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INVETORY MANAGEMENT

INVETORY MANAGEMENT. WHY. PURPOSE OF MAINTAINING INVENTORY. SATISFY CUSTOMER DEMANDS AVOID STOCK OUTS PROVIDE CUSHION FOR VARRYING DEMANDS & FLUCTUATING SUPPLIES PROTECT AGAINST PRICE ESCALATION AVAIL QUANTITY DISCOUNTS OPTIMISE COST OF PROCUREMENT. CATAGORIES OF INVENTORY.

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INVETORY MANAGEMENT

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  1. INVETORY MANAGEMENT WHY

  2. PURPOSE OF MAINTAINING INVENTORY • SATISFY CUSTOMER DEMANDS • AVOID STOCK OUTS • PROVIDE CUSHION FOR VARRYING DEMANDS & FLUCTUATING SUPPLIES • PROTECT AGAINST PRICE ESCALATION • AVAIL QUANTITY DISCOUNTS • OPTIMISE COST OF PROCUREMENT

  3. CATAGORIES OF INVENTORY • RAW MATERIALS & COMPONENTS • CONUMABLES & SPARES • WIP ( WORK IN PROGRESS ) • MATERIALS IN TRANSIT • FINISHED GOODS

  4. ELEMENTS OF COSTSIN INVENTORY MGMT • ORDERING COST (COST OF REPLENISHMENT ORDES) • INVENTORY CARRYING COST • STOCKOUT COST (COST OF UNDERSTOCKING)

  5. ELEMENTS OF ORDERING COST • TENDERING & PROCESSING COST • STATIONARY & COMMUNICATION COST • FOLLOW-UP COSTS • INWARD RECEIPT & HANDLING COST • INSPECTION & VERIFICATION COST • SALARIES & WAGES OF PURCHASERS

  6. ELEMENTS OF INVENTORY CARRYING COST • INTEREST ON CAPITAL • INSURANCE & TAX • STORAGE & HANDLING • MAITENANCE & PRESERVATION • DETERIORATION & OBSOLESCENCE • THEFT & PILFERAGE • WAREHOUSE RENTAL • SALARIES & WAGES OF STORES STAFF

  7. MAX INV. LEVEL 100 QUANTITY 4 4 4 MONTHS ANNUAL DEMAND=300

  8. WHAT DO WE OBSERVE HERE ? • INVENTORY CARRYING COST IS DIRECTLY PROPORTIONAL TO QUANTITY ON ORDER • ORDERING COST IS INVERSELY PROPORTIONAL TO THE QUANTITY ON ORDER • TOTAL COST INITIALLY TENDS TO DECREASE AND THEN INCREASES WITH INCREASE IN QUANTITY ON ORDER

  9. TOTAL ANNUAL COST COST INVETORY CARRYING COST ORDERING COST EOQ ORDER QUANTITY

  10. ECONOMIC ORDER QUANTITY(EOQ) • ANNUAL DEMAND IN QUANTITY : D • QUANTITY PER ORDER (ECONOMIC ORDER QUANTITY) : Q • ORDERING COST ( COST PER ORDER IN RUPEES ) : Co • INV. CARRYING COST IN RUPEES PER UNIT PER YEAR : Cc • NO. OF ORDERS PER ANNUM: D/Q • ANNUAL ORDERING COST: (D /Q ) x Co • AVERAGE INV. CARRIED DURING THE YEAR: (MAX + MIN) / 2 = (Q + 0 ) / 2 = Q / 2 • COST OF CARRYING INVENTORY PER YEAR : (Q/2) x Cc

  11. ECONOMIC ORDER QUANTITY(EOQ) • TOTAL COST ‘ C : = ORDERING COST + INV. CARRYING COST = ( D/Q ) . Co + ( Q/2 ) . Cc • AT EOQ O: ORDERING COST = INV. CARRYING COST ( D/Q ) . Co = ( Q/2 ) . Cc Q X Q = 2 X D X Co / Cc • Q = √ ( 2DCo / Cc ) • ‘Q’ IS THE ECONOMIC ORDER QUANTITY

  12. PROBLEM • ZEN BICYCLE LTD. SOURCES 3000 SEAT COVERS FOR ITS BICYCLES FROM OUTSIDE SUPPLIER. • ORDERING COST IS Rs 10 PER ORDER • INV. CARRYING COST PER UNIT PER YEAR IS Rs. 6 • COMPANY HAS 300 WORKING DAYS • FIND: • EOQ • NO. OF ORDERS PER YEAR • TOTAL INVENTORY COST • NO. OF INVENTORY CYCLES IN A YEAR • DURATION OF INV. CYCLE

  13. SOLUTION • EOQ: Q = √( 2DCo / Cc ) = √( 2 X 3000 X 10 / 6 ) = 100 • Q = 100 UNITS • NO. OF ORDERS PER YEAR: • 3000 / 100 = 30 • ANNUAL ORDERING COST = 30 X 10 = Rs 300 • AV. INV. PER CYCLE= ( 100 X 6 ) / 2 = Rs 300 • TOTAL COST = Rs 300 + Rs 300 = Rs 600 • NO OF INV CYCLE PER YEAR (300 WORKING DAYS) =30 • DURATION OF EACH CYCLE = 300 / 30 = 10 DAYS

  14. PROBLEM • TRINITY HOSPITAL, BANGLORE SOURCES 20,000 SYRINGES EVERY YEAR FROM A LOCAL SUPPLIER • ORDERING COST PER ORDER IS Rs 100 AND INV. CARRY COST IS Rs 1 PER UNIT PER YEAR. • THE PRICE OF A SYRINGE IS Rs 5. • DETERMINE QUANTITY TO BE ORDERED EVERY TIME. • WHAT WILL BE TOTAL ORDERING COST AND TOTAL STORAGE COST DURING THE YEAR? • WHAT WILL BE THE TOTAL ANNUAL COST TO THE HOSPITAL ON SYRINGES

  15. SOLUTION • D=20000; Co= 100; Cc= 1 ; P=5 • EOQ ‘Q’ = √( 2DCo / Cc ) = √( 2x20000 x100 / 1) = 2000 UNITS • TOTAL INV. CARRY COST: (2000/2) X 1=1000 • TOTAL ORDERING COST: 20000/2000 X 100 =1000 • TOTAL ANNUAL COST: • = 20000X5 + 1000 + 1000 = 102,000

  16. MAX INV. LEVEL Q RE-ORDER POINT QUANTITY L L L MIN. INV. LEVEL T T T TIME

  17. MAX INV. LEVEL Q RE-ORDER POINT QUANTITY L L L T T T TIME

  18. MAX INV. LEVEL Q RE-ORDER POINT QUANTITY L L L T T T TIME

  19. MAX INV. LEVEL = SAFETY STOCK + RE-ORDER QUANTITY RE-ORDER POINT= SAFETY STOCK + LEADTIME CONSUMPTION RE-ORDER QUANTITY = EOQ L L L BUFFER STOCK OR SAFETY STOCK == MIN. INV. LEVEL S S

  20. NEED FOR SAFETY STOCK • STOCKOUT COSTS ARE VERY HIGH • TO TAKE CARE OF THE UNCERTAINTY OF DEMAND AND SUPPLY DURING THE LEAD TIME SAFETY STOCKS ARE MAINTAINED • SAFETY STOCK = K X STD. DEVIATION OF LTD X √AVERAGE LEAD TIME • ‘K’ : IS A FACTOR DEPENDING UPON CRITICALITY OF DEMAND • ‘LTD’ ; IS AVERAGE DEMAND DURING THE LEAD TIME • GENERALLY VALUE OF ‘K’ VARRIES FROM 0.1 – 3.0 AS IN FLG. TABLE:

  21. ESTIMATION OF SAFETY STOCK( BASED ON STANDARD DEVIATION IN LEAD TIME DEMAND) • STANDARD DEVIATION IN DEMAND PER MONTH = 20 • LEAD TIME =4 M0NTHS • STANDARD DEVIATION IN LEAD TIME DEMAND SD LTD = SD OF DEMAND PER UNIT TIME X √ LEAD TIME = 20 X √ 4 = 40 • UNDER SUPER CRITICAL CIRCUM STANCES: • SERVICE LEVEL = 99.9 PERCENT • CORRESPONDING VALUE OF ‘K’ = 3 • SAFETY STOCK = K X SD LTD • SAFETY STOCK = 3 X 40 = 120

  22. LEVELS FOR INVENTORY CONTROL • MINIMUM INVENTORY LEVEL: RESERVE + SAFETY STOCK • RE-ORDER LEVEL: ROL = LEAD TIME DEMAND ( LTD ) + RESERVE (R) + SAFETY STOCK ( SS ) • RE-ORDER QUANTITY: ROQ = EOQ • MAX INV. LEVEL = ROQ + RESERVE + SAFETY

  23. Selective Inventory Control Techniques: A B C : V E D : F S N & X Y Z Analysis

  24. VITAL FEW : TRIVIAL MANY • A FEW CUSTOMERS ACCOUNT FOR MAJORITY OF SALES • A FEW PROCESSES ACOUNT FOR BULK OF THE SCRAP OR RE-WORK • A FEW NON-CONFORMITIES ACCOUNT FOR MAJORITY OF CUSTOMER COMPLAINTS • A FEW PRODUCTS ACCOUNT FOR MAJOR SHARE IN PROFITS • A FEW ITEMS OF INVENTORY ACCOUNT FOR BULK OF THE WORKING CAPITAL • STOCK OUT OF A FEW ITEMS ACCOUNT FOR SEVERE LOSS IN PRODUCTION • A FEW ITEMS OF INVENTORY ACCOUNT FOR MAJOR SHARE OF THE TOTAL INVENTORY COST • A FEW ITEMS OF INVENTORY DO NOT MOVE AT ALL • A FEW ITEMS ARE EXTREMELY DIFFICULT TO PROCURE WHILE OTHERS ARE EASILY AVAILABLE

  25. A B C ANALYSIS • PARETO ANALYSIS ( ALFREDO PARETO ) • 80 – 20 PRINCIPLE • CONTROL ON 20 PERCENT VARRIABLES CAN PRODUCE 80 PERCENT RESULTS

  26. ITEMS ON INVENTORY 0 20 40 60 80 100 100 80 60 ANNUAL CONSUMPTION VALUE 40 20 0

  27. MANAGERIAL DECISIONS BASED ON A- B – C ANALYSIS

  28. PROBLEM • CLASSIFY THE FOLLOWING ITEMS OF INVENTORY IN A B C CATEGORY BASED ON ANNUAL CONSUMPTION VALUE: • SOLUTION: • WORKOUT ANNUAL CONSUMPTION VALUE OF EACH ITEM • RANK THEM IN DESCENDING ORDER OF CONSUMPTION VALUE • SUMMATION OF INDIVIDUAL CONSUMPTION VALUES WILL GIVE • THE TOTAL INVENTORY CONSUMPTION VALUE DURING THE YEAR ANNUAL CONSUMPTION CONSUMPTION VALUE CODE PRICE RANK M 1 400 07 M 5 1950 11 M 6 40 10 M 9 1000 05 M 15 14 20 M 25 2400 07 M 30 08 160 M 2 800 06 M 7 100 07 M 13 50 09 TOTAL VALUE OF INVENTORY CONSUMPTION

  29. SOLUTION: • A B C CLASSIFICATION BASED ON ANNUAL CONSUMPTION VALUE • WORKOUT ANNUAL CONSUMPTION VALUE OF EACH ITEM • RANK THEM IN DESCENDING ORDER OF CONSUMPTION VALUE • SUMMATION OF INDIVIDUAL CONSUMPTION VALUES WILL GIVE • THE TOTAL INVENTORY CONSUMPTION VALUE DURING THE YEAR ANNUAL CONSUMPTION CONSUMPTION VALUE CODE PRICE RANK 5 M 1 400 07 2800 M 5 1950 11 214501 1 M 6 40 10 400 9 M 9 1000 05 5000 3 M 15 14 20 280 10 M 25 2400 07 16800 2 M 30 08 1280 6 160 M 2 800 06 4800 4 M 7 100 07 700 7 M 13 450 50 09 8 TOTAL VALUE OF INVENTORY CONSUMPTION 53960

  30. TABULATE VALUES IN DESCENDING ORDER • COMPUTE CUMULATIVE VALUE WHICH WILL BE IN ASCENDING ORDER • CALCULATE ANNUAL CONSUMPTION OF EACH ITEM AS PERCENTILE • OF THE TOTAL ANNUAL INVENTORY CONSUMPTION • IDENTIFY TOTAL NUMBER OF ITEMS RESPONSIBLE • FOR 80% OF CONSUMPTION VALUE AND CLASSIFY AS ‘A’ ITEMS • NEXT IITEMS WHICH ARE RESPONSIBLE FOR 10-15% OF THE TOTAL INVENTORY CONSUMPTION VALUE CAN BE CLASSIFIED AS ‘B’. • THE REST ARE CLASSIFIED AS ‘C’ WHICH CONSTITUTE 65-70% OF TOTAL ITEMS & ACCOUNT FOR 5% OF ANNUAL CONSUMPTION ANNUAL CONSUMPTION VALUE CUMULATIVE VALUE CONSUMPTION. AS % OF TOTAL INV.CONSUMPTN CODE CLASS A M 5 21450 21450 39.8 M 25 16800 38250 70.9 A M 9 5000 43250 80.2 B M 2 4800 48050 89.0 B M 1 50850 2800 94.2 B M 30 1280 52130 96.6 C M 7 52830 97.9 C 700 M 13 450 53280 98.7 C M 6 400 53680 99.5 C M 15 100 280 53960 C

  31. PROBLEM • CLASSIFY THE FOLLOWING ITEMS OF INVENTORY IN A B C CATEGORY BASED ON ANNUAL CONSUMPTION VALUE: • SOLUTION: • WORKOUT ANNUAL CONSUMPTION VALUE OF EACH ITEM • RANK THEM IN DESCENDING ORDER OF CONSUMPTION VALUE • SUMMATION OF INDIVIDUAL CONSUMPTION VALUES WILL GIVE • THE TOTAL INVENTORY CONSUMPTION VALUE DURING THE YEAR ANNUAL CONSUMPTION CONSUMPTION VALUE CODE PRICE RANK M 1 120 10 M 5 240 04 M 6 1700 O2 M 9 139 05 M 15 08 345 M 25 512 07 M 30 O1 1100 M 2 865 O3 M 7 730 06 M 13 637 09 TOTAL VALUE OF INVENTORY CONSUMPTION

  32. MULTI – UNIT SELECTIVE INVENTORY CONTROL: – THREE DIMENSIONAL APPROACH ( MUSIC-3D )

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