1. INVENTORY MANAGEMENT

2. Inventory Management
It is the most important constituent of a supply chain network of an organisation.
Inventory Management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale.

3. The act or manner of managing, handling, directing or controlling the flow of inventory.

4. Definition
According to Donald Waters "Stock consists of all the goods and materials that are stored by an organization. It is a store of items that is kept for future use. An inventory is a list of the items held in stock".
According to Gordon Carson ”Inventory control is the process whereby the investment in materials and parts carried in stocks is regulated, within pre-determined limits set in accordance with the inventory policy established by the management .”

5. Motives of Holding Inventory
1. Transaction Motive
2. Precautionary Motives
3. Speculation Motives

6. 1. Transaction Motive To meet Unpredictable demand of the Customer
To achieve Economies of Scale
Seasonal Availability
Favorable Market Conditions

7. 2. Precautionary Motives
Hedge for uncertainty
To maintain safety stock
To cover for Errors

8. 3. Speculation Motives
It is defined as an attempt to generate profit by trading in inventory without processing it.
When raw material are available at favorable market conditions, an organization buys more than its requirement.
The surplus material so purchased is kept as stock to be further sold when prices rise in future.

9. Objectives of Inventory Control
1. Reduction in cost
By ensuring smooth and uninterrupted flow of production
Guaranties economies of scale
Help in taking benefits of quantity discount
2. Ensure investment of optimum capital
Ensures that stock is kept only of required minimum quantity
Helps in increasing inventory turnover leading to minimum investment in inventory.

10. 3. Classification of Inventory
Helps inventory manager to concentrate on the stock that constitutes highest proportion of total cost
4. Smoothen the Production Process
Continuous supply of raw material is required
In absence of it, the production may stop which will lead to escalation of cost.

11. 5. Help Reduce losses 6. Systematic Record
Helps in proper maintenance of inventory an avoid losses due to obsolescence, deterioration, leakage and evaporation
6. Systematic Record
Helps top management to make proper plan for its best usage and maintenance

12. Components of Inventories
1. Raw material and purchased parts
- Raw materials are used by manufacturer to convert them into components, sub assemblies and finished goods.
2. Work in Progress
- The raw material in the incomplete production process
- It includes the full cost of raw material that has been partially converted and cost of labour and overhead directly apportioned in it.

13. Finished Goods
The finished Goods are the product that are the result of production process. The stock of finished goods is maintained at the following two levels:
a. By Producer
b. By Retailers

14. 4. Maintenance, Repair and Operating Equipment's (MRO)
a. MRO items are used in the production process but does not become part of the Finished goods.
b. They are required to keep machines and plant in the working order.

15. Types of Inventory 1. Buffer Inventory 2. Seasonal Inventory
3. Cycle Inventory
4. De-Coupling Inventory
5. Pipeline Inventory

16. 1. Buffer Inventory
Buffer Inventories are held to protect against uncertainties of demand and supply.
It is defined as a supply of inputs held as a reserve in case there are future demand and supply fluctuations.
Hence, It is a minimum level of inventory maintained by the organizations to meet unforeseen demand.
It is also known as Buffer Stock or Safety Stock.

17. 2. Seasonal Inventory
Seasonality in demand is absorbed using inventory.
These inventories are carried to compensate for differences in the timing of supply and demand, and to smooth out the flow of products throughout the supply chain.

18. 3. Cycle Inventory
When the same production process is used to produce more than one category of products, then an organisation has to manufacture or decide a batch size that is sufficient to meet the demand till the time production of that product happens again in system.

19. 4. De-Coupling Inventory
De-Couples means reducing the dependence of one machine on the other in a sequential production process.
Complexity of production control is reduced by splitting manufacturing into stages and maintaining inventory between these stages.

20. 5. Pipeline Inventory
Inventories that are still in transit that have yet to reach their ultimate destination.
The goods that are in transit means that are travelling from production plant to distributor’s location are not available for sale.
Formula to calculate Goods in Transit are :
Goods in Transit (in units) = Transit Time (in days) X Demand per day

21. Types of Inventory Costs
1. Purchase Price of Material or Components
2. Carrying Cost
3. Ordering Cost
4. Shortage Cost

22. 1. Purchase Price of Material or Components
The first cost involved in inventory is price paid for the raw material or Components purchased from outside.
The purchase price includes the cost of freight, insurance and taxes.
In case of technical nature, it includes cost of testing, certification and inspection.

23. 2. Carrying Cost
It is the cost of holding the inventory in the store. It includes:
Opportunity cost of money locked up in inventory
Cost of handling material
Cost of storage
Cost of obsolescence, theft, breakage and shrinkage
Depreciation of warehouse and equipments

24. 3. Ordering cost
It is the cost of placing a new order. Every time when material reaches the reorder level, a new order of the same is to be placed with suppliers. This cost includes:
Cost of Preparing order
Cost of Communication
Cost of Indentifying the supplier
Cost of Transportation and unloading at the store
Cost of documentation, receiving, testing and certification

25. 4. Shortage Cost
Sometimes demand exceeds supply and company is not in a position to immediately fulfill the demand. This is known as shortage situation. It involves:
Higher cost of Transportation
Loss of customer/ profits
Loss of Brand and Goodwill
Higher prices for additional supplies
Penalty depending upon the urgency of the goods or requirements

26. Inventory Management Fundamentals
Inventory Management system is the process of monitoring and controlling that right material in right form at right costs, reaches the right customers at the right time and place.

27. Inventory Management System Comprises
Economic Order Quantity (EOQ)
Quantity Discount
Price Break Method
Maintenance of Stock Level in the Organization
Knowledge of Lead time
Just in Time Inventory (JIT) System
EOQ when shortages are allowed
Inventory Classification System

28. EOQ ( Economic Order Quantity)
EOQ is a number of units that an organization should order each time a requisition of material is to be made to the supplier. EOQ is that amt. of quantity ,if ordered will result in minimization of total cost keeping in view certain assumptions.

29. Assumptions…
Annual demand is uniform , constant and continous.
The lead time is constant and known.
There is no constraint about how many times an order is made.
There is no constraint about the holding the purchased inventory in the stock.
The cost of order is constant and is not dependent on the size of order.
No quantity discount is available.
As soon as the quantity reaches reorder level, an EOQ order is placed.

30. a)Carrying or Holding Cost :
It refers to the cost of holding the inventory in store.
Calculated as a %age of purchase price
Higher the quantity ordered, higher will be the carrying cost .
Total Carrying Cost : EOQ Carrying cost per unit 2

31. cost associated with placing an order
b) Ordering Cost:
cost associated with placing an order
Cost remain same regardless of the magnitude of the order.
Total ordering cost = D Ordering cost per order
EOQ

32. EOQ MODEL

33. QUANTITY DISCOUNT
Discount offered by the supplier on buying a specific quantity of material, is Quantity discount.
If discount is offered, it becomes important to compare the cost with discount, without discount and with EOQ cost.
Objective of enterprise is to buy Quantity Of Material that minimizes Total Cost.

34. NUMERICAL PROBLEMS QUES.1
A Factory manufacturing Hard Disk buys microchips at rs.1000 per unit from the supplier. On Jan1, 2016, the factory received an offer of 20% discount on order of 300 or more units. The Annuals Sales of Hard Disk is 600 units, the Ordering Cost per order is rs.900 and the Avg. Holding Cost per unit per annum is estimated to be rs.108 per unit. Should offer of Discount be accepted ?

35. QUES.2
A Company uses 8000 units of product as Raw Material, costing rs.10 per unit. The Administrative Cost per purchase is rs.40. The Holding Costs are 28% of Avg. Inventory. The Company is following an Optimal Purchase Policy and places orders according to EOQ. It has been offered a Qty. Discount of 1% if it purchases its entire requirements only four times a year. Should the Company accept the offer of Qty. Discount of 1% ?

36. PRICE BREAK METHOD
When Quantity Discount offers are available, then while making an appropriate decision as to whether the discount offer should be accepted or not, Price Break Method is used.

37. PRICE BREAKS (discount available)
One Price Break Multiple Price Break
(single discount (more than one
offer available) discount offer
available)

38. ONE PRICE BREAK METHOD STEP1 STEP2 STEP3
Compute EOQ for each discount price, starting from the least cost price offer.
STEP2
Now calculate EOQ using the next least cost price offer available (if EOQ < minimum quantity eligible for discount, in step1)
STEP3
Compare the cost in EOQ at Step2 with cost at Step1. The quantity corresponding to the minimum Total Cost will be the Optimal Quantity to order.

39. QUES.1 Find EOQ for a product for which the price break is given as:
Qty Unit Cost (Rs.)
0 =< q <
400 =< q

40. MULTIPLE PRICE BREAK METHOD
STEP1: Compute EOQ for each discount price, starting from the least cost price offer.
# EOQ falls within quantity available for discount , we will choose that and stop here.
# EOQ< Minimum qty. eligible for discount, then we will move to next step.

41. STEP2: Now calculate EOQ using the next least cost price offer available ( at which max. discount offer is available ).
STEP3: Compare the cost of feasible EOQ (which falls within the eligible qty. available for discount ) with the cost of all adjusted EOQs.
The qty. corresponding to the min. total cost will be the Optimal Qty. to Order.

42. NUMERICAL PROBLEMS
QUES.1 Find the Optimal Order Qty. ( EOQ ) for a product where Annual Demand is 500 units, Cost of Storage per unit per year is 10% of cost of a unit and Ordering Cost is rs.180. The units costs are: QTY. UNIT COST (Rs.) 0 =< q < =< q < =< q < =< q 24.40

43. Qty. (units) Unit Cost (Rs.) q < 500 1 500 =< q < 1000 0.95
QUES.2
Find EOQ for a product for which following data is given:
Annual Demand = 100 units per week
Ordering Cost = Rs. 300 per order
Carrying Cost = 10% per
Qty. (units) Unit Cost (Rs.)
q <
500 =< q <
1000 =< q

44. Maintenance of Stock Level in the Organisation
(a)Maximum Level
(b)Reorder Level
(c)Safety Stock Level
(d)Average Stock Level

45. (a)Maximum Level
It is the maximum quantity of stock that an organization should keep. The following points should be kept in mind while fixing maximum level.
Reorder Level
Economic Order Quantity
The rate of consumption of material
Lead time
Carrying cost of inventory
Market Environment
Availability of financial Resources
Risk of evaporation, Deterioration or Obsolescence
Stability or non stability of prizes of raw material
Maximum Level = (Reorder Level + Reorder Quantity)-(Minimum Consumption × Minimum Reorder Period) OR
Maximum Level = Safety Stock+ Reorder Quantity

46. (b)Reorder Level or Reorder Point
Reorder Level is a point at which fresh order for the supply of the material should be placed. Reorder level is always set above minimum level.
It is affected by factors:-
Rate of consumption of material
Lead Time
Minimum Level
Reorder Level = Maximum Consumption × Maximum Reorder Period) Or
Reorder Level = Safety Stock + (Average Consumption per day × Average Lead Time)

47. (c)Safety Stock Level
It is the level below which the stock of an organisation should not go. It must be present with the organisation.
Relationship with suppliers
Minimum order size fixed by the suppliers
Consumption rate of materials
Time to get deliveries
Formulae for calculating safety stock level are:-
In case of Variation in demand
Safety Stock Level = (Maximum consumption Rate –Average consumption Rate) × Lead Time

48. In case of Variation in lead time Or
In case of Variation in lead time
Safety Stock Level = (Maximum Lead Time-Average Lead Time)× Average Consumption Rate
In case of variation in both demand and lead time
Safety Stock Level = (Maximum consumption Rate × Maximum Lead Time) – (Average consumption Rate × Average Lead Time)

49. Types of Lead Time Raw Material Lead Time Finished Goods head Time
Pre Ordering Processing by Post Order Preproduction Production Post-
Process Raw Material Processing by process Process Production
Supplier Manufacturer Process

50. A. Raw Material Lead Time
It is the total time taken by the supplier to deliver raw material and components to the manufacturer.
(a) Pre Ordering Process-
It is the time taken by the manufacturer to order the goods to the suppliers . It includes:-
Receiving requisition
Preparing details and receiving invoice from customers
Making a contract
(b) Processing by raw material supplier-
After receiving the order, supplier will perform the following function-
Preparing a Purchase order
Order Entry in the system
Production and Fabrication
Packaging
Transportation

51. (c) Post order processing by Manufacturer-
Receiving the Goods
Unloading
Inspection and Testing
Stacking in the Store
Raw Material Lead Time = Pre Ordering Process + Processing + Post Order Processing

52. B. Finished Goods Lead Time
It is the total time taken by the manufacturer to deliver the finished goods to the retailer/customer. (a) Pre Production Process- It is the time taken by manufacturer after receiving the order but before the start of the production. (b) Production Process- It is the time taken by the production process to convert the raw materials into finished products. (c) Post Production Process- It includes the packing, transportation and receiving of the finished goods by the warehouse.
Finished Goods Lead Time = Pre Production Process+ Production + Post Production Process

53. Just in Time Inventory (JIT) System
Just in time is a philosophy that concentrates on supplying product of best quality in exact quantity at a right time and place.
It ensures supply of goods and material in such a way that total cost is minimized.
JIT is an inventory philosophy in which materials are bought and processed at the demand of the customer.
The philosophy is different from traditional system as traditionally a buffer or inventory is created between all the stages of supply chain.
In JIT inventory model, goods and raw material are issued on request and no stock is maintained in between.
JIT reduces the need of keeping inventory to a great extent.

54. Traditional Inventory Model
Storage Raw Material
Storage Finished goods
Supplier
Plant
Wholesaler
Storage Finished goods
Retailer
Customer

55. JIT Inventory Model JIT JIT JIT JIT Suppliers Plant Wholesaler
Retailer
Customers

56. Elements of JIT 1. Pull Effect- 2. Kanban-
In JIT the goods are transferred from one stage to another on the basis of demand raised by it.
The whole supply chain network should work backward , this means customer to retailer to wholesaler to manufacturer to suppliers.
2. Kanban-
It is a card that is used to communicate message to the upper work station to transfer a standardized quantity of a specific unit mentioned on it to the next work station.
No kanban means no supplies.
Kanban’s are mainly of main types-
Withdrawal kanban’s
Production kanban’s

57. 4. The Uniform Plant Loading or Levelled Scheduling-
3. Eliminates wastes-
JIT system has identified Inventory waste, Transportation waste, Waste of waiting time, Waste from overproduction, Waste of motion, Processing waste, Waste from product defects.
4. The Uniform Plant Loading or Levelled Scheduling-
Traditional production schedule plant is producing different products each day but uniform plant loading has resulted in the uniform production schedule for a planned time period.
5.Short Set up Time-
In JIT various equipments, methods and machines should be tried to reduce the setup time as much as possible.
Set up times include cleaning, oiling, changing and repairing the machines.

58. 6. Small Production Lots-
It reduces the lead time and ensures prompt delivery of goods to customers.
Immediate feedback reduces the chances of defectives and reduce losses.
7. Plant Layout-
In this layout, the machines that produce homogenous products are divided into various groups and separate section or cells are assigned to each group.
It reduces the work in progress and increases machine utilization.
8. Respect for people-
Workers work in teams and are trained to operate various machines. They are made aware that it is not about performing a task but it is about making a world class product at a lowest possible cost.

59. Advantages of JIT Less chances of obsolescenes Reduction in lead time
Less requirement of working capital
Less carrying cost
Less storage space
Early detection of errors

60. Limitations of JIT Complicate system Difficulty to handle big order
High dependence on suppliers
Employees attitude

61. Inventory Classification System…

62. 1. ABC Classification… Invented by : Pareto
According to him, a small fractions of items accounts for a significant portion of total inventory cost and a large proportion of inventory constitutes a very small part of the total cost . Hence inventory should be classified on the basis of its usage value .

63. `A’ category  items – 10% to 20% of the items accounts for 70% to 80% of the annual consumption value of the items.
‘B’ category  items – 25% to 35% of the items accounts for 25% to 35% of the annual consumption value of the items.
‘C’ category items - 50% to 60% of the items accounts for 5% to 15% of the annual consumption value of the items.

64. Advantages : Limitations :
It ensures control by exception.
It helps in releasing money stuck in inventory .
Leads to less requirement of manpower.
Limitations :
It takes into account only usage or monetary value of stock into account.
It may lead to huge losses.
It is not easy to categorize all the inventory items in terms of their value.

65. 2.HML Classification…
In HML classification goods are classified on the basis of their unit value. They are classified into three categories :
H= High value items.
M= Medium value items.
L= Low value items.

66. 3.VED Analysis…
VED classify material on the basis of their importance for the operation . This analysis is done for spares and other goods critical for continuous flow of operations . These are divided into three categories :
V= Vital
E= Essential
D= Desirable

67. V –Vital:
Vital are those components without which production cannot even run for a second.
E- Essential:
Essential are those spares without which function can run for few hours .
D- Desirable:
Desirable are those whose non supply even for few days will not result in stoppage of production .

68. 4.SDE Analysis…
SDE analysis is relevant when the organization is facing a problem of procurement.
S- Scarce: The material that are scarce and available for short span of time .
D-Difficult: The goods which are produced by few suppliers that too are located at distant place.
E-Easy: The goods that are easily available in the market place.

69. 5.GOLF Analysis…. G= Government supplies O= Open market supplies
GOLF stands for
G= Government supplies
O= Open market supplies
L= Local supplies
F= Foreign supplies

70. 6.FNSD Analysis…
In FNSD analysis inventory is classified on the basis of consumption as follows:
F- Fast moving stock : its consumption rate is very high.
N- Normal moving stock : It is consumed normally within the year .
S- Slow moving stock: It is consumed within two years.
D- Dead moving stock: It is that stock which is lying in store but is not being used.

71. In this items are classified on the basis of season : S-Seasonal items
7.S-OS Classification…
In this items are classified on the basis of season :
S-Seasonal items
OS-Off seasonal items (items available throughout the year)