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Inventory Control

Inventory Control

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Inventory Control

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  1. Inventory Control

  2. Meaning Of Inventory Control • Inventory control is a system devise and adopted for controlling investment in inventory. It involve inventory planning and decision making with regard to the quantity and time of purchase , fixation of stock levels, maintenance of store records and continuous stock taking. In fact where proper inventory control exists, neither the material wait unduly long for men and machines, nor men machines wait for materials

  3. Types of Inventories • Inventory is very broad term and includes the elements whose value are always very high in industrial units. It may be held for a variety of purposes. The term inventory can be classified into the broad types • Direct Inventories • Indirect Inventories

  4. Direct Inventories Direct Inventories involves those items which are directly contributed in manufacturing and become major parts of finishing goods. It is classified into three types 1.Raw Material (RM) 2. Work In Progress (WIP) 3. Finishing Goods (FG)

  5. Indirect Inventories • Indirect inventories involves those items which are necessary for manufacturing but do not become there major components of finishing output, e.g. grease, oil, petrol, lubricant, tools and the maintenance material etc.

  6. Inventory Models • Independent demand – finished goods, items that are ready to be sold • E.g. a computer • Dependent demand – components of finished products • E.g. parts that make up the computer

  7. Functions of Inventory • To meet anticipated demand • To smooth production requirements • To protect against stock-outs • To permit operations • To take advantage of quantity discount

  8. Objective of Inventory Control • To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds • Level of customer service • Costs of ordering and carrying inventory

  9. Factors Effecting Inventory Control

  10. Effective Inventory Control • A system to keep track of inventory • A reliable forecast of demand • Knowledge of lead times • Reasonable estimates of • Holding costs • Ordering costs • Shortage costs • A classification system

  11. Inventory Counting Systems • Periodic System Physical count of items made at periodic intervals • Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

  12. Inventory Counting Systems • Two-Bin System - Two containers of inventory; reorder when the first is empty • Universal Bar Code - Bar code printed on a label that hasinformation about the item to which it is attached

  13. Key Inventory Terms • Lead time: time interval between ordering and receiving the order • Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year • Ordering costs: costs of ordering and receiving inventory • Shortage costs: costs when demand exceeds supply

  14. ABC Classification System High A Annual $ value of items B C Low Low High Percentage of Items Classifying inventory according to some measure of importance and allocating control efforts accordingly. A-very important B- mod. important C- least important

  15. Economic Order Quantity Models • Economic order quantity (EOQ) model • The order size that minimizes total annual cost • Economic production model • Quantity discount model

  16. Assumptions of EOQ Model • Only one product is involved • Annual demand requirements known • Demand is even throughout the year • Lead time does not vary • Each order is received in a single delivery • Inventory Level = 0 when new order just arrived • There are no quantity discounts

  17. The Inventory Cycle Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Receive order Receive order Receive order Place order Lead time

  18. Total Cost Q D S H + 2 Q Annual carrying cost Annual ordering cost Total cost = + TC =

  19. Cost Minimization Goal Annual Cost Ordering Costs Order Quantity (Q) (optimal order quantity) QO

  20. Minimum Total Cost Q D S H = 2 Q The total cost curve reaches its minimum where the Carrying Cost = Ordering Cost

  21. Deriving the EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

  22. Economic Production Quantity (EPQ) Assumptions Only one product is involved Annual demand requirements are known Usage rate is constant Usage occurs continually, but production occurs periodically The production rate is constant Lead time does not vary There are no quantity discounts 12-22

  23. EPQ: Inventory Profile Q Production and usage Usage only Production and usage Usage only Production and usage Q* Cumulative production Imax Amount on hand Time 12-23

  24. Quantity Discount Model Quantity discount Price reduction offered to customers for placing large orders 12-24

  25. Quantity Discounts 12-25

  26. Quantity Discounts 12-26

  27. When to Reorderwith EOQ Ordering • Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered • Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time. • Service Level - Probability that demand will not exceed supply during lead time.

  28. Determinants of the Reorder Point • The rate of demand • The lead time • Demand and/or lead time variability • Stockout risk (safety stock)

  29. Safety Stock reduce risk of stockout during lead time

  30. Reorder Point Service level Risk of a stockout Probability of no stockout Quantity ROP Expected demand Safety stock 0 z z-scale The ROP based on a normal Distribution of lead time demand

  31. Single Period Model • Single period model: model for ordering of perishables and other items with limited useful lives • Shortage cost: generally the unrealized profits per unit • Excess cost: difference between purchase cost and salvage value of items left over at the end of a period

  32. Single Period Model • Continuous stocking levels • Identifies optimal stocking levels • Optimal stocking level balances unit shortage and excess cost • Discrete stocking levels • Service levels are discrete rather than continuous • Desired service level is equaled or exceeded

  33. Optimal Stocking Level Ce Cs Service Level Quantity So Balance point Cs Cs + Ce Service level = Cs = Shortage cost per unitCe = Excess cost per unit

  34. Operations Strategy • Too much inventory • Tends to hide problems • Easier to live with problems than to eliminate them • Costly to maintain • Wise strategy • Reduce lot sizes • Reduce safety stock