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L6 Inventory Management 1

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37 views16 pages

L6 Inventory Management 1

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nikhilnegi1704
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INVENTORY MANAGEMENT

Inventory – Is the stock of any item or resource used in an


organization. An inventory system is the set of policies and
controls that monitor levels of inventory and determine
what levels should be maintained, when stock should be
replenished.
Types of inventory - Manufacturing inventory generally
refers to items that contribute to a firm’s product output.
Manufacturing inventory is classified into Raw Materials,
Component parts, Work-in-process, and Finished Products.
The basic purpose of inventory analysis in manufacturing is
to satisfy : (1) when items should be ordered and (2) how
large the order should be
INVENTORY MANAGEMENT
Purpose or objective of inventory
1. To maintain independence of operations
2. To meet variations in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw material
delivery time
5. To take advantage of economic purchase order size
6. Reduction of investment in inventories
INVENTORY MANAGEMENT
Types of inventory
• Cycle inventory - The portion of total inventory that
varies directly with lot size. Determining how frequently
to order and what quantity to be ordered is lot sizing.
• Safety stock - To avoid customer service problems
companies hold safety stock. This is surplus inventory that
protects against uncertainty in demand
• Anticipation inventory – Inventory used to absorb uneven
rates of demand or supply
• Pipeline inventory - Inventory moving from point to point
in the materials flow system. Materials move from
supplier to plant and from one operation to other
operation.
• Speculative inventory - Inventory that protects against
some future event, e.g. labor strike
INVENTORY MANAGEMENT
Terms used in Inventory Management
Economic Order Quantity (EOQ): It is the size of the order
for which the aggregate of the cost of procuring and
holding the inventory i.e. the total variable cost is
minimal.
INVENTORY MANAGEMENT
INVENTORY MANAGEMENT
Two common measures to evaluate supply chain efficiency are :
• Inventory turnover AND Weeks of supply
• Cost of goods sold is the annual cost incurred by company to
produce the goods or services provided to customer; it is
sometimes reffered to as cost of revenue. This does not include
selling and administrative expenses of the company.
• Average aggregate inventory value is the total value of all items
held in inventory for the firm valued at cost. It includes the raw
material, work-in-process, finished goods, and distribution
inventory considered owned by the company.
• Inventory turnover =
• Weeks of supply is a measure of how many weeks’ worth of
inventory is in the system at a particular point of time.
• Weeks of supply = ( ) x 52
weeks
UNIT – III : INVENTORY MANAGEMENT

Q1.Dell computer reported following information in its 2010


annual report(all amounts are expressed in millions) :
1.Net revenue (fiscal year 2010) : $18,243
2.Cost of revenue (fiscal year 2010) : $14,137
3.Cost of production materials(fiscal year 2010) : $6423
4.Production materials on hand(25Jan.2010):$234
5.Work-in-process & finished goods on hand : $39
(25 Jan.2010)
6.Production materials – days of supply : 6 days
(a)What is the inventory turnover?
(b)What is weeks of supply?
UNIT – III : INVENTORY MANAGEMENT
SOLUTION

Inventory turnover =
= = 51.78 Turns/year

Weeks of supply = ( ) x 52 weeks = x 52


= 1 week
INVENTORY MANAGEMENT

INVENTORY COSTS :
1.Holding (or carrying) costs - Includes cost of storage
facilities, handling, insurance, breakage, depreciation,
taxes, and opportunity cost of capital.
2.Set up cost - To make each different product, it involves
obtaining the necessary materials, arranging specific
equipment set up, and moving out the previous stock of
materials. The cost involved in completing these exercises
is called set up cost.
3.Ordering cost - These costs refer to the managerial and clerical
costs to prepare the purchase order. Ordering costs include all the
details, such as preparing bill of materials. The costs associated with
maintaining the system needed to track orders are also included in
ordering cost.
INVENTORY MANAGEMENT
4.Shortage costs - When the stock of an item falls short, an
order for that item must either wait until the stock is
replenished or be cancelled. There is a trade-off between
carrying stock to satisfy demand and the costs resulting
from the stock out. This balance is difficult to obtain,
because it may not be possible to estimate lost profits, the
effects of lost customers, or lateness penalties. The
assumed shortage cost is little more than a guess.
Establishing the correct quantity to order on vendors
involves a search for the minimum total cost resulting from
the combined effects of four individual costs : holding costs,
setup costs, ordering costs and shortage costs.
INVENTORY MANAGEMENT
Multi period Inventory System
Multi period inventory systems are designed to ensure that
an item will be available on an ongoing basis throughout
the year. Usually the item will be ordered multiple times
throughout the year where the logic in the system dictates
the actual quantity ordered and the timing of the order.
1.Fixed-order Quantity Models (also called Economic Order
Quantity, EOQ, and Q-Model).
2.Fixed Time Period Models (referred to as Periodic system,
Periodic Review System, Fixed Order Interval System, and
P-Model)
INVENTORY MANAGEMENT
Difference between Q-Model & P-Model
Feature Q-Model (Fixed order P-Model (Fixed-Time
quantity model) period model)
Order Quantity Same amount ordered Quantity varies each
each time time order is placed
When to place When inventory level When review period
order drops to reorder level arrives
Record keeping Each time a withdrawal Counted only at
or addition is made review period
Size of inventory Less than fixed-time Larger than fixed-
period model order quantity model
Time to maintain Higher due to perpetual
record keeping
INVENTORY MANAGEMENT
FIXED-ORDER QUANTITY MODEL
Fixed-order quantity model attempts to determine the
specific point, R at which an order will be placed, and the
size of that order, Q. Inventory position is defined as :
Inventory position = Inventory on hand + Inventory on
order – Backordered quantity
Assumptions for developing Q-Model
• Demand for the product is constant and uniform
throughout the period
• Lead Time (Time from ordering to receive) is constant
• Price per unit of product is constant
• Inventory holding cost is based on average inventory
INVENTORY MANAGEMENT
• Ordering or setup costs are constant
• All demands for the product will be satisfied (No
backorders are allowed).
Total = Annual + Annual + Annual
Annual cost purchasing cost ordering cost holding
cost
TC = DC + + H
TC = Total annual cost, S=Setup cost/cost of placing an
order
D = Annual demand R=Reorder point
C=Cost/Unit L=Lead Time
Q= Quantity to be H=Annual holding or storage cost
ordered, EOQ per unit of average inventory
INVENTORY MANAGEMENT
The second step in model development is to find out the
optimum order quantity, QOPT at which the total cost is
minimal. Using calculus, we take the derivative of total cost
with respect to Q and set this equal to zero.
TC = DC + S + H
=0+()+ = 0
QOPT = )
Reorder point, R = d.L
d = Average daily demand (constant)
L = Lead Time in days (constant)
UNIT – III : INVENTORY MANAGEMENT

Q1.Synergy Incorporation requires 1000 Units of product-A per


annum. The firm purchases each unit of A for Rs.100 and
spends Rs.500 on each order. The inventory carrying cost of
item is 25% of the unit price. Determine the EOQ and total
annual cost associated with the item A.
Q2.A two wheeler manufacturing company uses large
quantities of a component made of steel. Although these are
production items, the demand is continuous. The annual
demand for the component is 2500 boxes. The company
procures the item from a supplier at the rate of Rs.750 per
box.The company estimates the cost of carrying inventory to be
18% per unit per annum and the cost of ordering as Rs.1080
per order. The company works for 250 days in a year. How
should the company design an inventory control system for this
item? What is the overall cost of the plan?

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