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Inventory control

Inventory control. MEANING. Inventory- A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

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Inventory control

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  1. Inventory control

  2. MEANING • 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- 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. It involves inventory planning and decision making with regard to the quantity and time of purchase, fixation of stock levels, maintenance of stores record and continuous stock taking.

  3. THE INVENTORY DECISION • In an Inventory control situation, there are three basic questions to be answered. They are:- • How much to order? • When should the order be placed? • How much safety stock should be kept?

  4. TYPES OF INVENTORIES

  5. Factors Affecting Inventory Control Policy • Characteristics of the manufacturing system: • Degree of Specialization and differentiation of the products at various stages. • Process capability and flexibility. • Production capacity and storage facility. • Quality requirements. • Nature of production system. • Amount of protection against storages: • Changes in size and frequency of orders. • Unpredictability of sales. • Physical and economic structure of distribution pattern. • Costs associated with failure to meet demand. • Accuracy, frequency and detail of demand forecasts. • Protection against breakdown or other interruptions in production.

  6. Objectives of Inventory Control • A hedge against inflation. • Protection against fluctuation in demand. • Protection against fluctuation in supply. • To avoid stock outs and shortages. • Quantity discounts. • Optimum use of men, machines & materials. • Maintaining different level of stock. • Control of stock volume. • The decoupling function.

  7. Scope of Inventory Control • Formulation of policy. • Organization structure. • Determination of economic order quantity. • Determination of safety stock. • Determination of lead time. • Minimum material handling & storage cost. • Effectiveness towards running of store.

  8. TOOLS & TECHNIQUES OF INVENTORY MANAGEMENT

  9. 1. Determination Of Stock Levels Reorder Point Level of inventory at which a new order is placed. R = dL where d = demand rate per period L = lead time

  10. Re-ordering level It is the level of stock quantity between minimum and maximum level and material order was sent for getting fresh stock. Formula : maximum usage of stock X maximum delivery period

  11. Minimum level • It is the minimum balance, which must be maintained in hand at all times, so that there is no stoppage of production due to non availability of inventory.  Remember  You must need re-order level for getting it. Formula : Re-order level - ( Normal usage X average period )

  12.  Maximum level • It shows maximum quantity which should be in the stock, if we buy more, it means we are wasting money. Formula : re-order level X re-order quantity - ( minimum usage X minimum period ) 

  13.  Average Stock Level • This is the average of minimum and maximum level and it can be calculated by adding minimum level and maximum level and divided by 2. formula : minimum level + maximum level / 2

  14. Danger level • It is the level at which normal issues of the raw material inventory are stopped and emergency issues are only made.  formula : average consumption X lead time for emergency purchases

  15. 2. Determination of Safety Stocks • Safety stock • buffer added to on hand inventory during lead time • Stockout • an inventory shortage • Service level • probability that the inventory available during lead time will meet demand

  16. Q Inventory level Reorder point, R 0 LT LT Time Variable Demand with a Reorder Point

  17. Q Inventory level Reorder point, R Safety Stock 0 LT LT Time Reorder Point with a Safety Stock

  18. R = dL + zd L where d = average daily demand L = lead time d = the standard deviation of daily demand z = number of standard deviations corresponding to the service level probability zd L = safety stock Reorder Point With Variable Demand

  19. Probability of meeting demand during lead time = service level Probability of a stockout Safety stock zd L dL Demand R Reorder Point for a Service Level

  20. d = 30 yards per day L = 10 days d = 5 yards per day R = dL + zd L = 30(10) + (1.65)(5)( 10) = 326.1 yards Safety stock = zd L = (1.65)(5)( 10) = 26.1 yards Reorder Point for Variable Demand The carpet store wants a reorder point with a 95% service level and a 5% stockout probability For a 95% service level, z = 1.65

  21. 3. Inventory Control Systems • Continuous system (fixed-order-quantity or Q Systems) • constant amount ordered when inventory declines to predetermined level • Periodic system (fixed-time-period or P Systems) • order placed for variable amount after fixed passage of time

  22. Fixed Order Quantity System or Q Systems – In reorder level system, a replenishment order fixed size (Q) is placed when the stock level falls to the fixed reorder level (R). Thus a fixed quantity is ordered at various interval of time. • Periodic Review System or P System – In periodic review system, the inventory levels are reviewed at fixed points of time, when the quantity to be ordered is decided. By this method variable quantities are ordered at fixed time intervals

  23. 4. ECONOMIC ORDER QUANTITY (EOQ) • Economic order quantity is the size of the lot to be purchased which is economically viable. This the quantity of materials which can be purchased at minimum costs. • ASSUMPTIONS • Demand rate D is constant, recurring, and known • Amount in inventory is known at all times • Ordering (setup) cost S per order is fixed • Lead time L is constant and known. • Unit cost C is constant (no quantity discounts) • Annual carrying cost is i time the average RUPEE value of the inventory • No stock outs allowed. • Material is ordered or produced in a lot or batch and the lot is received all at once

  24. EOQ Inventory Order Cycle Demand rate Order qty, Q Inventory Level ave = Q/2 Reorder point, R Lead time Lead time 0 Time As Q increases, average inventory level increases, but number of orders placed decreases Order Placed Order Received Order Placed Order Received

  25. Co - cost of placing order D - annual demand Cc - annual per-unit carrying cost Q - order quantity Annual ordering cost = CoD Q CoD Q Annual carrying cost = CcQ 2 CcQ 2 Total cost = + EOQ Cost Model

  26. Deriving Qopt Proving equality of costs at optimal point CoD Q CcQ 2 TC = + CoD Q2 Cc 2 TC Q = + = C0D Q2 Cc 2 0 = + 2CoD Cc CoD Q CcQ 2 Q2 = 2CoD Cc Qopt = 2CoD Cc Qopt = EOQ Cost Model

  27. Annual cost ($) Total Cost Slope = 0 Carrying Cost = Minimum total cost CcQ 2 CoD Q Ordering Cost = Optimal order Qopt Order Quantity, Q EOQ Cost Model (cont.)

  28. Cc = $0.75 per yard Co = $150 D = 10,000 yards CoD Q CcQ 2 TCmin = + Qopt = 2(150)(10,000) (0.75) (150)(10,000) 2,000 (0.75)(2,000) 2 Qopt = TCmin = + 2CoD Cc Qopt = 2,000 yards TCmin = $750 + $750 = $1,500 EOQ Example Orders per year = D/Qopt = 10,000/2,000 = 5 orders/year Order cycle time = 311 days/(D/Qopt) = 311/5 = 62.2 store days

  29. 5. Production Quantity Model • An inventory system in which an order is received gradually, as inventory is simultaneously being depleted • AKA non-instantaneous receipt model • assumption that Q is received all at once is relaxed • p - daily rate at which an order is received over time, a.k.a. production rate • d - daily rate at which inventory is demanded

  30. Inventory level Maximum inventory level Q(1-d/p) Average inventory level Q 2 (1-d/p) 0 Begin order receipt End order receipt Time Order receipt period Production Quantity Model (cont.)

  31. p = production rate d = demand rate 2CoD Cc1 - Q p Maximum inventory level = Q - d = Q 1 - Qopt = d p d p d p CoD Q CcQ 2 Q 2 d p Average inventory level = 1 - TC = + 1 - Production Quantity Model (cont.)

  32. 2CoD Cc1 - Qopt = = = 2,256.8 yards d p Q p 2,256.8 150 CoD Q CcQ 2 d p 32.2 150 TC = + 1 - = $1,329 2(150)(10,000) 0.75 1 - Production run = = = 15.05 days per order Production Quantity Model: Example Cc = $0.75 per yard Co = $150 D = 10,000 yards d = 10,000/311 = 32.2 yards per day p = 150 yards per day

  33. D Q 10,000 2,256.8 Number of production runs = = = 4.43 runs/year d p 32.2 150 Maximum inventory level = Q 1 - = 2,256.8 1 - = 1,772 yards Production Quantity Model: Example (cont.)

  34. CoD Q CcQ 2 TC = + + PD where P = per unit price of the item D = annual demand 6. QUANTITY DISCOUNTS Price per unit decreases as order quantity increases

  35. TC = ($10 ) ORDER SIZE PRICE 0 - 99 $10 100 – 199 8 (d1) 200+ 6 (d2) TC (d1 = $8 ) TC (d2 = $6 ) Inventory cost ($) Carrying cost Ordering cost Q(d1 ) = 100 Qopt Q(d2 ) = 200 Quantity Discount Model (cont.)

  36. QUANTITY PRICE 1 - 49 $1,400 50 - 89 1,100 90+ 900 2CoD Cc 2(2500)(200) 190 Qopt = = = 72.5 PCs For Q = 72.5 CoD Qopt CcQopt 2 For Q = 90 CcQ 2 CoD Q TC = + + PD = $233,784 TC = + + PD = $194,105 Quantity Discount: Example Co = $2,500 Cc = $190 per computer D = 200

  37. 7. ABC ANALYSIS • The materials are divided in to a number of categories for adopting a selective approach for material control. • Classification of items as a, b, or c • Purpose: set priorities for management attention. • ‘A’ items: 20% of the items contributes, 80% value • ‘B’ items: 30 % of Items contributes , 15% Value • ‘C’ items: 50 % of Items contributes , 5% value • Three classes is arbitrary; could be any number. • Percents are approximate.

  38. +Class C +Class B 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class A Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items ABC Analysis Example

  39. ABC Classification • Class A • 5 – 15 % of units • 70 – 80 % of value • Class B • 30 % of units • 15 % of value • Class C • 50 – 60 % of units • 5 – 10 % of value

  40. 8. JIT CONTROL SYSTEM • Just in Time purchasing is the purchase of material in such a way that delivery of purchased items is assured before their use or demand.

  41. 9. VED Analysis • VED – Vital, Essential, Desirable – analysis is used primarily for control of spare parts. The spare, parts can be divided into three categories – vital, essential or desirable – keeping in view the critically to production.

  42. 10. FNSD Analysis • FNSD analysis divides the items into four categories in the descending order of their usage rate as follows: • ‘F’ means Fast moving items • ‘N’ means normal moving items • ‘S’ means slow moving items • ‘D’ means dead stock.

  43. 11. Perpetual Inventory System Perpetual Inventory is a system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balance. It aims at devising the system of records by which the receipts and issues of stores may be recorded immediately at the time of each transaction and the balance may be brought out so as to show the up-to-date position. The records used for perpetual inventory are: (i) Bin Cards; (ii) Store Ledger Accounts or Stores Record cards; (iii) The forms and documents used for receipt, issue and transfer of materials.

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