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Inventory Control.

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Presentation on theme: "Inventory Control."— Presentation transcript:

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


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