cost qCosts associated with maintaining inventory

qRent of warehouse or storage place qCost of capital tied up in inventory qExpenses of the warehouse like electricity, telephone, insurance, security etc. qCost of damages & Obsolescence

qStock-Out Cost qIndirect Cost of not serving the customers

qIdle time for Machine and Manpower qDelay in work (production) leads to penalties qLoss of Sale (Profits) qDissatisfaction of customers & Loss of Goodwill

Inventory Control / Management

qA process of finding a balance between: qMinimum Cost in Inventory and qAvoiding Stock-Outs q q qBy using scientific methods and techniques. qPurpose is that to keep the stock in such a way that neither there is overstocking nor under stocking qFor proper management of inventory level, two issues need attention And analysis: q ORDER QUANTITY: how much to order of each material with either outside suppliers or production dept. with organization. q ORDER POINTS: when to place the orders. It is also called reorder level points.

Objective Inventory Control

vTo ensure smooth supply of materials vTo avoid both over stocking and under stocking vTo maintain investment in inventories at optimum level as required vTo keep materials cost under control so as to reduce cost of production vTo eliminate duplication in ordering or replenishing stocks vTo minimize losses through deterioration ,pilferage, wastages and damages vTo design proper organization for inventory management. vTo ensure perpetual inventory control so that materials shown in stock ledgers lying in stores. vTo ensure right quality goods at reasonable prices. vTo facilitate furnishing of data for short term and long term planning and control of Inventory.
v

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 Analysis 8. 9.VED Analysis 10. 11.FSN Analysis 12. 13.SDE Analysis

1. Fixed Order Quantity System (Q System)

Various levels of inventories are decided based on Consumption of Material Availability of material Lead Time Different Levels of Inventories are: Reorder Level Minimum Level (Safety Level) Maximum Level Minimum Level (Safety Level) That quantity which must always be in stock To counter with uncontrollable factors Calculated based on past and current factors Maximum Level Level above which inventory should never be maintained Based on past experience and storage

Reorder Level Level (point) at which if stock in store reaches Immediate Order should be placed Reorder Level depends on these factors Maximum Consumption Per day Lead Time (Time Gap b/w Order and Receipt) Pre-Decided Safety Stock
REORDER LEVEL = Maximum Usage (Per Day) X Lead Time + Safety Stock

1. Fixed Order Quantity System (Q System)

T1 T2 T3 Q3 Q2 Re-Order Level Safety Level O O1 S1 LT1 O2 LT2 Time S2 O3 S3 LT3

Maximum Level

Inventory Level

Q1

An order of pre-decided quantity is given to the supplier as soon as re-order level comes. Q1 = Q2 = Q3 T1 # T2 # T3

1. Fixed Order Quantity System (Q System)

T1 5000

T2

T3 4600

5200

Maximum Level(5000)
4000

Inventory Level

4000 3000 2000 1500 Q1 = 4000

4100 Q3 = 4000 2600 1500

3000 2000 1500 Q2 = 4000

Re-Order Level (1500)

1000

Safety Level (1000) Time

O2

1000 600
LT2 LT3 S2 O3

1200

LT1

O1

S1

S3

2. Fixed Order Period System (P System)

T1

T2 Q2

T3 Q3

Inventory Level

Maximum Level

Q1

Safety Level O Time

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

2. Fixed Order Period System (P System)

Maximum Level(5000)
5000

Inventory Level

4000 3000 2000 1500 Q1 = 4000

4000

Q2 = 3000 3000 2000 1500 Q3 = 3500

1000

O
T1 = 30

Safety Level (500)

T2 = 30 T3 = 30

Time

3. Economic Order Quantity (EOQ Model)

Another approach to control the inventory by 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)

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

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 will increase With increase in no. of orders, quantity to be hold will decrease, will reduce the holding cost.

3. Economic Order Quantity (EOQ Model) Problem

5000

Inventory Level

4000 3000 2500 2000

Average Inventory (2500)

1000

O1 Time

3. Economic Order Quantity (EOQ Model) - Problem

1000

1000

1000

1000

1000

Inventory Level

500

500

500

500

500Average

Inventory (500)

O1

O2

O3

O4 Time

O5

3. Economic Order Quantity (EOQ Model) Problem

500

500

500

500

500

500

500

500

500

500

Inventory Level

250

250

250

250

250

250

250

250

250

Average Inventory (250)

O1

O2

O3

O4

O5

O6 Time

O7

O8

O9

O10

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 optimum solution I.e. EOQ (Economic Order Qty.)

3. Economic Order Quantity (EOQ Model) Solution

Suppose

in the current example O+C combinations can be:

5000 1 2500 2500 100 2600 1000 5 500 500 500 1000 500 10 250 250 1000 1250 250 20 125 125 2000 2125

Ordering Cost (O) is Rs.100/- per order Carrying Cost (C) is Rs.1/- per unit
Different

Order Size (Q) No. of Orders (A/Q) Average Inventory (Q/2) Annual Carrying Cost (C x Q/2) Annual Ordering Cost (O x A/Q) Total Annual Cost (Rs.)

3. Economic Order Quantity (EOQ Model) Solution

Total Cost

Cost (Rs.)

Carrying Cost

EOQ
Quantity

Ordering Cost

3. Economic Order Quantity (EOQ Model) Solution

Mathematical

Formula for calculating EOQ

2 OC AD EOQ = CC
2 100 5000 = 1000 units 1

EOQ =

3. Economic Order Quantity (EOQ Model) Assumption Inventory is consumed at a constant rate Price does not vary with quantity Lead time is known and constant Ordering Cost per order is fixed Holding cost is proportionate to quantity

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

4. ABC Analysis - Concept

If

we generalize this concept, we will find out no. of items in small quantities contribute maximum value no. of items in large quantities contributes less value Much greater control is required on small no. of items contributing large value.

Small

Large

Therefore,

4. ABC Analysis - Working

Under

this analysis, we divide inventory in 3 categories i.e. A, B & C A 15% inventory 70% Value B 30% inventory 20% Value C 55% inventory 10% Value on inventory control is given accordingly.

Focus

4. ABC Analysis Steps

Calculate percentage of each individualcategorized asvalue price of Arrange20% items in descendingof by categorized to Category as First 10% its cumulative percentage usageeach usage with on total Last 70% of usage valueannual usage isitems item usage value of cumulative percentage is multiplying it Calculate in total order according Calculate rupees is value Next the ofCumulative Percentage ofcalculatedas Category C, cumulative percentage is categorized A, which requires least control which requires high control items Category B, whichusage valuerelatively less control requires
Items Units % of Total 10.00% 5.00% 16.00% 14.00% 30.00% 15.00% 10.00% Cumulativ Unit e Price (Rs.) 15% 30% 55% 30.4 51.2 5.5 5.14 1.7 1.5 0.65 Total Cost (Rs.) 304000 256000 88000 72000 51000 22500 6500 800000 % of Total Cumulative Category

1 2 3 4 5 6 7 Total

10000 5000 16000 14000 30000 15000 10000 100000

38.00% 32.00% 11.00% 9.00% 6.38% 2.81% 0.81%

A 70.00% 20.00% C 10.00% B

4. ABC Analysis Graphically

100 %

Percentage of Value

90 %

C
70 %

B A
15 % 45 % 100 %

Percentage of Units

4. ABC Analysis - Limitation

Can C

not be used independently

category item may be critical items Review required

Constant

5. VED Analysis - Concept

Like ABC VED

ABC Analysis is as per consumption value is as per items criticality.

5. VED Analysis - Categories

VITAL Essential

(V): Items without which production can not be done (E): Items which will not stop the production, but their stock out will effect the efficiency (D): Items which are required, but do not cause an immediate loss

Desirable

6) FSN

ANALYSIS

qWhen analysis is carried out on the basis of the rate of movement 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 , and Non-moving Items. qThe demand for fast moving items is generally high. Thus special care should be taken in respect of these items ,otherwise the production may be interrupted due to shortage of such materials. Inventories which have only a low turnover are brought under the category of slow moving items. These items are not issued at frequent intervals q qThe items with almost nil consumption are brought under the category of non moving items .All obsolete inventories constitute this category.

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 scarce items, those which are difficult to obtain and those which are fairly 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 difficult item on the other hand might be an item which is intricate to manufacture. q qThe easy classification covers those items which are readily available. q qA purchase department usually adopts the SDE analysis to determine the method of buying and to fix the responsibilities of buyers.