a clear explaination on inventory management and its optimum solution

1. 1

2. BY:
K.MOHAN VENKAT VINAY
CH.NARSI TEJA REDDY
2

3. Inventory Definition
 A stock of items held to meet future
demand
 Inventory is a list for goods and
materials, or those goods and
materials themselves, held available in
stock by a business.
3

4. Introduction
 Constitute significant part of current assets
 On an average approximately 60% of current assets in Public Limited Companies in
India
 A considerable amount of fund is required
 Effective and efficient management is imperative to avoid unnecessary investment
 Improper inventory management affects long term profitability and may fail
ultimately
 10 to 20% of inventory can be reduced without any adverse effect on production
and sales by using simple inventory planning and control techniques
4

5. Work in
process
Vendors Raw Work in Finished Customer
Materials process goods
Work in
process
5

6. Nature of Inventories
 Raw Materials – Basic inputs that are converted into finished product through
the manufacturing process
 Work-in-progress – Semi-manufactured products need some more works before
they become finished goods for sale
 Finished Goods – Completely manufactured products ready for sale
 Supplies – Office and plant cleaning materials not directly enter production but
are necessary for production process and do not involve significant investment.
6

7. Objective of Inventory Management
 To maintain a optimum size of inventory for efficient and smooth production
and sales operations
 To maintain a minimum investment in inventories to maximize the profitability
 Effort should be made to place an order at the right time with right source to
acquire the right quantity at the right price and right quality
7

8. An effective inventory management should
 Ensure a continuous supply of raw materials to facilitate uninterrupted
production
 Maintain sufficient stocks of raw materials in periods of short supply and
anticipate price changes
 Maintain sufficient finished goods inventory for smooth sales operation,
and efficient customer service
 Minimize the carrying cost and time
 Control investment in inventories and keep it at an optimum level
8

9. An optimum inventory level involves
three types of costs
Ordering costs:- Carrying costs:-
 Quotation or tendering
 Warehousing or storage
 Requisitioning
 Order placing  Handling
 Transportation  Clerical and staff
 Receiving, inspecting and storing
 Insurance
 Quality control
 Clerical and staff  Interest
Stock-out cost  Deterioration,shrinkage,
 Loss of sale
evaporation and
 Failure to meet delivery
commitments obsolescence
 Taxes
 Cost of capital
9

10. Dangers of Over investment
 Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity
cost
 Excessive carrying cost
 Risk of liquidity- difficult to convert into cash
 Physical deterioration of inventories while in storage due to mishandling and
improper storage facilities
10

11. Dangers of under-investment
 Production hold-ups – loss of labor hours
 Failure to meet delivery commitments
 Customersmay shift to competitors which
will amount to a permanent loss to the firm
 May affect the goodwill and image of the
firm
11

12. Classification of inventory
• ABC Classification
• HML Classification
• XYZ Classification
• VED Classification
• FSN Classification
• SDF Classification
• GOLF Classification
• SOS Classification
12

13. ABC Classification
• In most of the cases 10 to 20 % of the inventory
account for 70 to 80% of the annual activity.
• A typical manufacturing operation shows that the top
15% of the line items, in terms of annual rupees usage,
A
represent 80% of total annual rupees usage.
• Next 15% of items reflect 15% of annual rupees
• Next 70% accounts only for 5% usage
B
C 13

14. XYZ Classification
 On the basis of value of inventory
stored
 Whereas ABC was on the basis of
value of consumption to value.
 X – High Value
 Y – Medium value
 Z – Least value
Aimed to identify items which are
extensively stocked.
14

15. HML Classification
 On the basis of unit value of item
 There is 1000 unit of Q @ Rs. 10 and 10,000 units of W @ Rs. 5.
Aimed to control the purchase of raw materials.
H – High, M- Medium, L - Low
15

16. VED Classification
• Mainly for spare parts because their consumption
pattern is different from raw materials.
Therefore V items has to be stocked more
• Raw materials on market demand
• Spare parts on performance of plant and machinery.
• and D Items has to be less stocked
V – Vital, E – Essential, D – Desirable
16

17. FSN Classification
 According to the consumption pattern
 To combat obsolete items
 F – Fast moving
 S – Slow moving
 N – Non Moving
17

18. SDF & GOLF Classification
 Based on source of procurement
 S – Scarce, D- Difficult, E- Easy.
 GOLF
 G – Government, O – Ordinary, L – Local, F – Foreign.
18

19. SOS Classification
 Raw materials especially for agriculture units
 S – Seasonal
 OS – Off seasonal
19

20. EOQ – Three Approaches
Trial and Error method
Order-formula approach
Graphical approach
20

21. EOQ & Re-order point
EOQ – gives answer to question
“How much to Order”
Re-order point – gives answer
to question “when to order”
21

22. Trial & Error Method
Assumptions:-
Annual requirement (C)=1200 units
Carrying cost (I) = Rs.1
Ordering cost (O) =Rs.37.5
Order size Q 1200 600 400 300 240 200 150 120 100
Average inventory Q/2 600 300 200 150 120 100 75 60 50
No. of orders C/Q 1 2 3 4 5 6 8 10 12
Annual carrying cost 600 300 200 150 120 100 75 60 50
I* Q/2
Annual ordering cost 37.5 75 112.5 150 187.5 225 300 375 450
O*C/Q
Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500
22

23. Order- Formula approach
1/2
EOQ =(2CO/I)
C = Annual demand
O = Ordering cost per order
I = Carrying cost per unit
1/2
EOQ =(2*1200*37.5/1) = 300 units
23

24. Graphical method to find
EOQ Cost in RS.
0 EOQ
Order quantity
24

25. A Review
So we have dealt with
1. EOQ model
2. Its extension
3. And now we will be dealing with special inventory
models
25

26. Special inventory model
 Non – Instantaneous replenishment
 Quantity Discount
 One – period decision
26

27. Special inventory model
Non – Instantaneous replenishment
Capacity 10 units
A B C D
Thus the inventory is replenished gradually than in lots
Particularly in situation were manufacturers use continues
production process
e.g. FACT makes Ammonium on a continual basis27

28. Special inventory model
Discount Quantities
 If discount increases with the order quantity, then the price of
inventory is no more constant
Hence a new approach is needed to find the
best lot size
Total Annual holding Annual Annual cost of
cost = cost + ordering cost + materials
28

29. Special inventory model
One period decisions
The newsboy problem
 If a newspaper seller does not buy enough papers to resell on the
street corner, sales opportunity is lost. If the seller buys too many, the
overage cannot be sold because nobody wants yesterdays newspaper.
Applicable to fashion goods, seasonal goods and
due to change in technology 29

30. Inventory management
under uncertainty
1. Option price model
2. Risk adjusted discount cash flow (DFC) Model
3. Dynamic inventory model
30

31. Option price model
 Option is a contract that gives the holder a right to
acquire or sell certain things at a predetermined price
without any obligation.
 Calculated by integrating the market information and
inventory control.
31

32. Risk adjusted discount cash
flow (DFC) Model
• Inventory control problem is converted to capital
budget problem
Beneficial afor projects like to hold an
• Suppose television dealer decides oil drilling were the
additional inventory of 1000 television per month. The
benefit of holding inventory is spread overtime.
cost is acquired only after a long time but
once Inflows = struck the additional expanse is covered.
• oil is no: of units × probability × present value
32

33. Dynamic inventory model
1. Uncertain variables are identified
2. Probability associated with them is taken
3. Simulation techniques are applied
33

34. Emerging trends in inventory
management
• Entering into log term contract at a fixed price to
reduce uncertainties
• Just-in-time
• Kanbans – Japanese technique (Only produce when
demand comes)
• Internet based ordering system
• Vendor development
• Investment in plant and machinery
• Continuous-flow manufacturing
• Visual control
• Supply chain management
34

35. Theories under Supply chain Managment
 Resource-based view (RBV)
 Transaction Cost Analysis (TCA)
 Knowledge-Based View (KBV)
 Strategic Choice Theory (SCT)
 Agency Theory (AT)
 Institutional theory (InT)
 Systems Theory (ST)
 Network Perspective (NP)
 Materials Logistics Management (MLM)
 Just-in-Time (JIT)
 Material Requirements Planning (MRP)
 Theory of Constraints (TOC)
 Performance Information Procurement Systems (PIPS)

36.  Performance Information Risk Management System (PIRMS)
 Total Quality Management (TQM)
 Agile Manufacturing
 Time Based Competition (TBC)
 Quick Response Manufacturing (QRM)
 Customer Relationship Management (CRM)
 Requirements Chain Management (RCM)
 Available-to-promise (ATP)
 and many more
36

37. 37

38. 38