1. Inventory Control

2. Inventory Control
Materials : raw, in process, finished packaging, spares, and others
Stocked in order to meet an unexpected demand or distribution in future
Stock on hand at a particular time : raw materials, goods in process of manufacturing, finished products, merchandise purchased for resale and the like
For financial statements and accounting records, the above in terms of amount assigned at the particular time

3. Inventory Management
Development and administration of policies, systems & procedures
To minimise total costs relative to inventory decisions & related functions such as
Customer service requirements, production scheduling, purchasing & traffic
Inventory control is primarily the administration of established policies, systems and procedures

4. Carrying and Ordering costs can be 25-30% of the total inventory cost
Inventory Costs
Ordering cost
Carrying cost
Out of stock or shortage cost
Capacity cost
Carrying and Ordering costs can be % of the total inventory cost

5. Inventory costs Ordering costs include
Staff salaries of purchase department
Traveling & purchase follow-up expenses
Cost of bills of payment
Cost of inward inspection
Inventory / carrying costs include
Expenses on warehouse personnel salaries
Cost of security for warehouses
Taxes & insurance
Interest on the value of average inventory
Cost of handling materials in stores
Obsolescence & pilferage
Cost of storage space for storing materials

6. Factors affecting Inventory Control
Type of product
Closer control required for materials of high unit cost, materials in short supply or rationed by government, materials for manufacturing of custom made items
Volume
Large volume of product needing only a few components vs. low product volume but needing a large number of components
Example : manufacture of a locomotive
Type of manufacturing
Continuous, needing uninterrupted supply of raw material vs. intermittent manufacture with greater flexibility

7. Inventory management process
Determination of optimum inventory levels & procedures for review and adjustment
Determination of degree of control required for best results
Planning and design of inventory control systems
Planning of inventory control organisation

8. Optimum control levels
Too much inventory locks up capital and increased carrying cost
Too little inventory may result in stock outs
Levels to be determined based on trend of sales, manufacturing cycle and lead time

9. Inventory systems
System responsible for ordering / receipt of goods, timing & placement of orders / follow up till receipt of materials
Fixed Order Quantity system or ‘Q’ system
Fixed Order Point system or ‘P’ system

10. Fixed Order Quantity system or ‘Q’ system
Fixed quantity of material ordered whenever stock reaches reorder level.
Stock to be within maximum and minimum limits
Material ordered in economic order quantity
Benefits
Attention devoted only when needed
Inventory investment controlled by planning maximum & minimum levels

11. FIXED ORDER QUANTITY OR ‘Q’ SYSTEM
*REORDER LEVEL/BUFFER STOCK/ LEAD TIME CONSUMPTION E G
MAXIMUM LEVEL
QUANTITY K
EOQ F H
*REORDER LEVEL
MINIMUM LEVEL/ SAFETY STOCK A B C D
LEAD TIME
TIME PERIOD

12. Fixed Order Quantity system or ‘Q’ system
Problems
Items cannot be grouped & ordered at the same time
Bunching of supplies by vendors
Economic order levels may be too small from supplier point of view
Orders raised at irregular intervals may not be convenient to suppliers
Missed reorder level might result in stock outs
Usage and lead times may be erratic

13. Fixed Order Point system or ‘P’ system
Stock position to be reviewed at regular intervals
Stocks ordered to last till next review and for the lead time
Frequency of review varies from firm to firm, importance of material, production schedule, market condition etc.

14. . . . . . . . FIXED ORDER POINT SYSTEM ‘P’ SYSTEM REVIEW FREQUENCY
REPLENISHMENT LEVEL
QUANTITY . . . . D E F
UNITS IN STOCK . Y3 Y1 . Y2 A . C B R1 S1 R2 S2 R3 S3
15 DAYS
REVIEW FREQUENCY

15. Fixed Order Point system or ‘P’ system
Benefits
Inventory costs are low
System appropriate for materials with irregular or seasonal usage
Limitations
Compels a periodic review making it inefficient
Varying consumption rate affects stock position during the review period
Quantities ordered not necessarily EOQ
Work load increases around review dates

16. Inventory control techniques
ABC (Always Better Control)
Inspired by Vilfred Pareto’s 80:20 theory
Application to inventory management by H. Ford Dickie
A class: 10% items 70% cost
B class: 20% items 20% cost
C class: 70% items 10% cost

17. ABC CLASSIFICATION OF INVENTORY
100 90
C CLASS 70% ITEMS, 10% COST
% OF TOTAL COST 70
B CLASS 20% ITEMS, 20% COST
A CLASS 10% ITEMS, 70% COST 10 30
100
% OF TOTAL NO. OF ITEMS

18. Inventory control techniques
Various other classifications
HML(heavy / medium / low consumption)
VED(vital / essential / desirable)
FSN (fast / slow / normal movement)
SDE (scarce / difficult / easily obtainable)
SOS (seasonal / off-seasonal availability)
GOLF (govt. Controlled / open market / local purchase / foreign market)
XYZ (according to numbers & value stored)

19. Economic order quantity (EOQ)
Used for fixed order quantity system
Large order quantities reduces ordering cost but carries a high carrying cost
Small lot buying reduces holding cost but adds to ordering cost
EOQ is the optimum order size at which the total cost comprising of ordering cost and carrying cost is minimum

20. ECONOMIC ORDER QUANTITY
Total cost .
Carrying cost
COST .
Ordering cost .
EOQ
ORDER QUANTITY

21. Economic Order Quantity
EOQ can be mathematically derived as
At EOQ point, carrying cost and ordering cost are equal
Carrying(Inventory cost) = (Q/2)*H,
Ordering cost= (D/Q)*S
Hence (Q/2)*H = (D/Q)*S, giving
Q= (2*D*S)/H, where Q,D,S and H are order quantity, annual demand, ordering cost per order and holding cost per unit of average inventory per annum respectively,
And H=C*I, where C is cost per unit and I is the rate of interest
Further, at this EOQ point, the Total Cost (TC) of procurement is minimum
TC = D*C + (D/Q)*S + (Q/2)*H

22. EOQ - Assumptions Constant demand for the period Constant lead time
Constant price/unit of product
Inventory holding cost based on average inventory
Constant ordering cost
Demand for the period to be fully met with no back orders allowed

23. EOQ Advantages Limitations
Optimised decision regarding quantity to be ordered & ordering frequency
Applicable to single item as well as group of items with similar holding and ordering costs
Total procurement cost lower than for any other system
Limitations
Results misleading in case of erratic usage, faulty basic information regarding ordering and carrying costs
Costly calculations

24. Maximum- Minimum technique
Used with manual inventory control
Minimum quantity established first
Maximum quantity is minimum plus optimum lot size
Requisition raised when inventory falls below minimum level
Maximum minus inventory after the last drawl is the order quantity
Order quantity not necessarily EOQ

25. Two- Bin system One of the oldest systems
One bin contains just enough stock to last for the lead time
Other bin contains stock to meet demand during replenishment period
Stock first issued from first bin
Replenishment order placed when bin empty
Issue continued from second bin
Generally used for ‘C’ class items
Ideal for uniform consumption rate & regular lead time.
Needs more storage space
Practical difficulties in keeping two stocks separated properly

26. Material Requirement Planning (MRP)
A computer based programme
Most helpful to the organisation
With finished goods or end products
Which are made from a number of components, and also
Which are subject to uneven or lumpy demand

27. Material requirement planning (MRP)
Main inputs for preparing MRP
Master Production Schedule
Shows the number of units to be produced in each period
Bill of Material
Shows the materials, parts and components needed for the product
Inventory records
Shows what is available in stock, on order etc useful for working out the net requirement of material to be ordered

28. MRP PROCEDURE MASTER PRODUCTION SCHEDULE BILL OF MATERIALS
GROSS REQUIREMENTS
CURRENT STOCKS
NET REQUIREMENTS
INVENTORY RECORDS
SCHEDULED RECEIPTS
MATERIALS TO ORDER
STANDARD ORDER INFORMATION
TIME AND QUANTITIES TO ORDER
MRP PROCEDURE

29. MRP – application in service industry
Hospitals
Hospitals use MRP for scheduling surgical operations and ensure that supplies and equipment are ready when needed
Schedule of
Surgery gives the planned operations in any period,
The bill of materials contains information about the equipment and resources needed for each type of surgery, and
Inventory file contains information about surgical instruments, disposable materials, reusable instruments, sterilized materials etc

30. MRP – application in Service Industry
Restaurants
Restaurants use MRP to schedule food and equipment. Menus give the meals planned for the restaurants, and the recipes for each meal provide the bill of materials
Universities
Universities’ mps show the number of students who will be graduating from each programme in each term. The bill of material describes the courses the students take in each term. MRP can find the number of teachers, classrooms, laboratories etc

31. Manufacturing Resource Planning (MRP II)
Financial and marketing functions are tied to operation function in MRP II
Production and finance work together to ensure availability of desired resources to meet the production requirement
Marketing and plant people update sales forecast and update master schedules
MRP II provides a convenient vehicle for coordinating the efforts of manufacturing , finance, marketing, engineering and personnel departments towards the common business plan

32. Just In Time Conceptually, JIT means
That virtually no inventories held at any stage of production, and
The exact number of units brought to each successive stage of production at the right time
Alternatively known as ZIPS (zero inventory production system), MAN (materials as needed), NOT (nick of time) or ZIN (zero inventory)
Concept originated from Motomachi plant of Toyota
Also followed by rank Xerox, Maruti, Food Speciality etc

33. Make or Buy decision
Economic considerations based on cost of manufacture vs. cost of buying
Non-economic considerations
Availability of supply & alternative sources of supply for components & sub- units
Desire to specialise in a particular field of manufacture
Control of trade/design secrets
Quality and reliability
R&D facilities available in-house
Reliability of external supplies
Delivery schedules to be met
Lead time required for procurement or in-house manufacture
Availability of manufacturing capacity in-house
Employee preferences

34. Inventory Management Inventory management helps the organisation in
Meeting expected demand
Absorbing demand fluctuations
Protecting against unexpected increase in demand
Taking advantage of quantity discounts
Protecting against possible price increase
Protecting against disruption in delivery from supplier

35. References Production & Operations Management : Aswathappa / Bhat
Modern Production / Operation Management : Buffa / Sarin
Production & Operation Management : Chary S.N.
Production Inventory Control Handbook : Green James H
Production Planning & Inventory Control: Narasimhan / Mcleavey / Billington
Operations Management : Donald Walters

36. INVENTORY CONTROL ORGANISATION
GENERALLY, INVENTORY CONTROL FUNCTION ASSIGNED TO MATERIALS MANAGEMENT OR PRODUCTION PLANNING & CONTROL DEPARTMENT
ASSIGNING INVENTORY CONTROL FUNCTION TO EITHER OF THE DEPARTMENTS DETERMINED BY NATURE OF FIRM’S PRODUCTION OPERATION, ITS PRODUCT & THE TYPE OF MARKET IT CATERS TO
ENGINEERING ORIENTED COMPANY PRODUCING SPECIALISED TECHNOLOGY PRODUCTS ON A JOB SHOP BASIS OPTS FOR INVENTORY MANAGEMENT WITH PRODUCTION DEPARTMENT
MASS PRODUCER OF A PRODUCT MAY PREFER TO INTEGRATE INVENTORY CONTROL WITH MATERIALS MANAGEMENT GROUP

37. STRUCTURE OF MRP COMPUTER PROGRAMME
ORDERS & FORECASTS
MASTER SCHEDULE
PRODUCT STRUCTURES & BILL OF MATERIAL
MRP PROGRAMME
INVENTORY STATUS
REPORTS: OPEN ORDERS
PLANNED ORDERS
NET REQUIREMENTS
LOAD & CAPACITY
INVENTORY
SPECIAL

38. INPUTS & OUTPUTS FROM MRP SYSTEM
TIMETABLE FOR ORDERS
MASTER PRODUCTION SCHEDULE
CHANGES TO ORDERS
TIMES FOR OPERATIONS
BILL OF MATERIALS
EXCEPTION REPORTS
MRP PROGRAMS
LEAD TIMES
PERFORMANCE REPORTS
OTHER ORDER INFORMATION
LONG TERM PLANS
INVENTORY LEVELS
INVENTORY TRANSACTIONS

39. MATERIAL REQUIREMENT PLANNING (MRP) - BENEFITS
MATERIAL SUPPLY IS DIRECTLY LINKED TO KNOWN DEMAND
STOCK LEVELS ARE LOWER, WITH SAVINGS IN CAPITAL, SPACE, ETC
THERE IS HIGHER STOCK TURNOVER
CUSTOMER SERVICE IS BETTER WITH NO DELAYS DUE TO SHORTAGES OF MATERIALS
DELIVERY TIMES ARE MORE RELIABLE AND FASTER
HIGHER UTILIZATION OF FACILITIES AS MATERIALS ARE ALWAYS AVAILABLE

40. MATERIAL REQUIREMENT PLANNING (MRP) - BENEFITS
LESS TIME SPENT ON EXPEDITING AND EMERGENCY ORDERS
BETTER PLANNING
MRP SCHEDULES CAN BE USED FOR SHORT-TERM PLANNING
MRP SHOWS THE PRIORITY OF JOBS SUPPLYING MATERIALS

41. MATERIAL REQUIREMENT PLANNING (MRP) - LIMITATIONS
MRP CANNOT BE USED IF
THERE IS NO MASTER PRODUCTION SCHEDULE
THE MASTER PRODUCTION SCHEDULE IS NOT ACCURATE
PLANS ARE CHANGED FREQUENTLY
PLANS ARE NOT MADE FAR ENOUGH IN ADVANCE
SYSTEMS CAN BE COMPLEX

42. When to make
Lower cost because firm does not have to pay vendor’s profit & overheads
Assurance of availability from within
Better control on quality
Availability of appropriate manufacturing equipment & expertise
Desire to preserve trade/design secrets
Savings on transportation cost

43. When to buy
Parts can be bought at a lower cost, higher quality, faster delivery than in-house
Requirement very small
Outside vendor can sell an item at a cost lower than that the purchasing firm would have to spend to produce it
The vendor holds a patent on the required item
Opportunity costs of producing much higher than that of buying
Vendors able to meet the requirements of the purchasing firm in terms of quantity, quality, price & delivery schedule