INVENTORY CONTROL

Physical stock of goods raw materials, semi finished items, finished goods, etc. For smooth and efficient running of future affairs of an organization After receiving sales order placing order for purchase of materials, wait for their receipt and then start production customer has to wait a long time loss of business
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INVENTORY CONTROL Inventory Control: scientific method of finding out how much stock should be maintained in order to meet the production demands and be able to provide right type of material at right time in right quantities and at competitive prices Idle resource we have to minimize

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INVENTORY CONTROL Q1: how much to order? - Q Q2: When to order? r (ROL)

Input: Demand

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INVENTORY CONTROL Types of Inventories 1. Movement Inventories (pipe line inventories) material in transit 2. Buffer Inventories Reserve stock or safety stock to meet fluctuations in demand news papers 3. Anticipation Inventories Built-up for a big selling season, a promotion programme or a plant shutdown period refrigerators
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INVENTORY CONTROL Types of Inventories 4. Decoupling Inventories To cope-up the need during failure of any machine (in-process inventory) 5. Cycle Inventories Quotas

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INVENTORY CONTROL Types of Inventories 1. Raw material 2. Work-in-process 3. Finished goods 4. Spare parts 5. Tools
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INVENTORY CONTROL Types of Models 1. Deterministic 2. Stochastic

1. Single period (Static) 2. Muti-period (Dynamic)

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INVENTORY CONTROL Order cycle time period between placement of two successive orders Inventory review systems: a) Fixed-order quantity system (two-bin system) Inventory level checked continuously Reorder point b) Periodic review system Inventory levels are reviewed at fixed time intervals Order size is not fixed
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INVENTORY CONTROL Lead time time gap between the moment of placing an order or deciding for production and the moment of receiving the item into inventory Deterministic constant or variable; probabilistic Lead time zero instantaneous production no need to place an order in advance

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INVENTORY CONTROL Stock replenishment the rate at which items are added to inventory Instantaneous (when purchased) or uniform (when produced)

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INVENTORY CONTROL Inventory Costs 1. Cost of item 2. Ordering cost C Co Rs./order

Acquisition costs or set-up costs People, stationery, communication fax, follow-up travel, transportation, inspection, delay, rejection and rework Independent of quantity ordered or produced
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INVENTORY CONTROL Inventory Costs 3. Carrying cost / Holding Cost Rs./unit/period Cost of capital, space, people, stationery, power, special requirements airconditioners, dust-free environment, insurance, pilferage, obsolescence Cost of capital dominates (interest rate, i) Cc

Cc = iC
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INVENTORY CONTROL Inventory Costs 4. Shortage cost / back-order Cost Rs./unit/period Shortage: lost sales loss of profit, loss of opportunity Backorder: Delay in meeting the demand Loss of goodwill, increased transportation costs, extra costs associated with urgent (often small) quantity, etc.
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Cs

INVENTORY CONTROL Inventory Costs

Co = Rs. 100 per order; Q = 6000 units/year Cu = Rs. 10 per unit; i = 12% No. of orders 1 2 6 12 Ordering Ordering Carrying Quantity Cost Cost 6000 100 3600 3000 1000 500 200 600 1200 1800 600 300 Total Cost 3700 2000 1200 1500

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INVENTORY CONTROL Inventory Models

Deterministic Models (known demand) Elementary Models Instantaneous Production With shortages
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Probabilistic (Stochastic) Models Models with restrictions

Models with Price-breaks (Quantity discounts) Finite Production rate Without shortages

With shortages
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INVENTORY CONTROL Model I: Harris-Wilsons Model Single item, uniform demand, instantaneous production, no shortages Annual demand: D Ordering quantity: Q

2 DCO Q = = EOQ CC
*

TC = 2 DCO CC
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INVENTORY CONTROL Model I: Harris-Wilsons Model

I n v e n t o r y

Time

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INVENTORY CONTROL Model-I

Co = Rs. 300 per order; D = 10,000 units/year Cu = Rs. 20 per unit; i = 20%

2 10000 300 Q = = 1224.74 4

*

TC = 2 10000 300 4 = Rs.4898.98 / year

At the optimum, the order cost and the carrying cost components become equal
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INVENTORY CONTROL Model II Single item, uniform demand, Instantaneous replenishment, backordering is allowed Annual demand: D Ordering quantity: Q Maximum inventory level: Im Backorder quantity: s

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INVENTORY CONTROL
I n v e n t o r y

Model II

Im Q

s t1 t t2 t T
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Time

INVENTORY CONTROL Model II

2 DCo Q = Cc
*

( Cc + Cs )
Cs Cs ( Cc + Cs )

2 DCo Im = Cc

Cs TC = 2 DCoCc ( Cc + Cs )
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INVENTORY CONTROL Model-II

Co = Rs. 300 per order; D = 10,000 units/year Cu = Rs. 20 per unit; i = 20%; Cs = Rs. 25/unit/year

Q* = 1319.09 s = 181.9435 I m = Q* s = 1137.15 TC = Rs.4548.72 / year

Order cost = inventory cost + backorder cost

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INVENTORY CONTROL Model-II Period of holding inventory is less and the maximum inventory is also less Based on TC, model-II is best. Model-I is a restricted version of Model-II Model-II is a relaxed version of Model-I Limiting value of Cs is and II are same
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where Models I
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INVENTORY CONTROL Model III Basic production-Consumption Model Single item, uniform demand, finite production rate, backordering is not allowed When inventory builds up over a period of time or when units are produced and sold at a constant rate Annual demand: D Ordering quantity: Q Maximum inventory level: Im Production rate: P/year
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INVENTORY CONTROL Model III P>D: otherwise, no inventory builds up and stock outs will occur

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INVENTORY CONTROL
I n v e n t o r Q y

Model III

Im
P-D

t1

t2

Time

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INVENTORY CONTROL Model III

2 DCo Q = D Cc 1 P
*

D TC = 2 DCoCc 1 P
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INVENTORY CONTROL Model-III

Co = Rs. 300 per setup; D = 10,000 units/year Cu = Rs. 20 per unit; i = 20%; P = 20,000 units/year

Q = 1732.05 I m = 866.03 t1 = 0.08666 year t2 = 0.08666 year TC = Rs.3464.10 / year

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INVENTORY CONTROL Model IV Production-Consumption Model with Backordering Single item, uniform demand, finite production rate, backordering is allowed Annual demand: D Ordering quantity: Q Maximum inventory level: Im Production rate: P/year Backorder quantity: s
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INVENTORY CONTROL Model IV

P Q Im
P-D

t2

t3

t4

t1 t

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INVENTORY CONTROL Model IV

2 DCo Q = D Cc 1 P
*

( Cc + Cs )
Cs Cs ( Cc + Cs ) Cs ( Cc + Cs )
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2 DCo D s= 1 Cc P

D TC = 2 DCo Cc 1 P
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INVENTORY CONTROL Model-IV

Co = Rs. 300 per setup; D = 10,000 units/year Cu = Rs. 20 per unit; i = 20%; P = 20,000 units/year Cs = Rs. 25/unit/year

Q = 1865.48 s = 128.65 I m = 804.09 TC = Rs.3216.338 / year

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INVENTORY CONTROL Model-III

Co = Rs. 1000 per setup; D1 = 3000 units/year; D2 = 5000 units/year; D3 = 20000 units/year; i = 20%; C1 = Rs. 100 per unit; C2 = Rs. 200 per unit; C3 = Rs. 400 per unit; P1 = 10,000 units/year; P2 = 20,000 units/year; P3 = 50,000 units/year

Apply the basic production consumption model and verify the feasibility of the solution.
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INVENTORY CONTROL Model-III

2 D1Co 2 3000 1000 Q1 = = = 654.653 20 3000 D1 Cc 1 20 1 100 10000 P 1 2 D2Co 2 5000 1000 Q2 = = = 577.35 20 5000 D2 Cc 1 20 1 100 20000 P2 2 D3Co 2 20000 1000 = Q3 = = 912.87 20 20000 D3 Cc 1 20 1 100 50000 P3
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INVENTORY CONTROL Model-III

CYCLE TIME Q1 654.653 = = 0.2182 years D1 3000 Q2 577.35 = = 0.1155 years D2 5000 Q3 912.87 = = 0.0456 years D3 20000

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