Inventory Management
Prepared By,Mr. Nishant Agrawal
Inventory Management METAS Adventist College (NEHU)
Session OutlineInventory ManagementUse of Inventory Types of
CostsABC AnalysisVED Analysis
Inventory Management Inventory is stock in firm for future useIn
Manufacturing organization have inventories of raw materials,
components, tools and equipment etc.In Service organization such as
banks, financial organization , hospitals. in hospital have
inventories of medical equipment such as glucose bottle etc.
Inventory is maintained by organization to avoid stock out of
item.Stock Out of any items resultsLoss of potential profitLoss of
goodwill of customer
ContinueLow level of inventory and High level of
inventoryInventory of an item should neither be high or low. It
should just optimalHow much size of order placed to suppliers? When
should order placed ?
Function / Use of InventoryMeeting customer demand:Maintaining
finished goods inventory allows a company to immediately fill
customer demand for product.Anticipation Inventory : to satisfied
expected customerSafety or buffer stock : to avoid stock outTaking
advantage of quantity discounts:Many suppliers offer discounts
based on certain quantity breaks because large orders tend to
reduce total processing and shipping costs while also allowing
suppliers to take advantage of economies of scale in their own
production processes.
Types of CostsOrdering cost (OC) is cost of placing a single
order.Carrying cost (CC) is cost of storing the inventory in the
warehouse.
Example
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Inventory Management System
Inventory Management SystemDependent inventory is defined as the
inventory of items that are the components , parts, sub assemblies
of Finished Goods. Independent demand inventory is defined as
inventory of finished goods .
Economic Order Quantity (EOQ)Economic order quantity(EOQ) is the
order quantity that minimizes the total holding costs and ordering
costs.Economic order quality deals when the cost of procurement and
handling of inventory are at optimum level and total cost is
minimum. EOQ applies only when demand for a product is constant
over the year and each new order is delivered in full when
inventory reaches zero.
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ContinueThere is a fixed cost for each order placed,cost for
each unit held in storage.We want to determine the optimal number
of units to order so that we minimize the total cost associated
with the purchase, delivery and storage of the product.Safety
stock(buffer stock) is a term used to describe a level of extra
stock that is maintained due to uncertainties in supply and
demand.TheReorder point is the level ofinventorywhich triggers an
action to replenish that particular inventory stock. It is a
minimum amount of an item which a firm holds in stock, such that,
when stock falls to this amount, the item must be reordered.
Economic Order Quantity (EOQ)
Order Quantity Size (Q)Cost (Rs.)EOQTc (Total Cost)Carrying Cost
(Ordering Cost)
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Assumptions of EOQDemand for the product is constantLead time is
constantPrice per unit is constantInventory carrying cost is based
on average inventoryOrdering costs are constant per orderAll
demands for the product will be satisfied (no back orders)
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Basic Fixed Order Quantity Model (EOQ)
AnnualHoldingCostTotal Annual Cost
=AnnualPurchaseCostAnnualOrderingCost++
TC =Total annual costD = DemandC = Cost per unitQ = Order
quantityS = Cost of placing order/setup costH = Annual holding and
storage cost per unit of inventory
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ABC Analysis Inmaterials management, theABC analysisis
inventorycategorization technique. The ABC analysis provides a
mechanism for identifying items that will have a significant impact
on overall inventory costABC analysis divides an inventory into
three categories- "A items" with very tight control and accurate
records,"B items" with less tightly controlled and good records, "C
items" with the simplest controls possible and minimal records.
Recommended breakdown of ABC classes:"A" approximately 10% of
items or 66.6% of value"B" approximately 20% of items or 23.3% of
value"C" approximately 70% of items or 10.1% of value'A' items are
very important for an organization. Because of the high value of
these 'A' items, frequent value analysis is required. In addition
to that, an organization needs to choose an appropriate order
pattern to avoid excess capacity. 'B' items are important, but of
course less important than 'A' items and more important than 'C'
items. Therefore 'B' items are intergroup items. 'C' items are
marginally important.
VED ClassificationVED: Vital, Essential & Desirable
classificationVED classification is based on the criticality of the
inventories.Vital items Its shortage may cause stop the work in
organization. They are stocked adequately to ensure smooth
operation.
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ContinueEssential items - Here, reasonable risk can be taken. If
not available, the plant does not stop; but the efficiency of
operations is adversely affected due to expediting expenses. They
should be sufficiently stocked to ensure regular flow of
work.Desirable items Its non availability does not stop the work
because they can be easily purchased from the market as & when
needed. They may be stocked very low or not stocked.
It is useful in capital intensive industries, transport
industries, etc. VED analysis can be better used with ABC analysis
in the following pattern:
CategoryV itemsE itemsD itemsA itemsConstant control &
regular follow upModerate stocksNil stocksB itemsModerate
stocksModerate stocksLow stocksC itemsHigh stocksModerate
stocksVery low stocks
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