Inventory Management
The term inventory includes materials. Raw, in process,
finished, packaging, spares and others stocked in order to
meet an unexpected demand or distribution in future
Objectives of Inventories
a)Ordering Cost
b)Carrying cost
c)Out of stock or shortage stock
d)Capacity stock
1.Ordering Costs
2.
C.Cost of placing an order with a vendor of materials:
D.
(a) Preparing a purchase order.
(b) Processing payments.
(c) Receiving and inspecting the material.
B. Financial Costs
(a) Taxes
(b) Insurance.
(c) Storage
(d) Interest (as the cost of capital borrowed to acquire and
maintain the inventories).
3. Out-of-stock Costs
A. Back ordering.
B. Lost sales.
4. Capacity Costs
A. Overtime payments when capacity is too small.
B. Lay-offs and idle time when capacity is too large
1.Type of Product
2.Type of manufacture
3.Volume
b. Degree of control
vClassify inventory on the basis of value
vCalled ABC classification
A – Class Items – High in value – low in Quantity
B – Class Items – Low in value – High in Quantity
C – Class Items – More or Less equal in value and quantity
Q System
vFixed quantity of materials are added when stock on
hand reaches re-order point
vThe Fixed quantity is called EOQ(Economic order
quantity)
v
Advantages
1.Each material is procured in the most economical
quantity
2.Drives the attention of purchasing personnel
3.Positive control is achieved to maintain total inventory
investment
Dis Advantages
1.Order are raised at irregular time intervals
Dis-Advantages
vPeriodic review to be conducted
d) Organizational Arrangement:-
vInventory control function is assigned to materials
management where integrated material management is in
practice
vAttaching inventory and control department so that timely
requisition for replenishment of stocks are used in
production operation
Inventory Control Techniques
1)Always better control(ABC) Classification
2)
3)High medium and low (HML) classification
4)
5)Vital, essential and desirable (VED) classification
6)
7)Scarce, difficult and easy to obtain(SDE)
8)
9)Fast moving, Slow moving and non-moving (FSN)
10)
11)Economic order quantity(EOQ)
12)
13)Max-Minimum System
14)
15)Two bin system
Material requirement Planning (MRP)
Just in Time (JIT)
Inventory Catalogue
vPrepared after all inventory items have been described
vTwo important purpose
a)Medium of communication
b)Inventory control operations staff
c)
1)ABC Analysis
vAlso called as selective inventory control
method(SIM)
vDerived from vilfredo pareto, Italian economist and
sociologist
Procedure of developing ABC analysis
1. List each item carried in inventory by number or some
other designation.
2. Determine the annual volume of usage and rupee value of
each item.
3. Multiply each item's annual volume of usage by its rupee
value.
4. Compute each item's percentage of the total inventory in
terms of annual usage in rupees.
5. Select the top 10 per cent of all items which have the
highest rupee percentages and classify them as 'A' items.
6. Select the next 20 per cent of all items with the next
highest rupee percentages and designate them 'B' items.
7 The next 70 percent of all items with the lowest rupee
percentages are 'C' items.
Items A Items B Item C
1. Very strict control 1. Moderate control 1. Loose control
2. No safety stocks (or very low) 2. Low safety stocks 2. High safety stocks
3. Frequent ordering or weekly 3. Ordering once in 3 months 3. Bulk ordering, once
deliveries in 6 months
4. Weekly control statements 4. Monthly control statements 4. Quarterly reports
5. Maximum follow-up and expediting 5. Periodic follow-up 5. Follow-up in
exceptional cases
6. Rigorous value analysis 6. Moderate value analysis 6. Minimum value
analysis.
7. As many sources as possible for each 7. Two or more reliable sources 7. Two sources for
item each item
8. Accurate forecasts in materials 8. Estimates based on past data 8. Rough estimates
planning
9. Minimisation of waste, obsolete, and 9. Quarterly review 9. Annual review
surplus (review every 15 days)
10. Individual postings 10.Small group postings 10. Group postings
11. Central purchasing and storage 11.Combination purchases 11. Decentralized
purchasing.
12. Maximum efforts to reduce lead 12.Moderate efforts 12. Minimum efforts
time
13. To be handled by senior officers 13.To be handled by middle 13. Can be fully
management delegated.
2) HML Classification
4) SDE – Classification
vS – Scarce, D- Difficult items, E- easy to acquire
vUsed on purchasing strategies
5) FSN Analysis
TC = DC + D S + Q H
Q 2
TC = Total Cost
D – Annual Demand
C- Purchase cost per unit
Q – Quantity to be ordered
S – Cost of planning an order
H – Holding cost per unit of average inventory
Disadvantages
Facilities