1. Supply Chain Management
Inventory Control and Management
Sana Ullah Khan

2. Inventory
Inventory: the stock of any item or resource used in an organization.
Inventory system: the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.
It is a good idea to try to get your inventory down as far as possible
The average cost of inventory in the United States is 30 to 35 percent of its value

3. Purposes of Inventory
To maintain independence of operations; e.g. to reduce number of production setups.
To meet variation in product demand
To allow flexibility in Production scheduling
To provide a safeguard for variation in raw material delivery time
To take advantage of economic purchase-order size

4. Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple/ Separate operations
To protect against stock-outs
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5. Functions of Inventory (Cont’d)
To take advantage of order cycles
To help evade against price increases
To permit operations
To take advantage of quantity discounts
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6. Objective of Inventory Control
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Level of customer service
Costs of ordering and carrying inventory
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7. Effective Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
A classification system
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8. Key Inventory Terms
Lead time: time interval between ordering and receiving the order
Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year
Ordering costs: costs of ordering and receiving inventory
Shortage costs: costs when demand exceeds supply
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9. Inventory Costs 1. Holding (or carrying) costs
Costs for storage, handling, insurance, breakage, taxes and so on
2. Setup (or production change) costs
Costs for arranging specific equipment setups, and so on
3. Ordering costs
Costs of placing an order(managerial and clerical costs)
4. Shortage costs
Costs of running out

10. Independent demand is uncertain. Dependent demand is certain.
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
Dependent Demand
Independent demand is uncertain. Dependent demand is certain.
Inventory: a stock or store of goods
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11. Independent Versus Dependent Demand
Dependent demand: the demand for a product or service caused by the demand for other products or services.
Usually a higher-level item of which it is part
Independent demand: the demand for a product or service that cannot be derived directly from that of other products.
For example, a workstation may produce many parts that are unrelated but meet some external demand requirement
Which demand is difficult to forecast??????

12. Types of Inventories Raw materials & purchased parts
Partially completed goods called work in progress
Finished-goods inventories
(manufacturing firms) or merchandise (retail stores)
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13. Types of Inventories (Cont’d)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers
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14. Categories of Inventory
1- Raw materials & purchased parts inventory
Raw materials typically refer to bulk purchase or unfinished goods
e.g. chemicals, wheat, tomato pulp, petroleum.
Purchased parts inventory refers to components that are used as inputs during production.
They may be sourced externally or produced internally.
e.g. PC motherboards, car tyres

15. Categories of Inventory (contd.)
2-Work-in-process inventory – WIP refers to all inventory between raw materials and finished goods. WIP includes:
Materials being worked on
Materials being moved or waiting to be moved to the next process
3- Finished goods inventory – These are completed goods that are either kept in stock or transferred to the customer.
The customer may not be the end consumer

16. Categories of Inventory (contd.)
4-Maintenance, Repair and Operating (MRO) supplies inventory
MRO items are used in production and plant maintenance & does not form part of the final product. E.g. oils, lubricants, gloves, safety equipment and cleaning products.
5-Pipeline inventory – these are products in transit from one location to the other.
They may be raw materials (petroleum, iron ore) or finished goods (cars, food, electronics).

17. Categories of Inventory (contd.)
6-Waste products – “waste” is defined as anything other than the MINIMUM amount of time, equipment, tools, material, parts, people, and space required to ADD VALUE to the product/service/information-data.
e.g. Product defects, Overproduction
Some discarded products from the normal operation may have some value
e.g. scrap metal (for foundry) or scrap food (for animal feed).
Objective of JIT is to minimise waste

18. Inventory Counting Systems
Periodic System
Physical count of items made at periodic intervals
Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
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19. Inventory Counting Systems (Cont’d)
Two-Bin System - Two containers of inventory; reorder when the first is empty
Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached
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20. ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
A - very important
B - mod. important
C - least important
Annual
$ value
of items A B C
High
Low
Few
Many
Number of Items
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21. Inventory Systems Single-period inventory model
One time purchasing decision (Example: vendor selling t-shirts at a football game)
Seeks to balance the costs of inventory overstock and under stock
Multi-period inventory models
Fixed-order quantity models
Event triggered (Example: running out of stock)
Fixed-time period models
Time triggered (Example: Monthly sales call by sales representative)

22. A Single-Period Inventory Model
Consider the problem of deciding how many newspapers to put in a hotel lobby.
Too few papers and some customers will not be able to purchase a paper and they will lose the profit associated with these sales.
Too many papers and will have paid for papers that were not sold during the day, lowering profit

23. A Single-Period Inventory Model
We should increase the size of the inventory so long as the probability of selling the last unit added is equal to or greater than the ratio of Cu/Co+Cu

24. A Single-Period Inventory Model-Example
Assume a mean of 90 papers and a standard deviation of 10 papers. The newsvendor purchases daily papers at $0.20 and sells them at $0.50 apiece.

25. Multi-Period Models
There are two general types of multi-period inventory systems
Fixed–order quantity models
Also called continuous review system, the economic order quantity, EOQ, and Q-model
Event triggered.
Fixed–time period models
Also called the periodic system, periodic review system, fixed-order interval system, and P-model
Time triggered

26. Key Differences
To use the fixed–order quantity model, the inventory remaining must be continually monitored
In a fixed–time period model, counting takes place only at the review period
The fixed time period model has a larger average inventory
The fixed order quantity model favors more expensive items
The fixed order quantity model is more appropriate for important items
The fixed order quantity model requires more time to maintain

27. Fixed–Order Quantity and Fixed–Time Period Differences

28. Comparison for Fixed–Order Quantity and Fixed–Time Period Inventory Systems

29. Fixed-Order Quantity Model and Reorder Point Behavior
R = Reorder point
Q = Economic order quantity
L = Lead time L Q R
Time
Number
of units
on hand
1. You receive an order quantity Q.
2. Your start using them up over time.
3. When you reach down to a level of inventory of R, you place your next Q sized order.
4. The cycle then repeats.

30. Economic Order Quantity (EOQ)
The cost trade-off between quantity ordered, ordering costs and holding costs can be managed using Economic Order Quantity (EOQ) models
Determination of EOQ requires certain assumptions:
The lead time between ordering and delivery is constant
Demand for the item is known and constant
There are no quantity discounts
Ordering costs are known and constant
The product is made or supplied in lots-When an order is received, all the items ordered arrive at once (instantaneous replenishment)
The model assumes that there will be no shortages.

31. Economic Order Quantity (EOQ)
Notations;
Q = order quantity
D = annual demand
Co = order cost per order
Ch = annual holding cost per unit

32. Economic Order Quantity (EOQ)
Annual ordering costs= Orders placed / yr * Ordering costs
Where, , So $ Q

33. Economic Order Quantity (EOQ)$ Q

34. Economic Order Quantity (EOQ)
EOQ will be the point at which this total cost function is minimized; i.e. EOQ occurs where annual holding and ordering costs are equal as shown below

35. Economic Order Quantity (EOQ)
So,
And
where Q is optimal value of order , which is EOQ

36. Economic Order Quantity (EOQ)
Given:
25,000 annual demand
$3 per unit per year holding cost
$100 ordering costs
Orders/ yr= /1291= 19.4

37. Criticism of EOQ Model Basic assumptions are un-realistic
Modern approaches to SCM, JIT manufacturing, MRP make EOQ obsolete

38. Re-order Point
The level of inventory at which a purchase order for new material is issued is a function of the lead time and the amount of inventory to be used during the lead time period.
Where
is average lead time
is average demand

39. Basic Fixed–Order Quantity Model
Lead time
Receive order
Use inventory

40. Re-order Point with safety stock

41. Re-order Point with safety stock
The Re-order point is given by
Where LD is lead time demand and SS is safety stock
Lead time demand can be estimated from
LD = (Average lead time) x (Average daily demand)
An organisation may wish to specify a service level which indicates the probability of not being out of stock during the lead time. For example a service level of 97% indicates that the organisation wishes to meet lead time demand 97% of the time

42. Re-order Point with safety stock
The Re-order point is now given by =
Where
L is lead time
is average daily demand
is the standard deviation of daily demand
Z is a constant associated with the specified service level( in excel use NORMDIST function
The term is amount of safety stock

43. Periodic Review Model
stock levels are reviewed at fixed time intervals, and a variable amount of stock is ordered to bring the stock level up to a predetermined target level
it does not incur the overhead of continuous monitoring
If several stock keeping units (SKUs) use the same reorder cycle, then they can be combined for a single supplier or ‘run’ of the stock control system, simplifying procedures and reducing costs

44. Periodic Review Model
it is an optimal inventory policy where there are variable ordering costs
it provides a benchmark to estimate the desired inventory level for providing a certain service level
it does not react to low stock levels between the review points so there is a risk of stock-out if demand increases

45. Periodic Review Model

46. Periodic Review Model
In a periodic review system, reorders are placed at the time of review &
Q= quantity to be ordered
L = Lead Time
d` is average daily demand
is the standard deviation of daily demand
T= review period
I= inventory position
Z is a constant associated with the specified service level

47. Inventory Control and Supply Chain Management

48. ABC Classification

49. ABC inventory categories
Logic of few having greatest importance & many having little importance
In order to manage costs better, control of inventory is sometimes managed using the ABC classification. This classification ranks inventory items according to their costs – A(top 10-15%), B(next 30-35%) and C(lowest 50-60%).

50. ABC inventory categories
Classify the items of inventories, determining the expected use and price per unit.
Determine the total value of each item by multiplying the expected use by its unit price
Rank the items in accordance with the total value, giving the first rank to items with highest value and so on
Compute the percentage of number of units of each item to total units of all items and ratio of total value of each item to total value of all items.
Combine items on the basis of their relative value to farm three categories

51. Inventory Accuracy and Cycle Counting
Inventory accuracy: refers to how well the inventory records agree with physical count
Cycle counting: a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year
The recommended accuracy level is
For A items = 0.2 %
For B Items = 1 %
For C Items = 5 %

52. Example of EOQ
Calculate EOQ, Reorder Point, and number of orders per year

53. Example of EOQ

54. Example of Order Quantity & reorder point
Calculate order quantity and reorder point

55. Reorder point and safety stock
Daily demand of 10 units
Daily standard deviation of 3 units
Review period of 30 days
Lead time of 14 days
Satisfying 98 percent of demand from items in stock for which z= 2.05
150 Units in inventory
Calculate Reorder Point and Safety Stock?????

56. Reorder point and safety stock

57. ABC Classification: Example
1 $ 60 90
PART UNIT COST ANNUAL USAGE

58. PART UNIT COST ANNUAL USAGE
1 $ 60 90
PART UNIT COST ANNUAL USAGE
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,
8 16,
2 14,
1 5,
4 4,
3 3,
6 3,
5 3,
10 2,
7 1,
$85,400
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8,
B 1, 4,
C 6, 5, 10,