1. CHAPTER NO. 8 INVENTORY MANAGEMENT

2. INVENTORY MANAGEMENT
The dictionary meaning of inventory is “stock of goods, or a list of goods” consisting of various forms.Inventory serves as a link between production &
distribution processes. It serves the link between production & distribution processes. The investments
In Inventories constitutes the most significant part. It also provides cushion for future price fluctuations. One of the most expensive assets of many
Companies inventory system representing as much as 50% of total invested capital. Operations managers must balance inventory investment and customer service.

3. INVENTORY VARIOUS FORMS OF INVENTORY Raw material Work in progress
Consumables
Finished goods
spares
PURPOSE/ BENEFITS OF HOLDING INVENTORIES
Transaction motive
Precautionary motive
Speculative motive

4. TYPES OF INVENTORY Raw material Work-in-process
Purchased but not processed
Work-in-process
Undergone some change but not completed
A function of cycle time for a product
Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive
Finished goods
Completed product awaiting shipment

5. Types of Inventory Work in process Raw Materials Work in process
Finished
goods
Vendors
Customer
Work in
process

6. TYPES OF INVENTORY Inputs Outputs In Process Raw Materials Process
Purchased parts
Maintenance and Repair Materials
Outputs
Finished Goods
Scrap and Waste
Process
(in warehouses, or “in transit”)
In Process
Partially Completed Products and Subassemblies
(often on the factory floor)

7. FUNCTIONS OF INVENTORY
To decouple or separate various parts of the production process
To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers
To take advantage of quantity discounts
To hedge against inflation
To decouple or separate various parts of the production process
To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers
To take advantage of quantity discounts
To hedge against inflation

8. REASONS TO HOLD INVENTORY
Meet variations in customer demand:
Meet unexpected demand
Smooth seasonal or cyclical demand
Pricing related:
Temporary price discounts
Hedge against price increases
Take advantage of quantity discounts
Process & supply surprises
Internal – upsets in parts of or our own processes
External – delays in incoming goods
Transit
Reasons To NOT Hold Inventory
Carrying cost
Financially calculable
Takes up valuable factory space
Especially for in-process inventory
Inventory covers up “problems” …
That are best exposed and solved

9. Two Forms of Demand Dependent Independent
Demand for items used to produce final products
Tires stored at a Goodyear plant are an example of a dependent demand item
Independent
Demand for items used by external customers
Cars, appliances, computers, and houses are examples of independent demand inventory

10. INVENTORY HIDES PROBLEMS
Bad
Design
Poor
Quality
Lengthy
Setups
Machine
Breakdown
Inefficient
Layout
Unreliable
Supplier

11. TO EXPOSE PROBLEMS: REDUCE INVENTORY LEVELS
Bad
Design
Poor
Quality
Lengthy
Setups
Machine
Breakdown
Inefficient
Layout
Unreliable
Supplier

12. Remove Sources of Problems & Repeat the Process
Poor
Quality
Lengthy
Setups
Bad
Design
Machine
Breakdown
Inefficient
Layout
Unreliable
Supplier

13. Typical Inventory Carrying Costs
Costs as % of
Inventory Value
Housing cost:
Building rent or depreciation
Building operating cost
Taxes on building
Insurance
Material handling costs:
Equipment, lease, or depreciation
Power
Equipment operating cost
Manpower cost from extra handling and supervision
Investment costs:
Borrowing costs
Taxes on inventory
Insurance on inventory
Pilferage, scrap, and obsolescence
Overall carrying cost 6%
(3% - 10%) 3%
(1% - 4%)
(3% - 5%)
10%
(6% - 24%) 5%
(2% - 10%)
(15% - 50%)

14. The Material Flow Cycle
Cycle time
95% 5%
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Figure 12.1

15. RISK & COSTS OF HOLDING INVENTORIES
CAPITAL COSTS
STORAGE & HANDLING COSTS
RISK OF PRICE DECLINE
RISK OF OBSOLESCENCE
RISK OF DETERIORATION IN QUALITY

16. Nature of Inventory: Adding Value through Inventory
Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality
Speed - location of inventory has gigantic effect on speed
Flexibility - location, level of anticipatory inventory both have effects
Cost - direct: purchasing, delivery, manufacturing
indirect: holding, stock out.

17. INVENTORY MANAGEMENT
The investment in inventory is very high than in other assets, in most of the undertakings engaged in manufacturing, whole-sale & retail trade .In India study of 29 major industries has revealed that the average cost of materials is 64 paisa & labour and overheads is 36 paisa in a rupee.
In sugar industries, raw material cost is 68.75% of the total costs.
About 90% of the working capital is invested in inventories.
A proper planning of purchasing ,storing & accounting should form a part of inventory management. An efficient system of inventory management will determine
What to purchase
How much to purchase
From where to purchase
Where to store.

18. INVENTORY MANAGENENT To ensure continuous supply
To avoid over stocking & under stocking
Maintain investment in inventories
To keep material cost under control
To eliminate duplication in ordering stocks
To minimize the losses
To design proper organization for inventory management
To ensures perpetual inventory control
To ensure right quality goods at reasonable prices
To facilitate furnishing of data for short-term & long term.

19. TOOLS & TECHNIQUES OF INVENTORY MANAGEMENT
1. DETERMINATION OF STOCK LEVELS
2.DETERMINATION OF SAFETY STOCKS
3. PROPER SYSTEM OF ORDERING FOR INVENTORIES
4. ECONOMIC ORDER QUANTITY
5. ABC ANALYSIS
6. VED ANALYSIS
7. INVENTORY TURNOVER RATIO
8. AGING SCHEDULE OF INVENTORIES
9. CLASSIFICATION & CODIFICATION OF INVENTORIES
10. INVENTORY REPORTS
11. PREPETUAL INVENTORY SYSTEM
12. JIT CONTROL SYSTEM
13. LEAD TIME

20. 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.

21. ABC Analysis Example Percentage of dollar value Percentage of items 1020 30 40 50 60 70 80 90
100
Percentage of items
Percentage of dollar value
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
+Class C
Class A
+Class B

22. DETERMINATION OF 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

23. EOQ Lot Size Choice
There is a trade-off between lot size and inventory level.
Frequent orders (small lot size): higher ordering cost and lower holding cost.
Fewer orders (large lot size): lower ordering cost and higher holding cost.

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

25. Total Cost of Inventory – EOQ Model

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

27. CALCULATION OF ECONOMIC ORDER QUANTITY WHERE- A= ANNUAL CONSUMPTION S= COST OF REPLACING AN ORDER I= INVENTORY CARRYING COSTS OF ONE UNIT
EOQ=
2AS I
TC = Q
CoD 2
CcQ = Q2 Cc Q
TC
0 =
C0D
Qopt =
2CoD
Deriving Qopt

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

29. ECONOMIC ORDER QUANTITY
ORDERING COSTS
Cost of staff
Transportation expenses
Inspection costs
Cost of stationary, typing, postage etc.
CARRYING COSTS
Cost of capital invested
Cost of storage
Cost of loss of material due to natural factors
Insurance cost
Cost of spoilage in handling of material

30. Holding, Ordering, and Setup Costs
Holding costs - the costs of holding or “carrying” inventory over time
Ordering costs - the costs of placing an order and receiving goods
Setup costs - cost to prepare a machine or process for manufacturing an order

31. Production Quantity Model
An inventory system in which an order is received gradually, as inventory is simultaneously being depleted
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
d - daily rate at which inventory is demanded

32. PRODUCTION QUANTITY MODEL
Q(1-d/p)
Inventory
level
(1-d/p) Q 2
Time
Order
receipt period
Begin
order
receipt
End
Maximum
inventory level
Average

33. SAFETY STOCKS Safety stock Stockout Service level
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

34. Safety Stock
Reorder
point, R Q LT
Time
Inventory level
Safety Stock

35. Reorder Point
Quantity to which inventory is allowed to drop before replenishment order is made
Need to order EOQ at the Reorder Point:
ROP = D X LT
D = Demand rate per period
LT = lead time in periods

36. P-System Periodic Review Method
an alternative to ROP/Q-system control is periodic review method
Q-system - each stock item reordered at different times - complex, no economies of scope or common prod./transport runs
P-system - inventory levels for multiple stock items reviewed at same time - can be reordered together
higher carrying costs - not optimum, but more practical

37. VALUATION OF INVENTORIES
1. FIRST IN FIRST OUT METHOD
2. LAST IN FIRST OUT METHOD
3. AVERAGE PRICE METOD
4. BASE STOCK METHOD
5. STANDARD PRICE METHOD
6. MARKET PRICE METHOD

38. THANK YOU