1. CHAPTER V INVENTORY MANAGEMENT

2. Outline Inventory Definition and inventory types. Finance and other sides of inventory. Functions of Inventory. Inventory Costs. Inventory Management and Controlling. ABC Analysis Inventory Control Models

3. Inventory A list of goods on hand. Inventories are materials and supplies that a business or institution carries either for sale or to provide inputs to the production process. All materials, to support production, to meet customer’s requirements. Inventories are substantial parts of total assets.

4. Inventory Financial Side: Inventories represent 20% to 60% of total assets in balance sheet. In addition, there is a cost for carrying inventories, which increases operating costs and decreases profits. Thus, good inventory management is essential for a better financial position.

5. Inventory Production Side: Since inventory either a result from production or a support factor for production, two sides of inventory must be coordinated carefully. If we don’t have enough inventory at right time and place we cannot supply Customer Service, on the other hand,if we have excessive inventory, we will have to stand for additional costs.

6. Inventory Papers in cases Products in warehouse. Products sent in trucks. Screws, lubricants in maintenance warehouse.

7. Inventory Types Raw Material: Work-in-Process: Finished Good: Distribution Inventories Operational Supplies:

8. Inventory types Raw Material Inventories: There are raw materials and other supplies, parts and components, which enter into the product during the production process and generally form part of the product. WIP Inventories: These are semi-finished, work in progress and partly finished products formed at the various stages of production.

9. Inventory Types Finished Good: These are completely finished products ready for sales. In a manufacturing unit, they are the final output of the production process. Distribution Inventories: Finished goods located in the distribution system. Maintenance,repair and Operational Supplies (MRO): Items used in production but not become a part of main product.F or example; hand tools,spare parts, lubricants and cleaning supplies.

10. Stock or Inventory ? Stock is the monetary and physical elements in production. Inventory is used as a physical stock which is counted at the end of the year

11. Why do we have to make stock? Production is a continous process. Manpower and machines mustn’t be idle. To take the advantage of Economies of Scale. Fluctuations in demand necessitate to make stock. In the high levels of demand, we have to get stock. To prevent supply problems.

12. Objectives of inventory management Maximizing customer service: Minimizing cost-plan operation: (Operating Efficiency) Minimizing Inventory Investment: The higher inventory, the higher customer level on the other hand, the higher inventory the higher material cost!!! It is a paradox!!! The higher inventory, the higher customer level on the other hand, the higher inventory the higher material cost!!! It is a paradox!!! Minimizing risk and uncertainity. Prevent the risk of obsolescence. 12

13. Inventory Types based on Functionality Anticipation Inventory: Fluctuation Inventory: Lot-Size Inventory: Transportation Inventory: Hedge Inventory: Speculative Inventory: MRO:

14. Inventory types based on functionality Anticipation Inventory: They are built up in assumption of future demand. For example; they are created ahead of a peak selling season, a promotion program, vacation shut down e.t.c. The other aim to build up them may to reduce the costs of changing production rates.

15. Inventory types based on functionality Fluctuation Inventory(Safety Stock): It is held to cover random unpredictable fluctuations in supply and demand or lead time. If demand or lead time is greater than forecast, a stock out will occur. Safety Stock is carried to protect against this possibility. Its purpose is to prevent disruptions in manufacturing or deliviries to customers.It is also called buffer stock or reserve stock. Quality Problems Lead time fluctuations Equipment Problems

16. Inventory types based on functionality Lot-Size-Inventory: Items are purchased or manufactured in quantities greater than needed immediately create lot-size inventories. This is to take advantage of quantity discounts; to reduce shipping,clerical and set up costs.It is also called cycle stock. It is the portion of inventory that depletes gradually as customers’ orders come in and is replenished cyclically when suppliers’ orders are received.

17. Inventory types based on functionality Transportation-Inventory: They are also called pipeline or movement inventories. Hedge Inventory: The price of some products such as minerals and commodities fluctuates according to world supply and demand. If buyers expect prices to rise, they can purchase hedge inventory when prices are low. Speculative Inventory: MROs:

18. Inventory costs landed price. Purchase Cost: Price paid for a purchased item, which consists of the item and any other direct costs associated in getting them in to the plant. These could include such things as transportation, custom duties and insurance. The inclusive cost is often called landed price. 18

19. Inventory costs Carrying Cost: It includes all expenses incurred by the firm because of the volume of inventory carried. As inventory increases, these costs increases, as well. Carrying costs include some particular costs: Capital Cost: The interest income loss by not investing money Storage Cost:Space, Workers, Equipment Risk Cost: Loss of product value, damage, being stolen,deterioration 19

20. Inventory costs proportionally. Ordering Cost: Ordering costs are associated with placing an order either with the factory or supplier. It does not depend on quantity proportionally. They include the following costs: Production Control Cost: Set up Cost: Lost Capacity Cost: Purchase Order Cost 20

21. Inventory costs Stockout Cost: If demand during the lead time exceeds forecast, we can expect a stockout. It causes back-order costs, lost sales, and further lost customers Capacity-Associated Costs: When output levels must be changed, there may be costs for overtime,hiring,training,extra shifts, and layoffs.These costs can be avoided by levelling production by producing in slack periods for sale in peak periods. 21

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26. Abc Inventory Analysis 26 How well do we know the good in pur inventory? Strategy based on product category

27. Abc Inventory Analysis 1.What is the importance of the inventory item? 2.How are they to be controlled? 3.How much should be ordered at one time? 4.When should an order be placed? ABC analysis is helpful method to classify the items according to their importance. 27

28. Abc Inventory Analysis 1.What is the importance of the inventory item? 2.How are they to be controlled? 3.How much should be ordered at one time? 4.When should an order be placed? ABC analysis is helpful method to classify the items according to their importance. 28

29. 29 ProductNumber of Transportation CumulativeCategory 1XXXX150 A 2YYYY140290A 3ZZZZ80370A 4DDDD30400A 5GGGG20420B 6HHHH10430B 7TTTT10440B 8JJJJJ10450B 9LLLL10460B 10EEEE5465B 11SSSS5470B 12UUUU4474B 13KKKK4478C 14ABCD4482C 15EFGH4486C 16JKLM4490C 17NOPR2492C 18STUY2494C 19XYZT2496C 20AEDF2498C 21ASDH1499C 22SDER1500C 23TOPLAM500C A Group 500 x 80% B Group 500 x 15% C Group 500 x 5% A Group 4 Types 4/23 %18 B Group 8 Types 8/23 %35 C Group 11 Types 11/23 %47

30. Abc inventory analysis Group A : Group A : About 20% of the items account for about 80% of monetary usage. Group B: Group B: About 30% of the items account for about 15% of the monetary usage. Group C: Group C: About 50% of the items account for about 5% of the monetary usage 30

31. Abc Inventory Analysis A Items; 31 Do they important share on our turnover? Do you have to make inventory for them? Safety Stock? Where do you stock them? Are they the most demanded good?

32. Abc inventory analysis B Items; 32 Do they important share on our turnover? Do you have to make inventory for them? Safety Stock? Where do you stock them? Are they the most demanded good?

33. Abc inventory analysis C Items; 33 Do they important share on our turnover? Do you have to make inventory for them? Safety Stock? Where do you stock them? Are they the most demanded good?

34. Abc Inventory Analysis 34

35. Abc Inventory Analysis 1.Which material is more important for us? 2.How can we reduce inventory costs? 3.Which parts?Where will they be stocked? 4.Which type of material, how much stock? 35

36. Abc Inventory Analysis 36 TypeControl Level Stock InputInventoryFrequency of Check A TightDefinetely Accurate Not so Big Quantities Continuously B Not so tight AccurateEnoughFrequently C SlackBasicBig Quantities Scarcely

37. Abc Inventory Analysis(Advantages) Advantages: It is useful in sourcing value chain. Rescue us dealing with trivial material. Disadvantages: It may be hard to evaulate material accurately. 37

38. Abc Inventory Analysis (An Example) 38 Material PartAnnual Consumption Unit Price (1000 pb) Annual Cost(1000 pb)Sequence 3-32340,0000.728,0005 3-334195,0001.1214,5001 3-3354,0001 9 6-603100,0000.550,0003 06-6042,0001.42,80010 06-605240,0000.7168,0002 06-60616,0000.812,8006 12-15280,0000.648,0004 12-15310,0000.77,0007 12-1545,0000.94,5008 Total539,600

39. Abc inventory analysis(an example) 39 Material Part Annual Consumption Annual Cost (1000 pb) % Cost% Cumulative Cost Class 3-334195,000214,50039.8 A 06-605240,000168,00031.170.9A 6-603100,00050,0009.380.2B 12-15280,00048,0008.889B 3-32340,00028,0005.294.2B 06-60616,00012,8002.496.6C 12-15310,0007,0001.397.9C 12-1545,0004,5000.8398.73C 3-3354,000 0.7499.47C 06-60420002,8000.52100C 20 % 30 % 50 %

40. Methods of Evaluating Inventory FIFO: LIFO: Average Cost: Standart Cost: 40

41. Inventory Control Continuously Checking: Inventory is monitored every time. If inventory quantity goes down, order process starts. Control is realized by means of eye, two-boxes method, computer based data. Necessary for the material in group of A Risk of out of stock is minimized. 41

42. Inventory Control 42

43. Inventory Control Periodically Checking: Inventory is monitored in a definite frequencies. Suitable for B and C class of material. Material is ordered in a definite frequencies and in big quantities. It provides saving on transportation 43

44. Inventory Control 44