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    Inventory Control

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    The document discusses inventory control and inventory systems. It defines inventory as raw materials, finished products, component parts, supplies, and work-in-process. An inventory system determines inventory levels, replenishment policies, and order quantities. The purposes of inventory are to maintain operations, meet demand variation, allow flexible production scheduling, provide a buffer for raw material delays, and take advantage of economic order sizes. Inventory incurs holding, ordering, and shortage costs. It also distinguishes between independent and dependent demand.

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    Inventory Control

    Uploaded by

    chintu_thakkar9
    336 views30 pages
    The document discusses inventory control and inventory systems. It defines inventory as raw materials, finished products, component parts, supplies, and work-in-process. An inventory system determines inventory levels, replenishment policies, and order quantities. The purposes of inventory are to maintain operations, meet demand variation, allow flexible production scheduling, provide a buffer for raw material delays, and take advantage of economic order sizes. Inventory incurs holding, ordering, and shortage costs. It also distinguishes between independent and dependent demand.

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    The document discusses inventory control and inventory systems. It defines inventory as raw materials, finished products, component parts, supplies, and work-in-process. An inventory system determines inventory levels, replenishment policies, and order quantities. The purposes of inventory are to maintain operations, meet demand variation, allow flexible production scheduling, provide a buffer for raw material delays, and take advantage of economic order sizes. Inventory incurs holding, ordering, and shortage costs. It also distinguishes between independent and dependent demand.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    336 views30 pages

    Inventory Control

    Uploaded by

    chintu_thakkar9
    The document discusses inventory control and inventory systems. It defines inventory as raw materials, finished products, component parts, supplies, and work-in-process. An inventory system determines inventory levels, replenishment policies, and order quantities. The purposes of inventory are to maintain operations, meet demand variation, allow flexible production scheduling, provide a buffer for raw material delays, and take advantage of economic order sizes. Inventory incurs holding, ordering, and shortage costs. It also distinguishes between independent and dependent demand.

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    Inventory Control

    Inventory System Defined


    Inventory
    raw materials, finished products, component parts, supplies, and work-in-process. An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.

    Purposes of Inventory
    1. To maintain independence of operations. 2. To meet variation in product demand. 3. To allow flexibility in production scheduling. 4. To provide a safeguard for variation in raw material delivery time. 5. To take advantage of economic purchaseorder size.
    3

    Inventory Costs
    Holding (or carrying) costs.
    Costs for storage, handling, insurance, etc.

    Setup (or production change) costs.


    Costs for arranging specific equipment setups, etc.

    Ordering costs.
    Costs of someone placing an order, etc.

    Shortage costs.
    Costs of canceling an order, etc.
    4

    Independent vs. Dependent Demand


    Independent Demand (Demand not related to other items or the final end-product) Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc.)
    5

    Classifying Inventory Models


    Fixed-Order Quantity Models ( Q system )
     

    Event triggered (Example: running out of stock) The sale of an item reduces the inventory position to the re order point.

    Fixed-Time Period Models ( P system )


    Time triggered (Example: Monthly sales call by sales representative)
    6

    Fixed-Order Quantity Models: Model Assumptions

    Demand for the product is constant and uniform throughout the period. Lead time (time from ordering to receipt) is constant. Price per unit of product is constant.
    7

    Fixed-Order Quantity Models: Model Assumptions

    Inventory holding cost is based on average inventory. Ordering or setup costs are constant. All demands for the product will be satisfied. (No back orders are allowed.)
    8

    Basic Fixed-Order Quantity Model and Reorder Point Behavior

    Number of units on hand

    Q R

    L
    Time R = Reorder point Q = Economic order quantity L = Lead time

    Cost Minimization Goal

    Total Cost
    C O S T

    Holding Costs Annual Cost of Items (DC) Ordering Costs


    QOPT Order Quantity (Q)
    10

    Basic Fixed-Order Quantity (EOQ) Model Formula


    Annual Annual Total Annual Cost = Purchase + Ordering + Cost Cost Annual Holding Cost

    D Q TC = DC + S + H Q 2

    TC = Total annual cost D = Demand C = Cost per unit Q = Order quantity S = Cost of placing an order or setup cost R = Reorder point L = Lead time H = Annual holding and storage cost per unit of inventory
    11

    Deriving the EOQ


    2DS 2(Annual Demand)(Order or Setup Cost) = = H Annual Holding Cost
    _

    QOPT

    Reorder point, R = d L
    _

    d = average daily demand (constant) L = Lead time (constant)


    12

    Safety Stock
    Quantity Maximum probable demand during lead time Expected demand during lead time

    ROP Safety stock reduces risk of stockout during lead time Safety stock
    LT Time
    13

    Single Period Demand

    probabilistic Model

    In a Single period demand , The unfulfilled demand can not be back ordered to the next period - For example : Demand for morning news paper , Demand for perishable products , tickets for journey

    14

    Classification of Inventory
    ABC Classification XYZ ( On the basis of Unit cost of Product ) FSN ( fast Slow Non moving items) VED ( Vital Essential Desirable)

    15

    INVENTORY CONTROL

    Inventory control Inventory is referred to accumulation of items or goods required by the company for its products or as an aid to production. A manufacturing firm generally carries the following 7 major classification of items with inventories: Major raw materials. Finished components as work-in-progress. Finished goods. Tools and fixtures. Supplies, e.g., welding rods, oil and grease, electrical supplies, office supplies, consumables, etc. Machinery spares such as bearings, bolts, oil seals, springs, etc.

    INVENTORY CONTROL

    Purpose of carrying inventory To gain economy in buying. To keep pace with changing market conditions. To satisfy demand during the period of replenishment. To carry reserve stocks to avoid stock-outs. To stabilize production. To prevent loss of sales. To satisfy other business constraints.

    Objectives of Scientific Inventory Control Service to customers. Effective use of capital. Economy in buying. Reduction of administrative workload. Minimisation of risk obsolescence and deterioration. Stability of production activity. Space to install scientific inventory control system.

    Facility Layout

    18

    INVENTORY CONTROL STEPS TO INSTALL A SCIENTIFIC INVENTORY CONTROL SYSTEM

    Facility Layout

    20

    EOQ MODEL Assumptions: The demand of the item occurs uniformly over the period at the known rate. The replenishment of stock is instantaneous. The price per unit is fixed and is independent of the order size. The cost to place an order and process the delivery is fixed and does not vary with the lot size. The inventory carrying charges vary directly and linearly with the size of the inventory and are expressed as a percentage of average inventory investment. The item can be procured in the quantities desired, there being no restriction of any kind. The item has fairly long shelf life, there being no fear of deterioration or spoilage.

    INVENTORY CONTROL Mathematical Treatment of the model: The symbols used Annual consumption of the item (units) Unit price (Rs.) Order quantity (units) Procurement cost per order (Rs.) Inventory carrying cost expressed as a Percentage of average investment .

    : : : : :

    S Cu q Cp I

    Preparation of model Two costs are involved for the inventory decisions : Procurement cost and Inventory carrying cost.

    INVENTORY CONTROL

    Annual Procurement Cost

    No. of orders per year

    Procurement cost per order

    = Annual Consumption Order quantity S x Cp = q

    Procurement cost per order

    INVENTORY CONTROL

    Annual Inventory Carrying Cost Annual Inventory Carrying Cost

    Average inventory investment

    Inventory carrying cost Inventor y carrying cost

    1 Order Price = x per 2 Quantity Unit q x Cu x i = 2 S q x Cp + q 2

    Annual = Inventory Carrying Cost

    Cu x i

    INVENTORY CONTROL To determine economic order quantity (qo) the quantity that minimises the total cost we must differentiate ATC with respect to decision variables q and set the first derivative to zero. d(TAC) = S . + Cu x i = 0 Cp dq 2 2q2S . Cp (When order quantity equal . q2o = EOQ) Cu . i then q = qo qo 2 . S . Cp = Cu . i

    INVENTORY CONTROL

    Therefore Economic order Quantity =

    x [ Annual Consumption (units)] x [ Procurement cost/order ] Price /unit x Inventory carrying cost

    INVENTORY CONTROL ILLUSTRATIONS


    A company uses 75 numbers of an item per month. Each unit cost the company Rs.25/-.The cost of ordering is Rs.36 and inventory carrying charges is 1.5% of average inventory investment per month respectively. In what economic lots should the item be purchased to minimize total cost? It minimizes waste by identifying the causes of excessive variability in the quality of product. Impellers are procured by the water pump manufacturer from a local firm and are consumed at an average rate of 500 numbers per month. If the procurement cost is Rs.36 per order and the cost of holding it in stock is Rs.1.20 per unit per year, determine the quantity that should be procured at a time to optimize the cost involved. If the consumption of the above item increases to 40 numbers per day and its actual inventory carrying cost is Rs.0.2 per unit per day, what shall be its revised EOQ quantity? A manufacturer of control panels spends Rs.3400 per annum on its purchasing activities. Rs.67200 is spent each year in maintaining inventory of Rs.4.21 lacs (expenses referred above are only the variable portion of the total expense).Around 850 orders are placed every year to replenish stocks of the various items. One of the items whose annual consumption is 9600 numbers is bought by the company at the rate of Rs.30 each. How frequently should the company receive the staggered deliveries and in what quantities?

    INVENTORY CONTROL ILLUSTRATIONS


    The requirements of a particular size of oil seal at an automobile firm is estimated at 40,000 numbers next year. The oil seal is available locally with a lead time of two weeks and it cost Rs.10 each. The cost of order writing, follow up, primary inspection and inward stores is computed at Rs.50 per order. The holding cost is estimated at Rs.2 per unit for storage plus 20% per unit per year on account of opportunity cost of the capital. a) b) How many units should the firm order at a time to optimize the inventory cost? What is the annual inventory cost?

    ABC Pump Company uses 60,000 valves per year and the usage is fairly constant at 5000 valves per month. Each valve cost the company Rs.1.50. The carrying cost for the company has been estimated at 15% of the average inventory investment. The cost to place an order and process the delivery is Rs.30. a) Calculate economic order quantity. b) What is stock turnover rate ignoring safety stocks if EOQ is ordered frequently? c) What will be the effect on total cost if stock turnover rate is reduced to one third by infrequent ordering?

    INVENTORY CONTROL ILLUSTRATIONS


    A manufacturer of a hand grinder requires a special roller bearing at the rate of 300 numbers per year. Each bearing cost the company Rs.36. The procurement cost and the inventory carrying cost have been calculated at Rs.30 and 20% respectively. If the supplier offers discount of Rs.2 per bearing on an order of 200 or above, should higher quantity be purchased? A chemical firm buys 2500 units of a particular item annually from a vendor at a cost of Rs.3 per unit. It has now received a revised price schedule from the vendor which is as follows: Price per unit Order quantity Less than 500 units Rs. 3 Between 500 and 1250 units Rs.2.90 1250 units and above Rs.2.85 The total of placing an order and executing the delivery once is Rs.25 and inventory carrying cost as a percentage of average inventory investment is 20%. Determine the economic order quantity of the item.

    INVENTORY CONTROL ILLUSTRATIONS


    Monthly consumption of an item having unit price of Re.1 has been estimated at 300 units. The inventory carrying cost and the procurement cost for the company have been computed at 18% and Rs.36 per order respectively. Stock records show that this item can normally be procured within a period of one month. If the company adheres to the policy of one month safety stock for all A and B category of items. Calculate      re-order quantity minimum level re-order level maximum level average inventory

    assuming re-order level system of replenishment.

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