Inventory management

… The Inventory Management & Control in Production & Operation…
*** Flow of Presentation ***

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Introduction
Functions, Importance & Utility
Type & Classification
Inventory Control & Control Tools
Tools of Inventory Control
Valuation- LIFO, FIFI & Avg. Cost Method
Basic Order Quantity & Reorder Point
Economic Production Qty. & Qty. Discount Model

Presentation By:
Namita Shinde
J Ranjan
Madhu Jaiswal

ABC Analysis
Just in Time (Japanese Vs. US Approach
Conclusion

SMBA
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Athira Nair (Roll No 79)
Rachita Ramjiyani (Roll No 67)
Sanjay Kumbhar (Roll No 107)

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*** Introduction ***

Inventory:
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it
into a more valuable state.
Inventory System:
Inventory System- A set of policies and controls that monitors levels of inventory and determines what
levels should be maintained, when stock should be replenished, and how large orders should be

How much
should be
ordered

When should
it to be
ordered

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Relates to
EOQ

Relates to un
certainty

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*** Functions ***

Functions :
• To maintain independence of supply chain
• Anticipated customer demand
• Smoothen production requirements
• Decouple operations (eliminate sources of disruptions)
• Protect against stock-outs
• Advantage of order cycles

• Hedge against price increases
• Little's Law: the average amount of inventory in a system is equal to the product of the average
demand rate and the average time a unit is in the system
• Advantage of quantity discounts

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*** Importance ***

Importance:
• Improve customer service
• Economies of purchasing
• Economies of production
• Transportation savings
• Hedge against future
• Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)
• To maintain independence of supply chain

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*** Inventory Management ***

Utility:
• Track existing inventory
• Know what quantity will be needed
• Know when these items will be needed

• Know how much items will cost

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*** Types ***

Types of Inventory:
• Raw Materials or Purchased parts/consumables
• Works-in-Process (WIP)
• Finished Goods or merchandise
• Maintenance, Repair and Operating (MRO)
• Goods in Transit

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*** Classification ***

Classification:
•ABC Classification
•HML Classification
•XYZ Classification
•VED Classification
•FSN Classification
•SDF Classification
•GOLF Classification

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•SOS Classification
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*** Power of Buyers/Customers ***
• Types of Inventory Control:

•

Perpetual Inventory Control System
a) used in supermarkets or department storesb) A continuous flow of inventory count is tracked using a point of sale (POS) check out
system.

c) It manages what is sold and reorder when a reorder point is reached.
d) its ability to account for shrinkage (theft) and inventory turnover

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*** Types of Inventory Control ***
• Types of Inventory Control:

•

Periodic Inventory Control System
a) used in smaller retailers
b) Used to take a physical count of inventory at periodic intervals to replenish the inventory.
c) Beneficial for companies that do not have products with UPC or bar codes

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*** Inventory Control Tools ***
An optimum inventory level involves three types of costs
Ordering costs:-

Carrying costs:-

•

Quotation or tendering

•

Warehousing or storage

•

Requisitioning

•

Handling

•

Order placing

•

Clerical and staff

•

Transportation

•

Insurance

•

Receiving, inspecting and storing

•

Interest

•

Quality control

•

Deterioration, shrinkage

•

Clerical and staff

•

Evaporation and obsolescence

•

Taxes

•

Cost of capital

Stock-out cost
• Loss of sale
• Failure to meet delivery commitments

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*** Inventory Valuing Methods ***
An optimum inventory level involves three types of costs
First-In, First-Out (FIFO):
This method assumes that the first unit making its way into inventory is the first sold. For example, let's
say that a bakery produces 200 loaves of bread on Monday at a cost of $1 each, and 200 more on
Tuesday at $1.25 each. FIFO states that if the bakery sold 200 loaves on Wednesday, the COGS is $1
per loaf (recorded on the income statement) because that was the cost of each of the first loaves in
inventory. The $1.25 loaves would be allocated to ending inventory (appears on the balance sheet).
Last-In, First-Out (LIFO):
This method assumes that the last unit making its way into inventory is sold first. The older
inventory, therefore, is left over at the end of the accounting period. For the 200 loaves sold on
Wednesday, the same bakery would assign $1.25 per loaf to COGS, while the remaining $1 loaves
would be used to calculate the value of inventory at the end of the period.

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Average Cost:
This method is quite straightforward; it takes the weighted average of all units available for sale
during the accounting period and then uses that average cost to determine the value of COGS and
ending inventory. In our bakery example, the average cost for inventory would be $1.125 per
unit, calculated as [(200 x $1) + (200 x $1.25)]/400.

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*** Basic Order Quantity ***
Basic Economic Order Quantity Model:
Utility:
used to identify a fixed order size that will minimize the sum of the annual costs of holding
inventory and ordering inventory
Assumptions:
1. Only one product involved
2. Annual demand requirements are known

3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant
4. Lead time does not vary

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5. Each order is received in a single delivery
6. There are no quantity discounts

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*** Reorder Point ***
Under the Condition of Certainty:
Certainty case of the inventory cycle

Inventory
level order
quantity

Q
Average inventory =
Q/2

0

T1

T3

T2

T4

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Time
SMBA

1. Here the negative slope from Q to T1 represents the inventory
being used up
2. T1, T2, T3, T4 represents the replenishment points
3. The inventory varies between 0 and Q

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Cost in RS.

Graphical Method to Find EOQ:

0

EOQ

Order quantity

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Under the Condition of Uncertainty:

reorder Qm
point

safety stock

time

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*** Economic Production Quantity ***
Economic Production Quantity model (EPQ):

Utility:
Widely used in production; the reason for this is that capacity to produce a part exceeds the part’s
usage or demand rate ( the larger the run size, the fewer the number of runs needed and, hence,
the lower the annual setup cost; as long as production continues, inventory will continue to grow;

(see formulas below)
Assumptions:
• Only one item is involved

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• Annual demand is known
• Has a constant usage rate
• Usage occurs continually, but production occurs periodically

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• The production rate is constant
• Lead time does not vary
• There are no quantity discounts

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*** Power of Buyers/Customers ***
Quantity Discount Model:

Price reductions for large orders offered to customers to induce them to buy in large quantities; If
quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase
price and fewer orders that will result from buying in large quantities against the increase in
carrying costs caused by higher average inventories; The buyers goal is to select the order

quantity that will minimize total cost (see total cost formula below);

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*** EPQ & RoP ***
Quantifications:
Annual carrying cost = (Q/2)*H [Q = Order quantity in units, H = Holding (carrying) cost per unit]
Annual ordering cost = (D/Q)*S [ D = Demand, S = Ordering cost]
Total cost (TC) =(Q/2)*H + (D/Q)*S
Total cost curve is U-Shape

Length of order cycle = Q/D
EPQ= square root[(2DS)/H]*square root[p/(p-u)]

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p=production or delivery rate

u=usage rate
Reorder Point: ROP=d*LT

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d=demand rate(units per period/day/week)
LT=lead time(same units as d)
EOQ=square root of (2DS)/H

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Total ordering cost

=

(annual requirement x per order cost)
order size

Total carrying cost

=

average inventory x per unit carrying cost

Total cost

=

total order costs

+

total carrying cost +

Reorder Point:

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Quantity to which inventory is allowed to drop before replenishment order is made

Need to order EOQ at the Reorder Point:
ROP = D X LT

SMBA
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D = Demand rate per period
LT = lead time in periods

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*** ABC Analysis ***
ABC Analysis:
Used to define an inventory categorization technique often used in materials management. It is
also known as Selective Inventory Control.
The ABC analysis provides a mechanism for identifying items that will have a significant impact on
overall inventory cost,while also providing a mechanism for identifying different categories of
stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value.
Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated
importance.

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ABC Analysis:
A ITEMS: very tight control and accurate records.
'A' items are very important for an organization. Because of the high value of these ‘A’
items, frequent value analysis is required. In addition to that, an organization needs to choose an
appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.
B ITEMS: less tightly controlled and good records.
'B' items are important, but of course less important than ‘A’ items and more important than ‘C’
items. Therefore ‘B’ items are intergroup items

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C ITEMS: simplest controls possible and minimal records.
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'C' items are marginally important.

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ABC Analysis:
Example of ABC class are
‘A’ items – 20% of the items accounts for 80% of the annual consumption value of the items.
‘B’ items - 30% of the items accounts for 15% of the annual consumption value of the items.
‘C’ items - 50% of the items accounts for 05% of the annual consumption value of the items

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*** Just In Time ***
JIT:
An inventory strategy companies employ to increase efficiency and decrease waste by receiving
goods only as they are needed in the production process, thereby reducing inventory costs.
This method able to accurately forecast demand.
JIT focuses on.. continuous improvement.. return on investment, quality, and efficiency.

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Benefits:
• Uses a systems approach to develop and operate a manufacturing system
• Organizes the production process so that parts are available when they are needed.
• A method for optimizing processes that involves continual reduction of waste.
• Reduce inventory cost.

• Lesser storage space.
• No wastage, thereby higher profitability.
• Defects are identified faster.

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• C0nsistency and improved quality.

• Continuous improvement is assured.
• Properly defined space for storage .

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JAPANESE JIT APPROACH

U. S. APPROACH

•

Small size purchasing of raw material

•

Bulk quantity of raw material .

•

Inspection of Raw material at
supplier’s end.

•

Inspection of Raw material at buyer’s end.

•

2% defect in quality is acceptable.

•

Supplier is selected based on biding pricing
for quoted quality.

•

Vary from consignment to consignment.

•

More paper formality as is based on tender
system.



Heavy packing in handling of raw materials
as bulk purchases.

•

Zero defect in quality is required.

•

Supplier is selected based on
reasonable pricing as worked out in
view quality consideration.

•

Long term agreement with suppliers.

•

Less paper formality

•

Minimum packing in handling of raw
materials.


•
•

Transportation cost is less as supplier’s
are located nearby.
More suitable for single product
system.



Transportation cost is more as supplier’s are
scattered.
More suitable for multi product system.

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*** Conclusion ***

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Inventory management

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