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INVENTORY MANAGEMENT

INVENTORY MANAGEMENT

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INVENTORY MANAGEMENT

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  1. INVENTORY MANAGEMENT

  2. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  3. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  4. Definition of Inventory management It is the sum of value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semi processed and finished goods. Inventories 1.Production Inventories 2.MRO Inventories 3.In-Process inventories 4.Finished goods inventories.

  5. Inventory Analysis Inventory planning and subsequent control of an inventory is accomplishedon the basis of knowledge about each of the individual items and the finished products of which each is a part. Inventory Catalogue 1.it serves as a medium of communication 2. an inventory catalogue accrues to the inventory control operation it self.

  6. Functions of inventories. It makes possible smooth and efficient operation of a manufacturing organization by decoupling individual segments of total operation. 1.Purchased part inventories 2.Inventories of parts and components 3.Finished goods inventories

  7. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  8. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  9. Inventory Management in India

  10. Inventory may be defined as sum of value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semi possessed materials & finished goods at any given point of time. These resources are called idle resources since they are idle they are kept in the stores.

  11. These resources are maintained for operational smoothness. The size of inventory depends on internal lead time, suppliers lead time, vendors relation and availability of raw materials. Finished goods inventory are maintained to ensure free flowing supply of goods to customers.

  12. Two factors which affect inventories are:- • Accuracy & detail of final forecast. • Availability of storage space.

  13. Norms for inventory • The department set up monetary limits for investment in inventories. • They have to allocate the investments to various items and ensure smooth operations of the company. • While setting the norms involvement of people making the norms is desirable. • Departments like finance, production are included.

  14. Peculiarities in India • It operates in sellers market for purchase of goods. • Indian industry tends to stress a lot on machine utilization. • In India, inventory control technique do not run under “ free availability” of goods

  15. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  16. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  17. Classification of Inventories • Production Inventory • MRO Inventory (Maintenance Repair Operating Supplies) • In-process Inventory • Finished Goods Inventory

  18. Forces Creating Various Types of Inventory

  19. Three Components of Inventory Management Forecasting: How much do we need? when will we need it? Replenishment: How much should we order? When should we order? Inventory control: How much do we have on hand? How much do we have on order? How much have we sold?

  20. Dependent and Independent Demand

  21. Costs relevant for Inventory Decision • Holding Costs : Capital costs, inventory service costs, storage space and risk costs. • Shortage Costs: Penalty for not having inventory available when required. • Acquisition Costs: Cost to order and acquire inventory. • Control System Costs: Cost of administrating systems needed to manage inventory levels.

  22. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  23. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  24. COSTS ASSOCIATED WITH INVENTORIES CARRYING COSTS ACQUISITION COSTS

  25. CARRYING COSTS • Carrying material in inventory is expensive. • The annual cost of carrying a production inventory averaged approximately 25% of the value of the inventory.

  26. CARRYING COSTS • Opportunity cost of invested funds 12 – 20 % • Insurance costs 2 – 4 % • Property taxes 1 – 3 % • Storage costs 1 - 3 % • Obsolescence and deterioration 4 – 10 % Total carrying costs 20 – 40 %

  27. Annual cos t s CC AC 0 Inventory level (or order/delivery quantity) Relationship of inventory-related costs to inventory level (AC = acquisition costs; CC = carrying costs)

  28. (carrying cost / year) = (average inventory value) x (inv. Carrying cost as a % of inv. value) (carrying cost / year) = (average inventory in units) x (material unit cost) x (inv. Carrying cost as a % of inv. value) CC = Q x C x I 2 Where CC = carrying cost/yr for the material in question Q = order or delivery quantity for the material, in units C = delivery unit cost of the material I = inventory carrying cost for the material, expressed as a % of the inventory value

  29. Acquisition costs • A certain portion of wages and operating expenses of such departments as purchase and supply, production control, receiving etc. • The cost of supplies such as engineering drawings, envelopes, stationery, and forms of purchasing etc. • The cost of services such as computer time, telephone, fax etc.

  30. It can be calculated as follows: (acquisition cost/year) = (no of orders placed/yr) x (acquisition cost per order) AC = U/Q x A Where, AC = acquisition cost /year for the material in question U = expected annual usage of the material Q = order or delivery quantity for the material A = acquisition cost/order or per delivery for the material.

  31. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  32. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  33. Sr No. Type of Control Criteria Application 1) ABC analysis Annual Consumption value of To control inventory the item of raw material & WIP inventory • XYZ analysis Inventory value of items in To review the • stores actual inventories • their uses, etc. at • scheduled intervals. • VED analysis Criticality of the item To determine the • stocking level of • spare parts for • machines & • equipments. • FSN analysis Consumption pattern of the To control • items obsolescence.

  34. Sr No. Type of Control Criteria Application • HML analysis Unit price of the item To control the • purchases & to • develop vendors. • SDE analysis Purchasing problem Lead time analysis • in regard to availability & purchasing • strategies. • SOS analysis Nature of supplies & Procurement & • seasonality holding stratergy • for seasonal term. 8) GOLF analysis Source of supply of Procurement material strategy.

  35. Advantages of selective control system • Helps the material manager to exercise selective control and focus attention only on few vital items. • Able to control inventories and thereby achieve management objectives. • Results in proper inventory analysis & obsolete stocks are pinpointed. • Results in reduced administrative costs & improve inventory turnover. • Powerful approach in the direction of cost reduction as it is helps to control items with selective approach.

  36. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  37. Definition of inventories, inventory analysis and inventory catalog. • Inventory management in India. • Classification of inventories, forces creating various hypes of inventories, safety stock. • Cost associated with inventories. • Types of selective inventory control and advantages of selective control. • ABC analysis. • EOQ. • MRP. • P & Q systems.

  38. ABC Analysis What is ABC analysis? • ABC analysis is a basic analytical management tool which enables top management to place the effort where the results will be greatest. • The techniques tries to analyze the distribution of any characteristic by money value of importance in order to determine it’s priority.

  39. ADVANTAGES OF ABC ANALYSIS • This approach helps the material manager to exercise selective control and focus his attention only on few items when he is confronted with lakhs of stores items. • By concentrating on ‘A’ class items, the material manager is able to control inventories and is able to show ‘Visible’ results in a short span of life. • By controlling the ‘A’ items, and doing a proper inventory analysis, obsolete stocks are automatically pinpointed.

  40. MECHANICS OF ABC ANALYSIS The mechanics of classifying the items into ‘A’, ‘B’ and ‘C’ categories is described here: • CALCULATE • SORT • PREPARE A LIST • COMPUTE A RUNNING TOTAL • COMPUTE AND PRINT

  41. Cumulat ive % value 100 90 75 C A B 0 100 10 30 Cumulative % number

  42. Basic principles of ABC analysis are: • The analysis does not depend upon the unit cost of the items but only on its annual consumption value. • It does not depend on the importance of the item. • The limits of ABC categorization are not uniform but will depend upon the size of the undertaking, its inventory as well as the number of items controlled.

  43. PURPOSE OF ABC ANALYSIS

  44. A items: High consumption value • Very strict control • No safety stocks • Frequent ordering or weekly deliveries • Weekly control statements • Maximum follow-up and expediting • Rigorous value analysis • As many sources as possible for each item • Accurate forecasts in material planning • Minimisation of waste, obsolete and surplus • Individual postings • Central purchasing and storage • Maximum efforts to reduce lead time • Must be handled by senior officers

  45. B items: moderate value • Moderate control • Low safety stocks • Once in three months • Monthly control report • Periodic follow-up • Moderate value analysis • Two or more reliable sources • Estimates based on past data on present plans • Quarterly control over surplus and obsolete items • Small group postings • Combination purchasing • Moderate • Can be handled by middle management

  46. C items : low consumption value • Loose control • High safety stock • Bulk ordering once in six months • Quarterly control reports • Follow-up and expediting in exceptional cases • Minimum value analysis • Two reliable sources for each other item • Rough estimates for planning • Annual review over surplus and obsolete material • Group positioning • Decentralized purchasing • Minimum clerical efforts • Can be fully delegated

  47. Objectives of ABC analysis Exhibit 1 Item no Annual consumption value (Rs) No of orders Value per order Average inventory 4 4 4 60,000 4,000 1,000 15,000 1,000 250 7,500 500 125 1 2 3 Total inventory Rs 8,125 Exhibit 2 Value per order Average inventory Annual consumption value (Rs) Item no No of orders 60,000 4,000 1,000 8 3 1 7500 133 1000 3750 667 500 1 2 3 Rs 4,917 Total inventory

  48. Limitations of ABC analysis ABC analysis is based on grading the items according to the importance of the performance of an item, that is V.E.D.- Vital Essential and Desirable- analysis. Some times, through negligible in monetary value, may be vital for running the plant, and constant attention is needed.

  49. Music – 3D Analysis • Consumption Value • Delivery Time • Criticality