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What Is Inventory? Stock of items kept to meet future demand Purpose of inventory management how many units to order when to order
Inventory :
Inventory Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Raw Materials Works-in-Process Finished Goods Maintenance, Repair and Operating (MRO)
Types of Inventory :
12-4 Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment
Inventory Costs :
Inventory Costs Carrying cost - Capital (opportunity) costs - Inventory risk costs - Space costs - Inventory service costs Ordering cost - Order processing costs -Shipping costs Handling costs Shortage cost - temporary or permanent loss of sales when demand cannot be met
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TECHNIQUES OF INVENTORY CONTROL Modern Techniques Traditional Techniques Economic order quantity( EOQ) Reorder period (ROP) Fixing stock levels Selective inventory controls JIT ABC Analysis VED Analysis SDE Analysis FSN Analysis Inventory Control Analysis Two-Bin System Perpetual Inventory system Periodic Order System
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EOQ Example (1) Problem Data Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Given the information below, what are the EOQ and reorder point? 17-12 Lead time = 7 days Cost per unit = $15
Reorder Point :
Reorder Point Level of inventory at which a new order is placed R = dL where d = demand rate per period L = lead time
maximum level :
maximum level maximum level indicates the maximum quantity of an item of inventory which can be held in store at any time. Maximum level= (Re-order level + Re-order quantity) minimum consumption rate * minimum Re-order period)
MINIMUM LEVEL :
MINIMUM LEVEL Minimum level indicates the quantitative balance of an item of inventory which must be maintained in hand at all times. Minimum level= Re-order level (normal usage rate * normal Re-order Period)
RE-ORDER LEVEL :
RE-ORDER LEVEL Re-order level is that level where the stock level reaches a stage indicating the replenishment of the stock as there is always a gap between placing an order and actually getting the stock . Re- order level= maximum usage rate * maximum re-order period .
solution :
solution 1. Re order quantity Annual demand = 1000*12 = 12000 units EOQ = = 400 UNITS 2. Re- order level= maximum usage * maximum ROP = 75 * 6 = 450 UNITS 3. MINIMUM LEVEL= ROL- (Normal usage * average ROP) = 450 (50*5) = 450-250= 200 UNITS 4- MAXIMUM LEVEL= (ROL + ROQ) (Minimum usage * mini. ROP) = (450+400) (25*4) =850-100= 750 UNITS 5- AVERAGE STOCK LEVEL= MINI+MAXI/2 = 200+750/2= 475 UNITS
ABC Classification :
ABC Classification Class A 5 15 % of units 70 80 % of value Class B 30 % of units 15 % of value Class C 50 60 % of units 5 10 % of value Selective inventory controls
VED analysis :
VED analysis According to this analysis inventory items are grouped into vital, essential, and desirable. 1-vital- items constitute such items of inventory whose in adequate supply may substantially damage the productive activities
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2. Essential- items are the items whose non-availability can not be tolerated for few hours or one day and the cost of production lost is high. 3. Desirable- items do not have any immediate impact on production , hence these may or may not be maintained.
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Thus , VED analysis does not consider the utility of the inventory items on the basis of value but on their impact on the production. 12-27
SDE ANALYSIS :
SDE ANALYSIS 1- Scarce item are those items which are in short supply and mostly such items constitute important items 2- Difficult Items refer to such items which can not be procured easily 3- Easy- items are the items which are easily available in the market.
FSN ANALYSIS :
FSN ANALYSIS 1- Fast moving items are stored in large quantities and a close watch on the movement of such items is kept. 2- slow moving items are not frequently required by the production department 3 Non moving items are rarely required by the production department .
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Quick notice that stock depletion requires personnel to order new stock is critical to the inventory reduction at the center of JIT. This saves warehouse space and costs. However, the complete mechanism for making this work is often misunderstood. For instance, its effective application cannot be independent of other key components of a lean manufacturing system or it can "...end up with the opposite of the desired result."[1]. In recent years manufacturers have continued to try to hone forecasting methods (such as applying a trailing 13 week average as a better predictor for JIT planning)[2], however some research demonstrates that basing JIT on the presumption of stability is inherently flawed.[3]