Materials Management and Inventory Control

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INVENTORY CONTROL
Inventory is essential to provide flexibility in operating a system. Inventory classified as

Raw materials inventory In-process inventory Finished goods inventory Smoothing out regularities in supply Minimizing the production cost Allowing organizations to cope with perishable materials When to replenish the inventory of that item. How much of an item to order when the inventory of that is to be replenished.

Functions of inventory

Inventory Decisions

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INVENTORY MODELS
Deterministic Probabilistic

Purchase Model
(Instantaneous Replenishment)

Manufacturing Model

With Shortages Without Shortages

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Without Shortages

With Shortages

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Inventory models are classified as deterministic and probabilistic models. Various deterministic models are:Purchase model with instantaneous replenishment and without shortages Manufacturing model without shortages Purchase model with instantaneous replenishment and with shortages Manufacturing model with shortages.

MODELS OF INVENTORY

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Purchase Model with Instantaneous Orders of equal size are placed at periodical intervals Replenishment and without Items against an order are replenished Shortages and the items are consumed at a instantaneously

constant rate. The purchase price per unit is the same irrespective of order size.

Let, D be the annual demand in units. Co be the ordering cost/order Cc be the carrying cost/unit/year P be the purchase price per unit Q be the order size.

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The corresponding model is shown

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Fig.1. Purchase modelCivil Engg stockout Prepared by Merlin Sem-7 without

Therefore, The number of orders/year = Average inventory Cost of ordering/year Cost of carrying/year Purchase cost/year D/Q =Q/2 = D/Q Co = Q/2 Cc D/Q =DP

The total inventory cost (TC)/year = Co + Q/2 Cc + D P Differentiating w.r.t. Q yields d/dQ (TC) = D/Q2 Co + Cc/2

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The second derivative = +2D/Q3 Co Since the second derivative is positive, we can equate the first derivative to zero to get the optimal value for Q. -D/Q2 Co + Cc/2 = 0 Q2 = 2CoD Q* = 2CoD/Cc No. of orders = D/Q* Time between orders = Q*/D
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Manufacturing Model without Shortages

A company manufactures components required for its main product, then the corresponding model of inventory is called "Manufacturing model". This model will be with shortages or without shortages. The rate of consumption of items is uniform throughout the year. The cost of production per unit is same irrespective of production lot size
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Let r __annual demand of an item. k __production rate of item (No. of units produced per
year

).

Co __cost per set up. Cc __carrying cost per unit per period. P --cost of production per unit. EBQ be Economic Batch Quantity

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During period t1, the item is produced at the rate of k units per period and simultaneously it is consumed at the rate of r units per period. So, during this period, the inventory is built at the rate of units per period. During period t2, the production of item is discontinued but the consumption of that item is continued. Hence, the inventory is decreased at the rate of r units per period during this period.

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Fig.2 Manufacturing model without shortage

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The various formulas for this situation are given below.

EBQ = 2Cor/Cc(1-r/k t*1 = Q*/k t*1 = Q*[1r/k]/r Cycle time = t*1 + t*2

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Purchase Model with Shortages (Instantaneous Items on order will be received instantaneously Supply)
and they are consumed at a constant rate. Purchase price per unit remains same irrespective of order size. If there is no stock at the time of receiving a request for the items, it is assumed that it will be satisfied at a later date with a penalty. This is called backordering.

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The variables which are used in this model are given below: D Demand/period Cc Carrying cost/unit/period. Co Ordering cost/order. Cs Shortage cost/unit/period
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Q represents Economic order quantity, Q1, Maximum inventory, Q2, Maximum stockout Q* = EOQ = 2CoD/Cc (Cs+Cc)/Cs Q*1 = 2CoD/Cc (Cs+Cc)/Cs Q*2 = Q* Q1 t* = Q*/D t*1 = Q*1/D t*2 = Q*2/D

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Manufacturing Model with Shortages

Items are produced and consumed simultaneously for a portion of the cycle time. Rate of consumption of items is uniform throughout the year. Cost of production per unit is same irrespective of production lot-size.

Stockout is permitted. These units will be satisfied from the units which will be produced at a later date with a penalty. This is called backordering.

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The variables which are used in this model are given below. Let,
r --annual demand of an item k --production rate of the item (No. of units produced/year) Co --cost/set up. Cc --carrying cost/unit/period Cs --shortage cost/unit/period P -- cost of production/unit

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Fig. Manufacturing model of inventory with

stockout

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Q Economic Batch Quantity Q1 Maximum inventory Q2 Maximum stockout Q* = EBQ = 2Co/Cc kr/(kr) (Co+Cs)/Cs Q*1 = 2Co/Cc kr/(kr) (Co+Cs)/Cs Q*2 = 2CoCc/Cs(Co+Cs) r(kr)/k Q*1 = (kr/k Q*) Q*2 t* = Q*1/r t* = Q*1/(kr) t*2 = Q*1/r t*4 = Q*2/(kr)

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OPERATION OF INVENTORY SYSTEM

Consider the purchase model of inventory system which is as shown in Fig.

Fig. Operation of inventory system

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Q* is the economic order size and t* is the cycle time. Consider a model with constant demands and constant lead time, we will have to place order well before the end of cycle time, so that the items are received exactly at the end of the present cycle or at the beginning of the next cycle. Let DLT be the demand during lead time. DLT = demand rate lead time period = (d/day) (LT in days)

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If there is no variation in lead time and demand, then it is sufficient to have a stock of DLT at the time of placing order. Reorder level (ROL) = DLT

Fig. Inventory system with constant demand and constant 24 lead 1/26/12 time Prepared by Merlin Sem-7 Civil Engg

Reorder level is the stock level at which an order is placed so that we receive the items against the order at the beginning of the next cycle. If the demand is varying, then the ROL is as given below ROL = DLT + SS Where, SS is the safety stock, which acts as a cushion to absorb the variation in demand. SS = K Where, is the standard deviation of demand

K is the standard normal statistic value for a given service level.

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The corresponding chart is shown in Fig.

Fig. Inventory system with safety stock for

variation in lead time demand.

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QUANTITY DISCOUNT
When items are purchased in bulk, buyers are usually given discount in the purchase price of goods. The procedure to compute the optimal order size for this situation is given in the following steps. Step 1:Find EOQ for the nth (last) price break. Q*n = 2CoD/iPn If it is greater than or equal to bn1, then the optimal order size otherwise go to Step 2.

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Step 2: Find EOQ for the n 1th price break. Q*n1 = 2CoD/iPn1 If it is greater than or equal to bn2, then compute the following, and select least cost purchase quantity as the optimal order size; otherwise go to Step 3: (i) Total cost, TC(Q*n1) (ii) Total cost, TC(bn1) Step 3: Find EOQ for the n 2th price break. Q*n2 = 2CoD/iPn2

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If it is greater than or equal to bn3, then compute the following and select least cost purchase quantity; otherwise go to Step 4. (i) Total cost, TC(Q*n2) (ii) Total cost, TC(b*n2) (iii) Total cost, TC(bn1 ) Step 4: Continue in this manner until Q*n1 > bni1 .Then compare total costs TC(Q*n1) TC(bn1), TC(bni+1),..., TC(bn1) corresponding to purchase quantities Q*ni, bn1, bni+1, ..., bn1, respectively. Finally, select the purchase quantity w.r.t. the minimum total cost.

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IMPLEMENTATION OF PURCHASE INVENTORY The practical version of purchase model of inventory can MODEL
be classified into Fixed Order Quantity System (Q System) Fixed Period Quantity System (P System). The following cases exist in each of the systems: Varying demand and constant lead time. Constant demand and varying lead time. Varying demand and varying lead time.

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Fixed Order Quantity System (Q System) Whenever the stock level touches the reorder level, an order is placed for a fixed quantity which is equal to EOQ.

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Fig. Q system of inventory

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The average demand during the lead time (average lead time) is known as the demand during lead time (DLT). The variation in demand during lead time (average lead time) is known as safety stock. The average demand during delivery delays is called reserve stock. The Reorder level is computed as the sum of the demand during lead time (DLT), the variation in demand during lead time (safety stock) and the average demand during delivery delays (reserve stock).
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Periodic Review System (P System)

Stock position is reviewed once in a fixed period and an order is placed depending on the stock position, unlike a fixed quantity in the Q System of inventory. Review period is approximately equal to EOQ/D. Desired Maximum Inventory Level is fixed as the sum of the average demand during average lead time plus review period, variation in demand during average lead time plus review period, and the average demand during delays in supply.

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A schematic representation of this model is shown in Fig.

Fig. P-system of inventory

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