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INVENTORY MANAGEMENT. Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories,

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Presentation on theme: "INVENTORY MANAGEMENT. Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories,"— Presentation transcript:

1 INVENTORY MANAGEMENT

2 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

3 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

4 Definition of Inventory management It is the sum of value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semi processed and finished goods. Inventories 1.Production Inventories 2.MRO Inventories 3.In-Process inventories 4.Finished goods inventories.

5 Inventory Analysis Inventory planning and subsequent control of an inventory is accomplished on the basis of knowledge about each of the individual items and the finished products of which each is a part. Inventory Catalogue 1.it serves as a medium of communication 2. an inventory catalogue accrues to the inventory control operation it self.

6 Functions of inventories. It makes possible smooth and efficient operation of a manufacturing organization by decoupling individual segments of total operation. 1.Purchased part inventories 2.Inventories of parts and components 3.Finished goods inventories

7 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

8 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

9 Inventory Management in India

10 Inventory may be defined as sum of value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semi possessed materials & finished goods at any given point of time. These resources are called idle resources since they are idle they are kept in the stores.

11 These resources are maintained for operational smoothness. The size of inventory depends on internal lead time, suppliers lead time, vendors relation and availability of raw materials. Finished goods inventory are maintained to ensure free flowing supply of goods to customers.

12 Two factors which affect inventories are:- 1.Accuracy & detail of final forecast. 2.Availability of storage space.

13 Norms for inventory 1.The department set up monetary limits for investment in inventories. 2.They have to allocate the investments to various items and ensure smooth operations of the company. 3.While setting the norms involvement of people making the norms is desirable. 4.Departments like finance, production are included.

14 Peculiarities in India It operates in sellers market for purchase of goods. Indian industry tends to stress a lot on machine utilization. In India, inventory control technique do not run under free availability of goods

15 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

16 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

17 Classification of Inventories Production Inventory MRO Inventory (Maintenance Repair Operating Supplies) In-process Inventory Finished Goods Inventory

18 Forces Creating Various Types of Inventory Creating ForcesType of Inventory Uncertainties Batch / Lot Size Economics Time Transportation Time-processing Seasonality Varying activity rates Safety Stocks Cycle Stocks In-transit Work in Process Seasonal Stocks Decoupling Stocks

19 Three Components of Inventory Management Forecasting: How much do we need? when will we need it? Replenishment: How much should we order? When should we order? Inventory control: How much do we have on hand? How much do we have on order? How much have we sold?

20 Dependent and Independent Demand

21 Costs relevant for Inventory Decision Holding Costs : Capital costs, inventory service costs, storage space and risk costs. Shortage Costs: Penalty for not having inventory available when required. Acquisition Costs: Cost to order and acquire inventory. Control System Costs: Cost of administrating systems needed to manage inventory levels.

22 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

23 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

24 COSTS ASSOCIATED WITH INVENTORIES CARRYING COSTS ACQUISITION COSTS

25 CARRYING COSTS Carrying material in inventory is expensive. The annual cost of carrying a production inventory averaged approximately 25% of the value of the inventory.

26 CARRYING COSTS 1Opportunity cost of invested funds12 – 20 % 2Insurance costs 2 – 4 % 3Property taxes1 – 3 % 4Storage costs1 - 3 % 5Obsolescence and deterioration4 – 10 % Total carrying costs20 – 40 %

27 0 AC CC AnnualcostsAnnualcosts Inventory level (or order/delivery quantity) Relationship of inventory-related costs to inventory level (AC = acquisition costs; CC = carrying costs)

28 (carrying cost / year) = (average inventory value) x (inv. Carrying cost as a % of inv. value) (carrying cost / year) = (average inventory in units) x (material unit cost) x (inv. Carrying cost as a % of inv. value) CC = Q x C x I 2 Where CC = carrying cost/yr for the material in question Q = order or delivery quantity for the material, in units C = delivery unit cost of the material I = inventory carrying cost for the material, expressed as a % of the inventory value

29 Acquisition costs 1.A certain portion of wages and operating expenses of such departments as purchase and supply, production control, receiving etc. 2.The cost of supplies such as engineering drawings, envelopes, stationery, and forms of purchasing etc. 3.The cost of services such as computer time, telephone, fax etc.

30 It can be calculated as follows: (acquisition cost/year) = (no of orders placed/yr) x (acquisition cost per order) AC = U/Q x A Where, AC = acquisition cost /year for the material in question U = expected annual usage of the material Q = order or delivery quantity for the material A = acquisition cost/order or per delivery for the material.

31 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

32 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

33 Sr No.Type of ControlCriteriaApplication 1)ABC analysisAnnual Consumption value ofTo control inventory the itemof raw material & WIP inventory 2) XYZ analysisInventory value of items in To review the storesactual inventories their uses, etc. at scheduled intervals. 3) VED analysis Criticality of the itemTo determine the stocking level of spare parts for machines & equipments. 4) FSN analysisConsumption pattern of theTo control itemsobsolescence.

34 Sr No.Type of ControlCriteriaApplication 5) HML analysisUnit price of the itemTo control the purchases & to develop vendors. 6) SDE analysisPurchasing problemLead time analysis in regard to availability & purchasing strategies. 7) SOS analysisNature of supplies &Procurement & seasonalityholding stratergy for seasonal term. 8)GOLF analysisSource of supply of Procurement material strategy.

35 Advantages of selective control system Helps the material manager to exercise selective control and focus attention only on few vital items. Able to control inventories and thereby achieve management objectives. Results in proper inventory analysis & obsolete stocks are pinpointed. Results in reduced administrative costs & improve inventory turnover. Powerful approach in the direction of cost reduction as it is helps to control items with selective approach.

36 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

37 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

38 ABC Analysis What is ABC analysis? ABC analysis is a basic analytical management tool which enables top management to place the effort where the results will be greatest. The techniques tries to analyze the distribution of any characteristic by money value of importance in order to determine its priority.

39 ADVANTAGES OF ABC ANALYSIS This approach helps the material manager to exercise selective control and focus his attention only on few items when he is confronted with lakhs of stores items. By concentrating on A class items, the material manager is able to control inventories and is able to show Visible results in a short span of life. By controlling the A items, and doing a proper inventory analysis, obsolete stocks are automatically pinpointed.

40 ABC MECHANICS OF ABC ANALYSIS The mechanics of classifying the items into A, B and C categories is described here: 1.CALCULATE 2.SORT 3.PREPARE A LIST 4.COMPUTE A RUNNING TOTAL 5.COMPUTE AND PRINT

41 Cumulative % number CumulativeCumulative% value% valueCumulativeCumulative% value% value AB C

42 Basic principles of ABC analysis are: 1.The analysis does not depend upon the unit cost of the items but only on its annual consumption value. 2.It does not depend on the importance of the item. 3.The limits of ABC categorization are not uniform but will depend upon the size of the undertaking, its inventory as well as the number of items controlled.

43 ABC PURPOSE OF ABC ANALYSIS

44 A A items: High consumption value 1.Very strict control 2.No safety stocks 3.Frequent ordering or weekly deliveries 4.Weekly control statements 5.Maximum follow-up and expediting 6.Rigorous value analysis 7.As many sources as possible for each item 8.Accurate forecasts in material planning 9.Minimisation of waste, obsolete and surplus 10.Individual postings 11.Central purchasing and storage 12.Maximum efforts to reduce lead time 13.Must be handled by senior officers

45 B B items: moderate value 1.Moderate control 2.Low safety stocks 3.Once in three months 4.Monthly control report 5.Periodic follow-up 6.Moderate value analysis 7.Two or more reliable sources 8.Estimates based on past data on present plans 9.Quarterly control over surplus and obsolete items 10.Small group postings 11.Combination purchasing 12.Moderate 13.Can be handled by middle management

46 C C items : low consumption value 1.Loose control 2.High safety stock 3.Bulk ordering once in six months 4.Quarterly control reports 5.Follow-up and expediting in exceptional cases 6.Minimum value analysis 7.Two reliable sources for each other item 8.Rough estimates for planning 9.Annual review over surplus and obsolete material 10.Group positioning 11.Decentralized purchasing 12.Minimum clerical efforts 13.Can be fully delegated

47 ABC Objectives of ABC analysis Item no Item no Annual consumption value (Rs) No of orders Value per order Average inventory ,0004,0001, ,0001, , Total inventory Rs 8,125 Exhibit 1 Exhibit 2 Item no Item no Annual consumption value (Rs) No of orders Value per order Average inventory ,0004,0001, Total inventory Rs 4,917

48 Limitations of ABC analysis ABC analysis is based on grading the items according to the importance of the performance of an item, that is V.E.D.- Vital Essential and Desirable- analysis. Some times, through negligible in monetary value, may be vital for running the plant, and constant attention is needed.

49 Music – 3D Analysis Consumption Value Delivery Time Criticality

50 High Level Consumption Low Level Consumption Long Lead Time HLC&LLT critical HLC&LLT non- critical LLC&LLT critical LLC&LLT non- critical Short Lead Time HLC&SLT critical HLC&SLT non- critical LLC&SLT critical LLC&SLT non- critical

51 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

52 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

53 ECONOMIC ORDERING QUANTITY(EOQ) INTRODUCTION EOQ can be defined as that quantity which should be ordered during the lead time so that it becomes economic to order and the inventory carrying cost becomes minimum. When ordering quantity is less than EOQ, ordering cost will increase. When ordering quantity is more than EOQ, inventory carrying cost will increase Thus, EOQ refers to the quantity in which the ordering cost is equal to the holding cost (Inventory carrying cost)

54 GRAPHICAL DERIVATION OF EOQ Y TC HERE: EOQ = Economic ordering quantity TC = Total Cost COST ICC ICC = Inventory Carrying Cost OC = Ordering Cost OC O EOQ X ORDER QUANTITY

55 DERIVATION OF EOQ FORMULAE Annual Ordering Cost = Annual Inventory Carrying Cost A x Co = 0 + Q x i x Cc Q 2 Solving for Q Q x Q = 2 x A x Co i x Cc Q = 2 x A x Co i x Cc HERE : A = Annual Demand ; Co = Cost of ordering ; Q = EOQ ; i = Cost per unit ; Cc = Cost of carrying or ICC

56 PROBLEMS ON EOQ 1.Annual Demand = 20,000 units Ordering Cost = Rs. 100 ICC = 20 % Unit Price = Rs. 20 A.EOQ = 2 x A x Co I x Cc EOQ = 2 x 20,000 x x 0.20 EOQ = 1,000 units

57 2.In a leading biscuit manufacturing organization, the annual demand for corrugated boxes is 20,000. The cost of placing an order is Rs. 100 and the inventory carrying cost is 20 per cent. The price per box is Rs. 10. The supplier offers 1 per cent discount if 4,000 corrugated boxes or more are purchased and 3.5% discount if 10,000 units or more are purchased. What should be the ordering quantity and would you accept the discount? A. EOQ = 2 x A x Co I x Cc EOQ = 2 x 20,000 x x 0.20 EOQ = 1,414 units

58 Number of orders placed in the year = 20, = orders 1 ) 1% for 4,000 Savings - Inventory Carrying Cost (ICC) Savings = Discount + Cost of ordering Discount = 1 x 20,000 x = Rs. 2,000 Cost of ordering = [14.14 – (20,000/4,000)] x 100 = Rs. 914 Savings = Rs. (2, ) = Rs. 2,914 Inventory Carrying Cost (ICC) = ( 4,000- 1,414/2) x 10 x0.20 = Rs. 2,586 Rs. (2, ,586) = Rs. 328 Accept the offer

59 2) 3.5% for 10,000 Savings - Inventory Carrying Cost (ICC) Savings = Discount + Cost of ordering Discount = 3.5 x 20,000 x = Rs. 8,000 Cost of ordering = [14.14 – (20,000/10,000)] x 100 = Rs Savings = Rs. (7, ) = Rs. 8,214 Inventory Carrying Cost (ICC) = ( 10,000- 1,414/2) x 10 x0.20 = Rs. 8,586 Rs. (8, ,586) = - (Rs. 372) Reject the offer

60 LIMITATIONS OF EOQ Not suitable when annual demand fluctuates widely. Not suitable when cost per unit fluctuates widely.

61 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

62 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

63 Materials Requirement Planning (MRP) MRP is a computer based control system that determines how much of each material, any inventory item with a unique part / number, should be purchased or produced in each time period to support the master production schedule (MPS) - ( Newman, 1994)

64 MRP is, by necessity, a computer based system which is designed to: 1.Release production and purchase orders. 2.Ensure availability of materials, components and products. 3.Maintain minimum levels.

65 Major objectives of MRP are: 1.Improve customer service. 2.Reduce inventory costs. 3.Enhancing operating efficiency.

66 Elements of MRP

67 Orders/ forecast of service parts Inventory status file Master Production schedule Bill of Material file MRP system Inventory Transaction data Changes to plan Orders Planned order schedule Planning reports Performance reports Exception reports MRP computer programme inputsoutputs Primary outputs Secondary outputs

68 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

69 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.

70 P - SYSTEM Fixed Order Period System Not Suitable for A Class Items Extremely Useful for B & C Class Items Desired Inventory Level = Buffer stock + Safety stock + Reserve stock

71 Q- SYSTEM Fixed Order Quantity System Re-order point determined by Buffer stock, Reserve stock & Safety stock Suitable for A Class Items Requires continuous review of inventory

72 Buffer Stock: Average demand during average lead-time Reserve Stock: Variations in demand during average lead time are known as reserve stock depend on service level Safety Stock: Average demand obtained through multiplying average demand for maximum delay & probability of delay

73 Annual demand = 20,000 units; Standard deviation of demand per week = 50 units; Price per unit = Rs.10; Ordering cost = Rs.100; Inventory carrying cost = 20%; Average lead time = 4 weeks; Maximum delay =3 weeks; Probability of delay = 0.31; Service level = 95%(1.64)

74 Solution: Q System Order quantity = EOQ s*Cc = 2 * 20,000 * * 0.20 = 1414 units Re-order point = Buffer Stock + Reserve Stock + Safety Stock Buffer Stock = * 4 = 1540 units 52 Reserve Stock = 4*50*100 = 164 units 2*M*Co

75 Safety Stock = 20,000 *3 * = 358 units Re-order point = = 2062 units Solution: P System Review period = EOQ *52 weeks M = 1414 * 52 weeks = 3.7 weeks

76 Buffer Stock = 20,000 * 8 = 3080 units 52 Reserve Stock = 8 *50 *1.64 = 230 units Safety Stock = 20,000 *3 * 0.31 = 358 units 52 Desired Inventory Level = = 3668 units

77 Definition of inventories, inventory analysis and inventory catalog. Inventory management in India. Classification of inventories, forces creating various hypes of inventories, safety stock. Cost associated with inventories. Types of selective inventory control and advantages of selective control. ABC analysis. EOQ. MRP. P & Q systems.


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