Inventory management

Introduction - Inventory
Inventories are elements whose values are always very high. Investment on inventories are substantial. Inventory holds the major portion of Working Capital. WHY A FIRM HOLDS INVENTORIES. TWO PURPOSES. 1. Speculative purpose Value of stocks Increases, at a rate which is higher than the cost of holding stocks.(Inflation). Expectation of price increase. 2. To enable a constant rate of Output flow Common motive is to facilitate a constant and smooth rate of production. Meet excess demand out of the inventories accumulated during slack demand period. Involves holding stocks of RM and semi-finished goods , so that the production remains uninterrupted even sources of suppliers are not reliable.

Meaning
The function of directing the movement of goods through the entire manufacturing cycle from the requisitioning of raw materials to the inventory of finished goods in orderly manner to meet the objectives of maximum customer service with minimum investment and efficiency(low cost ) plant operation.

Average Demand
Jan 150 Feb 200 Mar 300 April 200 May 150 June 200 Average 1200/6

Functional Classification
Inventories Stock of goods, Commodities or other Economic resources that are stored or reserved at any given period for future production or for meeting future demand. Inventories May include Raw materials waiting to be used in producing goods(RM inventory), semi-finished goods or goods in process temporarily stored during the production process(WIP inventories), finished goods awaiting shipment from the factory(finished goods inventory). DIRECT INVENTORY INDIRECT INVENTORY 1. Raw materials 1.Transit or pipeline 2. Work in process 2.Buffer Inventories 3. Finished parts 3.Lot size or Cycle 4.Decoupling 5.Seasonal inventories 6.Fluctuation 7.Anticipation

Functional Classification
DIRECT INVENTORIES: items which play a direct role in the manufacture and become an integral part of the Finished Good.

Raw materials : Direct Materials. Holding RM is to ensure uninterrupted production in the event of delaying delivery.
Work in process: Includes partly finished goods and materials held between manufacturing stages. Finished goods : Ready for sales or distribution helps to reduce the risk associated with stoppage in output.

Functional Classification
INDIRECT INVENTORIES : which are necessary for manufacturing but do not become component of the finished production Ex: Lubricants,Grease,Oil,Office Materials, Maintenance Materials 1. Transit or pipeline : (Movement Inventories) Function is to cover delays in handling and transit. Coal in Transit. 2. Buffer inventories : held to prevent stock out due to uncertain demand and supply fluctuations. Actual demand may excess average demand. Average delivery time to be more than Expected time. To meet Fluctuations. 3. Lot size : that orders are placed in lots, rather than purchasing the exact amount of inventory which may be needed at a point of time. as needed basis, there would be no cycle inventory. Lots reduced ordering or set up costs or to obtain quantity discounts.

Functional Classification
Decoupling inventories : Decoupling operations in the production system. Permit production operations to operate more independently, they do not have to rely completely on the schedule of O/P of Prior activities. Seasonal : To meet the seasonal fluctuations in demand economically. ex : crackers.

Fluctuation : Sales and production times for the product cannot be predicted accurately. Fluctuation in demand and lead times required to manufacture items. Reserve or safety purpose. Anticipation : Built up in advance for a big selling season , a promotional programme. Men and machine hours for future need.

Inventory Decisions
How much amount of an item should be ordered when the inventory of that item is to be replenished When to replenish the inventory of that item? Inventory Decisions

When to order Fixed order Fixed period

How much to order

Demand

Supply

Rate of supply Instant gradual

Lead time

deterministic

probabilistic

Phases of IM
When to order? How much to order? To minimize cost and Achieve Customer Satisfaction. Five Phases: 1. Assessment of Inventory Requirement. 2. Ensuring Material Quality. 3. Timely Inventory Flow and Inventory Control. 4. Investment in Inventories. 5. Transactions Maintenance.

Phases of IM
Assessment of Inventory Requirement : Owns Social Responsibility of Producing economical and quality products for customers and also to ensure the supply without interruption. To maintain continuity in their production. Information regarding sales, break up of sales with the help of proper forecast and assessment they can determine their requirement schedules. Ensuring Material Quality Ensures that materials of requisite specifications and quality are purchased. Achieved by selecting suitable vendors and forcing suppliers of such materials to apply quality control and preventive inspection.

Phases of IM
Timely Inventory Flow and Inventory Control Task of ensuring timely and adequate flow of inventories from various vendors for optimum production and sales without unduly blocking high investments in inventories. Investment in Inventories Reducing the working capital tied up in inventories , by proper planning and resorting to the right policy for purchase such as bulk,seasonal,hand to mouth purchase etc Value analysis, standardization and variety reduction.

Transactions Maintenance Book keeping for Inventory control. Formulating procedures for inventory receipts issues and storage. By Laying down procedures.

Basic Characteristics
Design and implementation of an inventory system requires the knowledge of the stocks being maintained: 1. Relevant inventory costs. 2. Demand element system. 3. Order cycle. 4. Lead time. 5. Stock replenishment. 6. Time horizon. 7. Number of items. 8. Maximum stock. 9. Re order level.

Basic Characteristics - Cost

a) Purchase cost : Actual price paid for the procurement Includes : Direct material cost, direct labor cost , direct expenses, overhead cost , profit of the manufacturer. Purchase cost = Price per Unit demand per unit time. b) Ordering cost : Costs related acquisition of purchased items are those of getting an item into companys inventory or stores. Purchasing, inspection and stores, accounting , transports costs. Ordering cost = Cost per Order no of orders in the inventory planning. c) Inventory carrying (holding cost ): Cost associated with storing an item in inventory. Proportional to amount of inventory and the time over which it is held. Six components: Cost of money or capital tied up, Storage cost , Damage and deterioration, Insurance cost , Pilferage cost , Obsolescence cost. Formula : Cost of carrying one unit of item for a time average number of units of inventory for a given length of time.

Basic Characteristics - Cost

d) Shortage or stock out : Penalty associated with either a delay in meeting the demand or inability to meet it all due to the shortage of stock Shortage cost : Cost of being short one unit in inventory planning period Average no. of. Units short in Investment planning period. 2. Demand element : Demand cannot be predicted . How much customers need Adequate data to find. Deterministic Having Known Demand Probabilistic Demand Not known. 3. Order cycle : Time period B/W placement of two successive orders. a. Fixed order quantity (Two Bin System): Inventory level is checked continuously until a specified point is reached, where new order is placed. b. Periodic Review System: Reviewed at fixed time intervals and orders are placed at such intervals.

Basic Characteristics
4. Lead time : When an order is placed, it may be received immediately, or it may take sometime before it is received. The time B/W ordering a replenishment of an item and actually receiving the item.. Lead time Zero Instantaneous delivery. 5. Stock Replenishment : rate at which items are added to inventory. 6. Time horizon : the period over which the inventory level will be controlled. Finite or infinite 7. Number of items: 8. Maximum stock : a stock level selected as the maximum desirable which is used as an indicator to show when stocks have risen too high. 9. Re order level : Point fixed between maximum and minimum stock levels at which time it is essential to initiate purchase requisition. Re order quantity: