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INVENTORY CONTROL

AND MANAGEMENT

PRESENTED BY:
UJJAL SAHU
16/06/DBM/27
INVENTORY MANAGEMENT

p - System or Fixed Period q - System or Fixed


ABC Analysis, VED Analysis,
System, quantity system,

Economic Order Quantity.


(In manufacturing models,
XYZ Analysis, FNSD analysis,
this is known as Economic
Batch Quantity.
TERMINOLOGIES

Ordering Carrying Annual Shortage


Cost Cost Demand Cost

Lead Buffer
ROL
Time Stock
ASSUMPTIONS

Demand is uniform at a rate of ‘r’ quantity units per unit of time.

Lead time or time of replenishment is zero (some times known exactly).

Production rate is infinite, i.e. production is instantaneous.

Shortages are not allowed. (i.e. stock out cost is zero).


ECONOMIC ORDER QUANTITY
UNIFORM DEMAND WITH NO
SHORTAGE
2𝐷𝑂
• EOQ=√ 𝐶
2𝑂
• Optimal Order Time= √𝐶𝐷
• Optimal Inventory Cost= √2𝐶𝑂𝐷
𝐷
• Optimal Number of Order= 𝐸𝑂𝑄

Where,
EOQ : Economic Order Quantity
C : Carrying Cost per Unit
O : Ordering Cost
D : Annual Demand
EXAMPLE
The demand for an item is 8000 units per annum and the unit cost is Re.1/-.
Inventory carrying charges of 20% of average inventory cost and ordering
cost is Rs. 12.50 per order. Calculate optimal order quantity, optimal order
time, optimal inventory cost and number of orders.

Soln:
D=8000; O=Rs. 12.50/- ; C= 20% of average inventory cost; Inventory cost per
unit = Re. 1/-
2DO 2×8000×12.50
EOQ=√ =√ = 1000 units
C 0.20×1
2O 2×12.50
Optimal Order Time= √ =√ =
1/8 of a year
CD 0.20×8000
OptimaI Inventory Cost= √2COD= √2 × 0.20 × 12.50 × 8000= Rs. 200
D 8000
Number of order= = =8
EOQ 1000
NON-UNIFORM DEMAND WITH NO
SHORTAGE
2𝐷"𝑂
• EOQ=√ 𝐶
2𝑂
• Optimal Order Time= √𝐶𝐷"
• Optimal Inventory Cost= √2𝐶𝑂𝐷"
𝐷"
• Optimal Number of Order= 𝐸𝑂𝑄

Where,
EOQ : Economic Order Quantity
C : Carrying Cost per Unit
O : Ordering Cost
D” : Average Annual Demand
EXAMPLE
The demand for an item and the time period of consumption is given
below. The carrying cost C1 = Rs.2 / per unit and the ordering cost is
Rs. 75/- per order. Calculate economic order quantity and the cost of
inventory.
Demand in units. (D): 25 40 30 20 70 Period in months. (t) 1 2 2 1 6

Soln:
D”= {(25+40+30+20+70)/(1+2+2+1+6)}=15.42
2𝐷"𝑂 2×15.42×75
EOQ= √ =√ =34
𝐶 2
UNIFORM DEMAND RATE WITH
UNIFORM PRODUCTION
2𝑂 𝑟
• EOQ=√ 𝐶 × 𝑟
1−( )
𝑘
𝐸𝑂𝑄
• Optimal Order Time= 𝑟
• Optimal Inventory Cost=
𝑟
√2𝐶𝑂 𝑟
1−(𝑘)

Where,
EOQ : Economic Order Quantity
C : Carrying Cost per Unit
O : Ordering Cost
r : Demand rate
k : Production rate
EXAMPLE
An item is produced at the rate of 50 items per day. The demand
occurs at the rate of 25 units per day. If the set up cost is Rs. 100/- per
run and holding cost is Rs.0.01 per unit of item per day, find the
economic lot size for one run, assuming that the shortages are not
permitted.
Soln:
2𝑂 𝑟 2×100 25
EOQ= √ × 𝑟 = × 25 = 1000
𝐶 1−(𝑘) 0.01 1− 50
𝐸𝑂𝑄 1000
Optimal Time= = = 40 days
𝑟 25
UNIFORM DEMAND RATE WITH
SHORTAGES
2𝐷𝑂(𝐶+𝑆)
• EOQ=√ 𝐶𝑆
𝐸𝑂𝑄
• Optimal Order Time= 𝐷
• Optimal Inventory Cost=
𝑆
√2 𝐶𝑂𝐷
𝑐+𝑆
𝐷
• Optimal Number of Order= 𝐸𝑂𝑄

Where,
EOQ : Economic Order Quantity
C : Carrying Cost per Unit
O : Ordering Cost
D : Annual Demand/ Demand Rate
S : Shortage Cost
EXAMPLE
The demand for an item is uniform at the rate of 25 units per month.
The set up cost is Rs. 15/- per run. The production cost is Re.1/- per
item and the inventory-carrying cost is Rs. 0. 30 per item per month. If
the shortage cost is Rs. 1.50 per item per month, determine how often
to make a production run and what size it should be?
Soln:
2DO(C+S) 2×25×15×(0.30+1.50)
EOQ= √ =√ = 54
CS 1.50×0.30
EOQ 54
Optimal Time= = = 2.16 months
D 25
ROL AND BUFFER STOCK
Let,
• B = Buffer stock,
• L = Lead time,
• Ld = Difference between maximum lead-time and minimum lead- time. r = Demand rate.
• Total inventory consumption during lead-time, if buffer stock is not maintained = L × r = Lr.
• Thus as soon as stock level reaches ‘Lr’, quantity ‘q’ should be ordered. This point where we
order is known as reorder level or ROL.
• ROL = Lr + Buffer stock = Lr + B. = Lr + Ld r = (L + Ld) × r
• Now maximum inventory = q + B,
• Minimum inventory = S
• Average inventory = [(q + B) + B] / 2 = (q / 2) + B.
CONTD.
The average monthly consumption for an
item is 300 units and the normal lead-time is
one month. If the maximum consumption
has been up to 370 units per month and
maximum lead-time is 1 ½ months, what
should be the buffer stock for the item.

Maximum lead time demand = Maximum


lead-time × maximum demand rate = (3/2) ×
370 = 555 units.

Normal lead-time demand = 1 × 300 = 300


units.

Buffer stock = Maximum lead-time demand –


Normal lead- time demand = 555 – 300 = 255
units.
ROL = Normal Lead time consumption +
Buffer Stock = 255 + 300= 555
THANK YOU

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