Inventory Control

Inventory Control
Decisions regarding
What to Buy How Much to Buy When to Buy & Maybe even from Whom to Buy

Objectives
Cost Service Level

Inventory Control
Different Models
Deterministic or Probabilistic Demand Fixed Price or Variable Price Single Period or Multi-Period Dependent Demand or Independent Demand

Probabilistic Demand
Numbers of loaves of bread sold at a Kirana shop Number of Middays sold by a newspaper stall Here the method is to find the expected profit from each alternative and choose the best

Various Models
Deterministic Models
Factors affecting Decisions viz. Demand Rate, Supply Rate, Sales Price, Purchase cost, Inventory carrying cost, Ordering Cost, Backorder Cost, etc.

Sales Price Dependent Demand

Demand drops as price increases Margins go up as price increases Total profit is 0 when price = purchase cost and also when demand becomes 0 The price that gives maximum profit is somewhere between these two
Demand 350 300 250 200 150 100 50 0

24

26

28

30

32

34

36

38

Demand

40

Profit 1400 1200 1000 800 600 400 200 0

Profit 24 0 25 300 26 560 27 780 28 29 30 31 32 33 34 35 36 37 780 38 560 39 300 40 0

960 1100 1200 1260 1280 1260 1200 1100 960

Various Models
Classic EOQ Model Ford Warris, 1931

EOQ

2* S * D I

Classic EOQ Model

S : Setup or ordering cost (say 4000) D : Annual Demand (say 18000) I : Annual Inventory Carrying cost/pc When order quantity is Q, Average Inventory = Q/2, Inventory carrying cost = I*Q/2 No. of orders = D/Q Annual Ordering cost = D*S/Q At EOQ, D*S/Q = I*Q/2

Classic EOQ Model

S : Setup or ordering cost (say 4000) D : Annual Demand (say 18000) I : Annual Inventory Carrying cost/pc (say 36)

2 * 4000 *18000 EOQ 36

EOQ = 2000

Total Cost

7284000 7282000 7280000 7278000 7276000 7274000 7272000 7270000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000

Limitations of EOQ
Assumptions of EOQ
Uniform Consumption Rate Purchase price independent of order quantity Completely Predictable Supply Lead Time Precise Determination of Ordering Cost, Inventory Carrying Cost & Backorder Cost No Minimum Order Qty/ Multiples of ordering lots Infinite Shelf Life

Insights from EOQ

Holding and Setup costs are fairly insensitive to lot size If Q* is EOQ and Y(Q*) is the optimal cost, then for any Q, Y(Q) = Y(Q*) * (Q*/Q + Q/Q*) With 100% increase in Q*, Y(Q*) increases only by 25%

Rule

% Diff in Cost
30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Order Quantity Dependent Purchase Cost (Price Breaks)

As order qty increases, prices drop and so does material cost and ordering cost Inventory Cost increases as order qty increases Find EOQ for each Price Point Find Total cost at each EOQ as well as Price Break
Total Cost 1860000 1855000 1850000 1845000 1840000
Cost

1835000 1830000 1825000 1820000 1815000 1810000

1200

1700

2200

2700

3200

3700

4200

4700

5200

5700

6200

6700

7200

7700

8200

Order Qty

8700

Multi-period Models
Decisions for multiple periods, inventory can be used for next period Optimisation methods exist such as Linear Programming, Dynamic Programming

Typical Demand
Demand
60

55

50

45

40

35

30

25

20 1 2 3 4 5 6 7 8 9 10 11 12

Fixed Period Review P System

Methodology
Review Inventory periodically If stock < Max level, order the difference

Advantages
Simplicity Very low cost of operations

Where Used
C class Inventory or low value items

Fixed Period Review P System

Review Period
Higher the period, higher the stocks Lower the period, more frequent ordering Should be more than supply lead time

Safety Stock
To take care of variations in demand Max Possible Demand during review period less average demand during review period A function of % confidence or Service Level

Fixed Period Review P System

Stocks
90
80 70 60 50 Stocks 40 30

20
10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

Continuous Review / Fixed Quantity

Q System
Methodology
Watch the stocks continuously The moment stocks fall below ROL, Order EOQ

Advantages
Least Cost High Service Level

Where Used
High & Medium Value Items

Continuous Review / Fixed Quantity

Q System
ROL
Should last till the replenishment is received Safety Stock + Average Demand during supply lead time Protects against variations in demand rate and supply lead time A function of % confidence or Service Level

Continuous Review / Fixed Quantity

Q System
60 50

40

30

20

10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

Lead time
Influences reorder level ROL = Average Daily demand * Lead time

Variability
Variations in lead time Variations in demand rate Safety Stocks are dependent on variations in lead time and variations in demand rate Reorder level = safety stock + demand during lead time

Independent/ Dependent Demand

Independent Demand - Demand Dependent on factors external to the organisation, e.g. Demand for bicycles as seen by Hero Cycles. Dependent Demand - Demand Dependent on factors internal to the organisation, e.g. Demand for bicycle handles and sprocket wheels as seen by Hero Cycles.

Dependent Demand
Demand directly dependent on the demand for some other item. In manufacturing scenario, the demand for raw materials/ sub-assemblies is dependent on the production plan of the main product. The demand for consumables, food required in canteen is dependent on something else and can be calculated.

Pre-MRP methods
P System or Fixed Period review system
Decide on Maximum stock. Review periodically. Order the gap between Max Stock and Current Stock

Q System or Fixed Order Quantity system

Decide on Order Quantity (OQ) and Reorder Level. Keep monitoring the stock continuously. As soon as stocks reach ROL, Order OQ.

MRP
Find Independent Demand from Production Plan of the main product Using Bill of Material find the Gross Requirement (GR) of its components Subtract the stock to get the net requirement Calculate Planned Order Release (POR). POR gives the quantity and date for placing order for each item.

Table
Day
1 2

Stock
20 20

Orders

Production Plan 6
30

26

3
4 5 6

30
12 20 13

12
20 13

Bill of Materials
Table (1 day)

Table Top (1) (3 Days)

Leg Assembly (1) (1 Day)

Legs (4) (2 Days)

Short Support (2) (1 Day)

Long Support (2) (3 Days)

MRP Tabulation
Day->
TABLE GR 26 30 30 12 12 20 20 13 13

Stock
NR

20

20
6

POR
Table Top GR Stock NR 50

6
6 44

30
30 14

12
12 2

20
20 18

13
13 13

POR

18

13

MRP Tabulation
Day->
Leg Assy GR 6 30 11 12 12 20 20 13 13

Stock
NR

25

19 11
44

POR
Legs GR Stock NR 88

12
48 4

20
80 80

13
52 52

44

POR

80

52

MRP Tabulation
Day->
Short Support GR 22 24 40 16 26 26

Stock
NR

70

48

24 16 26
40 16 10 26

POR
Long Support GR Stock NR 102 22 80

24 56

POR

10