1. INVETORY MANAGEMENT
WHY

2. PURPOSE OF MAINTAINING INVENTORY
SATISFY CUSTOMER DEMANDS
AVOID STOCK OUTS
PROVIDE CUSHION FOR VARRYING DEMANDS & FLUCTUATING SUPPLIES
PROTECT AGAINST PRICE ESCALATION
AVAIL QUANTITY DISCOUNTS
OPTIMISE COST OF PROCUREMENT

3. CATAGORIES OF INVENTORY
RAW MATERIALS & COMPONENTS
CONUMABLES & SPARES
WIP ( WORK IN PROGRESS )
MATERIALS IN TRANSIT
FINISHED GOODS

4. ELEMENTS OF COSTS IN INVENTORY MGMT
ORDERING COST
(COST OF REPLENISHMENT ORDES)
INVENTORY CARRYING COST
STOCKOUT COST (COST OF UNDERSTOCKING)

5. ELEMENTS OF ORDERING COST
TENDERING & PROCESSING COST
STATIONARY & COMMUNICATION COST
FOLLOW-UP COSTS
INWARD RECEIPT & HANDLING COST
INSPECTION & VERIFICATION COST
SALARIES & WAGES OF PURCHASERS

6. ELEMENTS OF INVENTORY CARRYING COST
INTEREST ON CAPITAL
INSURANCE & TAX
STORAGE & HANDLING
MAITENANCE & PRESERVATION
DETERIORATION & OBSOLESCENCE
THEFT & PILFERAGE
WAREHOUSE RENTAL
SALARIES & WAGES OF STORES STAFF

7. MAX INV. LEVEL
100
QUANTITY 4
4 MONTHS 4
ANNUAL DEMAND=300

8. NUMBER OF ORDERS
PER ANNUM
AVERAGE
INVENTORY
INVENTORY CARRYING
COST
ORDERING COST
TOTAL ANNUAL COST
ONE ORDER PER ANNUM
150
2 x 150
= 300 75
375
TWO ORDERS PER ANNUM
2 x 75
= 150
300
THREEORDER PER ANNUM 50
2 x 50
= 100
225
325

9. WHAT DO WE OBSERVE HERE ?
INVENTORY CARRYING COST IS DIRECTLY PROPORTIONAL TO QUANTITY ON ORDER
ORDERING COST IS INVERSELY PROPORTIONAL TO THE QUANTITY ON ORDER
TOTAL COST INITIALLY TENDS TO DECREASE AND THEN INCREASES WITH INCREASE IN QUANTITY ON ORDER

10. TOTAL ANNUAL COST
COST
INVETORY
CARRYING COST
ORDERING COST
EOQ
ORDER QUANTITY

11. ECONOMIC ORDER QUANTITY (EOQ)
ANNUAL DEMAND IN QUANTITY : D
QUANTITY PER ORDER (ECONOMIC ORDER QUANTITY) : Q
ORDERING COST ( COST PER ORDER IN RUPEES ) : Co
INV. CARRYING COST IN RUPEES PER UNIT PER YEAR : Cc
NO. OF ORDERS PER ANNUM: D/Q
ANNUAL ORDERING COST: (D /Q ) x Co
AVERAGE INV. CARRIED DURING THE YEAR: (MAX + MIN) / 2
= (Q + 0 ) / 2 = Q / 2
COST OF CARRYING INVENTORY PER YEAR : (Q/2) x Cc

12. ECONOMIC ORDER QUANTITY (EOQ)
TOTAL COST ‘ C :
= ORDERING COST + INV. CARRYING COST
= ( D/Q ) . Co + ( Q/2 ) . Cc
AT EOQ O: ORDERING COST = INV. CARRYING COST
( D/Q ) . Co = ( Q/2 ) . Cc
Q X Q = 2 X D X Co / Cc
Q = √ ( 2DCo / Cc )
‘Q’ IS THE ECONOMIC ORDER QUANTITY

13. PROBLEM
ZEN BICYCLE LTD. SOURCES 3000 SEAT COVERS FOR ITS BICYCLES FROM OUTSIDE SUPPLIER.
ORDERING COST IS Rs 10 PER ORDER
INV. CARRYING COST PER UNIT PER YEAR IS Rs. 6
COMPANY HAS 300 WORKING DAYS
FIND:
EOQ
NO. OF ORDERS PER YEAR
TOTAL INVENTORY COST
NO. OF INVENTORY CYCLES IN A YEAR
DURATION OF INV. CYCLE

14. SOLUTION EOQ: Q = √( 2DCo / Cc ) = √( 2 X 3000 X 10 / 6 ) = 100
= 100
Q = 100 UNITS
NO. OF ORDERS PER YEAR:
3000 / 100 = 30
ANNUAL ORDERING COST = 30 X 10 = Rs 300
AV. INV. PER CYCLE= ( 100 X 6 ) / 2 = Rs 300
TOTAL COST = Rs Rs 300 = Rs 600
NO OF INV CYCLE PER YEAR (300 WORKING DAYS) =30
DURATION OF EACH CYCLE = 300 / 30 = 10 DAYS

15. PROBLEM
TRINITY HOSPITAL, BANGLORE SOURCES 20,000 SYRINGES EVERY YEAR FROM A LOCAL SUPPLIER
ORDERING COST PER ORDER IS Rs 100 AND INV. CARRY COST IS Rs 1 PER UNIT PER YEAR.
THE PRICE OF A SYRINGE IS Rs 5.
DETERMINE QUANTITY TO BE ORDERED EVERY TIME.
WHAT WILL BE TOTAL ORDERING COST AND TOTAL STORAGE COST DURING THE YEAR?
WHAT WILL BE THE TOTAL ANNUAL COST TO THE HOSPITAL ON SYRINGES

16. SOLUTION D=20000; Co= 100; Cc= 1 ; P=5 EOQ ‘Q’ = √( 2DCo / Cc )
= √( 2x20000 x100 / 1) = 2000 UNITS
TOTAL INV. CARRY COST:
(2000/2) X 1=1000
TOTAL ORDERING COST:
20000/2000 X 100 =1000
TOTAL ANNUAL COST:
= 20000X = 102,000

17. QUANTITY TIME Q MAX INV. LEVEL RE-ORDER POINT MIN. INV. LEVEL T T T L

18. MAX INV. LEVEL Q
RE-ORDER POINT
QUANTITY L L L T T T
TIME

19. MAX INV. LEVEL Q
RE-ORDER POINT
QUANTITY L L L T T T
TIME

20. MAX INV. LEVEL = SAFETY STOCK + RE-ORDER QUANTITY
RE-ORDER POINT= SAFETY STOCK + LEADTIME CONSUMPTION
RE-ORDER QUANTITY = EOQ L L L
S S
BUFFER STOCK OR SAFETY STOCK ==
MIN. INV. LEVEL

21. NEED FOR SAFETY STOCK STOCKOUT COSTS ARE VERY HIGH
TO TAKE CARE OF THE UNCERTAINTY OF DEMAND AND SUPPLY DURING THE LEAD TIME SAFETY STOCKS ARE MAINTAINED
SAFETY STOCK =
K X STD. DEVIATION OF LTD X √AVERAGE LEAD TIME
‘K’ : IS A FACTOR DEPENDING UPON CRITICALITY OF DEMAND
‘LTD’ ; IS AVERAGE DEMAND DURING THE LEAD TIME
GENERALLY VALUE OF ‘K’ VARRIES FROM 0.1 – AS IN FLG. TABLE:
CERTAINTY AND CRITICALITY
‘K’ SEVICE
LEVEL %
CERTAIN & UNCRITICAL
CERTAIN &
SEMI CRITICAL
UN CERTAIN &
CERTAIN & CRITICAL
UN CERTAIN & CRITICAL
SUPER CRITICAL
UNCERTAIN & SUPER CRITICAL

22. ESTIMATION OF SAFETY STOCK ( BASED ON STANDARD DEVIATION IN LEAD TIME DEMAND)
STANDARD DEVIATION IN DEMAND PER MONTH = 20
LEAD TIME =4 M0NTHS
STANDARD DEVIATION IN LEAD TIME DEMAND
SD LTD = SD OF DEMAND PER UNIT TIME X √ LEAD TIME
= 20 X √ 4 = 40
UNDER SUPER CRITICAL CIRCUM STANCES:
SERVICE LEVEL = 99.9 PERCENT
CORRESPONDING VALUE OF ‘K’ = 3
SAFETY STOCK = K X SD LTD
SAFETY STOCK = 3 X 40 = 120

23. LEVELS FOR INVENTORY CONTROL
MINIMUM INVENTORY LEVEL:
RESERVE + SAFETY STOCK
RE-ORDER LEVEL:
ROL = LEAD TIME DEMAND ( LTD )
+ RESERVE (R) + SAFETY STOCK ( SS )
RE-ORDER QUANTITY:
ROQ = EOQ
MAX INV. LEVEL = ROQ + RESERVE + SAFETY

24. Selective Inventory Control Techniques:
A B C : V E D : F S N & X Y Z Analysis

25. VITAL FEW : TRIVIAL MANY
A FEW CUSTOMERS ACCOUNT FOR MAJORITY OF SALES
A FEW PROCESSES ACOUNT FOR BULK OF THE SCRAP OR RE-WORK
A FEW NON-CONFORMITIES ACCOUNT FOR MAJORITY OF CUSTOMER COMPLAINTS
A FEW PRODUCTS ACCOUNT FOR MAJOR SHARE IN PROFITS
A FEW ITEMS OF INVENTORY ACCOUNT FOR BULK OF THE WORKING CAPITAL
STOCK OUT OF A FEW ITEMS ACCOUNT FOR SEVERE LOSS IN PRODUCTION
A FEW ITEMS OF INVENTORY ACCOUNT FOR MAJOR SHARE OF THE TOTAL INVENTORY COST
A FEW ITEMS OF INVENTORY DO NOT MOVE AT ALL
A FEW ITEMS ARE EXTREMELY DIFFICULT TO PROCURE WHILE OTHERS ARE EASILY AVAILABLE

26. TYPE OF ANALYSIS
CLASSIFICATION CRITERIA
BASIS OF
CLASSIFICATION
A B C ANALYSIS
V E D ANALYSIS
HIGH – MEDIUM - LOW VALUE OF ANNUAL CONSUMPTN.
VITAL –ESSENTIAL –DESIRABLE
FOR OPERATIONS
ANNUAL VALUE OF CONSUMPTION.
CRITICALITY OF USAGE
F S N ANALYSIS
H M L ANALYSIS
FAST- SLOW-
NON MOVING
IN CONSUMPTION
HIGH – MEDIUM –LOW
UNIT VALUE
RATE OF CONSUMPTION
UNIT PRICE OF THE ITEM
X Y Z ANALYSIS
S D E ANALYSIS
INVENTORY VALUE
SCARCE – DIFFICULT –EASY TO PROCURE
VALUE OF
INVENTORY
CONSTRAINTS IN PROCUREMENT

27. A B C ANALYSIS PARETO ANALYSIS ( ALFREDO PARETO ) 80 – 20 PRINCIPLE
CONTROL ON 20 PERCENT VARRIABLES CAN PRODUCE 80 PERCENT RESULTS

28. ITEMS ON INVENTORY 20 40 60 80
100
100 80 60
ANNUAL CONSUMPTION VALUE 40 20

29. MANAGERIAL DECISIONS BASED ON A- B – C ANALYSIS
A - CLASS :
HIGH
CONSUMPTION
VALUE ITEMS
B - CLASS :
MEDIUM
C - CLASS :
LOW
CONSUMPTION VALUE ITEMS
VERY STRICT CONTROL
NO OR LOW SAFETY STOCK
FREQUENT ORDERING OR STAGGERED DELIVERY
MODERATE CONTROL
MODERATE SAFETY STOCK
QUARTERLY ORDERING OR STAGGERED DELIVERY
LOOSE CONTROL
HIGH SAFETY STOCK
SIX MONTHLY OR YEARLY PURCHASING
MULTIPLE SOURCES
CLOSE DEMAND FORECAST
REDUCE LEAD TIME
CENTRALISED PURCHASING
TWO -THREE SOURCES
DEMAND FORECAST BASED
ON PAST CONSUMPTION
MODERATE LEAD TIME
CENTRALISED / DECENTRALISED PURCHASING
ONE - TWO SOURCES
APPROX. DEMAND FORECAST
LOW INTERNAL LEAD TIME
DECENTRALISED PURCHASING
MORE FREQUENT FOLLOW-UP
DEPLOY MATERIALS CHASERS
INVENTORY. CONTROL AT SENIOR MGMT. LEVEL
PERIODIC FOLLOW-UP
DEPLOY MATERIALS CHASERS FOR CRITICAL ITEMS
INVENTORY. CONTROL AT MIDDLE MGMT. LEVEL
LOW FOLLOW-UP
MATERIALS CHASERS NOT REQUIRED
INVENTORY. CONTROL DELEGATED TO LOWER MGMT. LEVEL

30. Item number
Annual usage ($)
Item Number
Annual Usage ($) 1 11 2 12 3 13 4 14 5 15 6 16 7 17 8 18 9 19 10 20

31. Item No
Annual Usage Value in Descending Order
Cumulative
Annual Usage
Classification 18
61000 A 4
50000
111000 13
42000
153000 10
15000
168000 11
13000
181000 2
12000
193000 8
11000
204000 B 16
10200
214200 14
9900
224100 5
9600
233700 17
4000
237700 19
3500
241200 20
2900
244100 C 3
2200
246300 7
2000
248300 1
1500
249800 15
1200
251000 9
800
251800 6
750
252550 12
600
253150

32. PROBLEM
CLASSIFY THE FOLLOWING ITEMS OF INVENTORY IN A B C CATEGORY BASED ON ANNUAL CONSUMPTION VALUE:
SOLUTION:
WORKOUT ANNUAL CONSUMPTION VALUE OF EACH ITEM
RANK THEM IN DESCENDING ORDER OF CONSUMPTION VALUE
SUMMATION OF INDIVIDUAL CONSUMPTION VALUES WILL GIVE
THE TOTAL INVENTORY CONSUMPTION VALUE DURING THE YEAR
ANNUAL
CONSUMPTION
CONSUMPTION
VALUE
CODE
PRICE
RANK
M 1
400 07
M 5
1950 11
M 6 40 10
M 9
1000 05
M 15 14 20
M 25
2400 07
M 30 08
160
M 2
800 06
M 7
100 07
M 13 50 09
TOTAL VALUE OF INVENTORY CONSUMPTION

33. A B C CLASSIFICATION BASED ON ANNUAL CONSUMPTION VALUE
SOLUTION:
A B C CLASSIFICATION BASED ON ANNUAL CONSUMPTION VALUE
WORKOUT ANNUAL CONSUMPTION VALUE OF EACH ITEM
RANK THEM IN DESCENDING ORDER OF CONSUMPTION VALUE
SUMMATION OF INDIVIDUAL CONSUMPTION VALUES WILL GIVE
THE TOTAL INVENTORY CONSUMPTION VALUE DURING THE YEAR
ANNUAL
CONSUMPTION
CONSUMPTION
VALUE
CODE
PRICE
RANK 5
M 1
400 07
2800
M 5
1950 11
214501 1
M 6 40 10
400 9
M 9
1000 05
5000 3
M 15 14 20
280 10
M 25
2400 07
16800 2
M 30 08
1280 6
160
M 2
800 06
4800 4
M 7
100 07
700 7
M 13
450 50 09 8
TOTAL VALUE OF INVENTORY CONSUMPTION
53960

34. TABULATE VALUES IN DESCENDING ORDER
COMPUTE CUMULATIVE VALUE WHICH WILL BE IN ASCENDING ORDER
CALCULATE ANNUAL CONSUMPTION OF EACH ITEM AS PERCENTILE
OF THE TOTAL ANNUAL INVENTORY CONSUMPTION
IDENTIFY TOTAL NUMBER OF ITEMS RESPONSIBLE
FOR 80% OF CONSUMPTION VALUE AND CLASSIFY AS ‘A’ ITEMS
NEXT IITEMS WHICH ARE RESPONSIBLE FOR 10-15% OF THE TOTAL INVENTORY CONSUMPTION VALUE CAN BE CLASSIFIED AS ‘B’.
THE REST ARE CLASSIFIED AS ‘C’ WHICH CONSTITUTE 65-70% OF TOTAL ITEMS & ACCOUNT FOR 5% OF ANNUAL CONSUMPTION
ANNUAL
CONSUMPTION
VALUE
CUMULATIVE
VALUE
CONSUMPTION.
AS % OF TOTAL
INV.CONSUMPTN
CODE
CLASS A
M 5
21450
21450
39.8
M 25
16800
38250
70.9 A
M 9
5000
43250
80.2 B
M 2
4800
48050
89.0 B
M 1
50850
2800
94.2 B
M 30
1280
52130
96.6 C
M 7
52830
97.9 C
700
M 13
450
53280
98.7 C
M 6
400
53680
99.5 C
M 15
100
280
53960 C

35. PROBLEM
CLASSIFY THE FOLLOWING ITEMS OF INVENTORY IN A B C CATEGORY BASED ON ANNUAL CONSUMPTION VALUE:
SOLUTION:
WORKOUT ANNUAL CONSUMPTION VALUE OF EACH ITEM
RANK THEM IN DESCENDING ORDER OF CONSUMPTION VALUE
SUMMATION OF INDIVIDUAL CONSUMPTION VALUES WILL GIVE
THE TOTAL INVENTORY CONSUMPTION VALUE DURING THE YEAR
ANNUAL
CONSUMPTION
CONSUMPTION
VALUE
CODE
PRICE
RANK
M 1
120 10
M 5
240 04
M 6
1700 O2
M 9
139 05
M 15 08
345
M 25
512 07
M 30 O1
1100
M 2
865 O3
M 7
730 06
M 13
637 09
TOTAL VALUE OF INVENTORY CONSUMPTION

36. MULTI – UNIT SELECTIVE INVENTORY CONTROL: – THREE DIMENSIONAL APPROACH ( MUSIC-3D )
HIGH CONSUMPTION VALUE AND
LONG LEAD TIME
SHORT LEAD TIME
LOW CONSUMPTION VALUE AND
SHORT LEAD TIME 1
CLOSE MONITORING OF STOCK LEVELS
ANNUAL CONTRACT WITH STAGGERED DELIVERY FROM MULTIPLE SOURCES
MAINTAIN GOOD SAFETY STOCK 2
JIT PROCUREMENT FROM DEPENDABLE VENDORS
HAVE LOW SAFETY STOCK 5
ANNUAL CONTRACT WITH STAGGERED SUPPLY FROM DEPENDABLE VENDORS 6
ANNUAL CONTRACT WITH STAGGERED SUPPLY
FROM LOCAL MKT.
CRITICAL 3
MEDIUM SAFETY STOCK 4
JIT PROCUREMENT CONTRACTS WITH LOCAL VENDORS 7
FROM DEPENDABLE SOURCES
8 .
RESORT TO LOCAL PURCHASES AS AND WHEN REQUIRED
NON-CRITICAL
STRICT CONTROL
MULTIPLE SOURCE
GOOD SAFETY STOCK
LOW SAFETY STOCK
MEDIUM CONTROL
LIBERAL
INVENTORY LEVEL
LOW ONTROL
LIBERAL INVENTORY LEVEL