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Introduction Motives for holding Inventory Types of organization Holding Inventory Valuation of Inventory Goal of Inventory management Inventory Strategies and techniques Working Capital Restrictions Material Requirement Planning (MRP I)
Definitions
Inventory-A physical
resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.
Inventory
Inventory
Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Raw Materials Works-in-Process Finished Goods Maintenance, Repair and Operating (MRO)
Improve customer service Economies of purchasing Economies of production Transportation savings Hedge against future Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) To maintain independence of supply chain
2.
3.
Ordering cost
It is generally fixed per order placed, irrespective of the amount of the order. The larger the orders placed, or the more frequent the acquisition made, the higher will be such costs. The larger the inventory , the fewer are the acquisition & the smaller or lower will be the cost. [inverse relation with the size of inventory]
Carrying cost
The variable cost per unit of holding an item in inventory for a specified time period. It includes : 1. Cost of storing: Storage cost Insurance of inventory (fire & theft) Deterioration (technical obsolescence , price decline) Servicing cost (labour for handing inventory, clerical )
2. Opportunity cost of funds: expenses in raising funds (interest on capital ) to finance acquisition of inventory. If funds are not locked up in inventory, then they will yield a return. Carrying cost is directly related with the size of inventory. Total cost = ordering cost + carrying cost
Benefits
Inventory Costs
Procurement costs: cost of replenishing inventory Carrying costs: cost of holding an item in inventory Out-of-stock costs: temporary or permanent loss of sales when demand cannot be met
Independent
1. 2. 3. 4. 5.
Main emphasis on the following: Sales Forecasting or Demand Management Sales and Operations Planning Production Planning Material Requirements Planning Inventory Reduction
ABC Classification
Class A
5 15 % of units 70 80 % of value
Class B
30 % of units 15 % of value
Class C
50 60 % of units 5 10 % of value
9 8 2 1 4 3 6 5 10 7
$30,600 1 16,000 2 14,000 3 5,400 4 4,800 5 3,900 3,600 6 CLASS 3,000 7 2,400 A 8 1,700 B 9 C $85,400
10
35.9 6.0 $ 60 18.7 5.0 350 16.4 4.0 30 6.3 9.0 80 5.6 6.0 30 4.6 10.0 % OF TOTAL 4.2 18.0 20 VALUE ITEMS 3.5 13.0 10 12.0 9, 8,2.8 2 71.0 320 17.0 1, 4,2.0 3 16.5 510 6, 5, 10, 7 12.5
20
6.0 90 11.0 40 A 15.0 130 24.0 60 30.0 B 100 40.0 % OF TOTAL 58.0 180 QUANTITY 71.0 170 C 83.0 50 15.0 100.0 25.0 60 60.0 120
Example 10.1
Basic EOQ model Production quantity model The EOQ is that level of inventory which MINIMIZES the total of ordering and carrying costs
ORDERING COSTS Requisitioning Order Placing Transportation Receiving, Inspecting & Storing Clerical & Staff
CARRYING COSTS Warehousing Handling Clerical Staff Insurance Deterioration & Obsolescence
Reorder point, R
Inventory Level
Demand rate
Time
Lower
Higher
Where:
EOQ (Q) Co D Ch
EOQ =
economic order quantity Ordering Cost Annual Demand Cost of holding 1 unit
EOQ
Q
STOCK LEVELS
1.
2. 3.
4. 5. 6.
MINIMUM LEVEL: Below which actual stock should not reduced. Must be maintained in hand all the time. MAXIMUM LEVEL: Level above which actual stock should not be exceed. RE-ORDERING LEVEL: Level of stock at which it is necessary to take steps for procurement of further lots of materials. DANGER LEVEL: Fixed below minimum level. LEAD TIME: (reorder point)- time taken in processing the order & then executing it. RATE OF CONSUMPTION: Average consumption of stock or material in the factory.
FSN The pace at which the [ Fast-moving, Slow- material moves moving, Non-moving ] HML Unit price of materials [ High, Medium, Low ] SDE Procurement [ Scarce, Difficult, Easy Difficulties
= NET SALES/ (AVEARGE) INVENTORY INVENTORY CONVERSION PERIOD: = DAYS IN A YEAR/ ITR
Just-in-Time JIT
Toyota was the first company to develop JIT Toyota needed to reduce costs of production and JIT was the solution. Companies thinking of introducing JIT will first have to: Find reliable suppliers Train employees to minimize wastages and idle time Improve quality Minimize lead times
VALUATION OF INVENTORIES
FIFO LIFO AVEARGE
METHOD: Simple average method weighted average method BASE STOCK METHOD STANDARD PRICE METHOD MARKET PRICE METHOD
Response-based - replenish inventory with order sizes based on specific needs of each warehouse
Material Requirements Planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. Although it is not common nowadays, it is possible to conduct MRP by hand as well. An MRP system is intended to simultaneously meet three objectives: 1. Ensure materials and products are available for production and delivery to customers. 2. Maintain the lowest possible level of inventory. 3. Plan manufacturing activities, delivery schedules and purchasing activities.