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Inventory is the stock of any item used in an organization. These items include: raw materials, finished products, component parts, supplies, and work-in-process. An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.
Purposes of Inventory
Avoid stock outs ( safety stock) satisfy expected customer demand esp periods of high seasonal demand (anticipation/seasonal inv) Provide a safeguard for variation in raw material delivery time Take advantage of economic quantity discounts and protect against price rise
E(1)
Inventory Planning
Finished goods and spare parts typically belong to independent demand items in manufacturing organisations Inventory planning of items must address the following two key questions:
How much? When?
Substantial improvement in the productivity of inventory can be achieved by re-engineering supply chain processes. Poor inventory management may lead to stock outs and hence cancellation of customers orders, overstocking leading to insufficient storage space and increase in the number and rupee value of obsolete products. Consequently, inventory management has a large financial impact on the firm. Investments blocked in inventory cannot be used to obtain other goods or assets that could improve the enterprise performance.
Types of Inventory
Cycle Stock/ Lot size
It is portion of inventory that depleted as customer orders come in and replenished as suppliers orders are received. Periodic replenishment is required. Example hospital ordering 10000 syringes and daily use is 500. If Q is the order quantity per cycle then average inventory = Q/2
Transportation/Pipeline Inventory:
Exists because of the time needed to move the goods from one location to another such as plant to distribution center called as Pipeline or movement inventories.
Safety Stock
is held to cover the unpredictable fluctuations in supply or demand or lead time, so that stock out will not happen.
Cyclic Stock
Quantity
Time
Cyclic inventory, pipeline inventory and safety stocks are critically linked to how much and when decisions in inventory planning
Types of Inventory
Anticipation inventory / Seasonal these are built up in anticipation of a future demand for example, ahead of a peak selling season, promotion etc. Dead stock- It is obsolete stock that part of the non moving inventory that is unlikely to be of any further use. Example electronics
Decoupling Inventory Complexity of production control is reduced by splitting manufacturing into stages and maintaining inventory between these stages
Cost of carrying and cost of ordering are fundamentally two opposing cost structures in inventory planning
Cost of Inventory
Minimum Cost
Level of Inventory
Co Cc
Q 2
The average inventory carried by an organisation= The cost associated with carrying inventory = The total ordering cost is given by
Total cost of the plan = Total cost of carrying inventory + Total cost of ordering
TC(Q)
D * C o Q
Q * Cc 2
Q = * C c + 2
D * C o Q
Q
*
2C o D Cc
D Q*
Q* D
Despite this, the EOQ model could be applied with suitable modifications because it is robust Q can be a minimum order quantity if EOQ value is lesser Have a preferred quantity based on truckload quantity, economies of scale, quantity discounts etc
Inventory Level
ROP
Safety Stock
Time
Inventory Level
SS
Safety Stock
R L
2R
3R
Time
Q R
L
R = Reorder Point Q = Economic Order Quantity L = Lead Time Time
Use of Q and P systems Q system is based on perpetual monitoring Q system is less responsive to demand changes when demand declines, the ROP moves to the right and system will continue to order even if demand is less, so carrying cost may rise If demand increases, ROP will happen frequently and ordering cost will increase Another issue is ordering of multiple items A, B,C from the same supplier. P system overcomes limitation of Q system. Greater chances of linkage between MRP and planning system. For high value/ A class use P system
Inventory Analysis
ABC Analysis
FSN Analysis VED Analysis
45,000 35,000 25,000 15,000 8,000 5,000 4,000 3,000 2,000 1,000 1,000 1,000 250
A A A A B B B B B B C C C
A graphical illustration
100% 90%
Class C
ABC Classification
80%
Class B
70% 60%
Class A
0%
% 90
10
20
30
40
50
60
70
80
No. of items (% )
10
0%
A fixed order interval or a periodic review system (P system) is useful for planning and control of high value and A class items.
The P system is more responsive to changes in demand patterns than the Q system.
Selective control of inventories is achieved through alternative classification methodologies. The ABC, VED and XYZ classifications are often used by organisations.