POM Module 3 Inventroy

POM MODULE 3
INVENTORY MANAGEMENT
INVENTORY
 Inventory is the stock of any item or resource
used in an organization and can include: raw
materials, finished products, component parts,
spares, and work-in- process.
 It can be used to refer to the stock on hand at a
particular time of raw materials, goods-in
progress of manufacture, finished products,
merchandise purchased for resale, and the like,
tangible assets which can be seen, measured
and counted…
The Term Inventory Includes The Following
Categories Of Items:
1. Production Inventories
 Raw material, parts and components which
enter the firm’s product in the production
process. These may consist of
 special items manufactured to
company specifications,
 standard industrial items purchased off
the shelf
2. MRO Inventories:
 Maintenance, repair and operating supplies
which are consumed in the production
process, but which do not become part of
the product.
 E.g., oil, nut/bolt, machine repair parts
3.In-process Inventories:
 Semi-finished products found at various
stages in the production operation
4.Finished Goods Inventories
 completed products ready for shipment
PURPOSES OF INVENTORY
 TO MEET VARIATION IN PRODUCT DEMAND
 TO ALLOW FLEXIBILITY IN PRODUCTION
SCHEDULING
 TO PROVIDE A SAFEGUARD FOR VARIATION
IN RAW MATERIAL DELIVERY TIME
 TO TAKE ADVANTAGE OF ECONOMIC
PURCHASE-ORDER SIZE/QUANTITY
DISCOUNTS
INVENTORY COSTS
 Holding (or carrying) costs
Costs for storage, handling, insurance,
obsolescence, depreciation, opportunity
cost of capital, etc.
Holding costs tend to favor low inventory
levels and frequent replenishment
(restoration of a stock or supply to a former
level or condition.)
It includes costs of storage facilities,
depreciation, taxes.
 Setup (or production change) costs
Costs for arranging specific equipment
setups, etc.
Set up costs reflect the costs involved in
obtaining the necessary materials, arranging
specific, equipment setups, filling out the
required parts appropriately charging time
and materials, and moving out the previous
stock of materials, in making each different
product.
 Ordering costs
 Costs involved in replenishing inventory, e.g.,
staffing, order placing, vendor development,
receiving and inspection, etc., are called
inventory ordering costs.
 Stock out costs / Shortage costs
The costs that are incurred as result of
running out of stock are known as stock out
or shortage costs.
INDEPENDENT VS DEPENDENT DEMAND

 Independent Demand
Independent Demand (Demand for the final
end-product or demand not related to
other items)
 Dependent Demand
Dependent Demand (Derived demand items
for component parts, subassemblies, raw
materials, etc)
THE ROLE OF INVENTORY IN SUPPLY CHAIN
MANAGEMENT
 Since demand is usually not known with
certainty, it is not possible to produce exactly
the amount demanded
 So an additional amount of inventory, called
safety or buffer is kept on hand to meet
variations in product demand
 The bullwhip effect: The bullwhip effect is a
phenomenon that represents the instabilities
and fluctuations in product and supplier orders
throughout various stages of the supply chain
INVENTORY AND QUALITY MANAGEMENT
 Level of customer service: The ability to meet
effectively internal or external customer
demand in a timely and efficient manner
 Customer for finished goods perceive quality
service as availability of goods they want at the
time when they want them
 To provide this level of quality customer service,
the tendency is to maintain large stocks of all
types of items
 As the level of inventory increases to provide
better customer service, inventory costs
increase, whereas quality-related customer
service costs, such as lost sales and loss of
customers decrease
 The conventional approach to inventory
management is to maintain a level of inventory
that reflects a compromise between inventory
costs and customer service
INVENTORY CONTROL SYSTEM
 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
 There are two basic inventory systems
Continuous system
Periodic system
CONTINUOUS INVENTORY SYSTEMS

 In a continuous inventory system, a continual
record of the inventory level for every item is
maintained
 It is also referred to as a “perpetual system” or
a “fixed-order-quantity system”.
 Whenever the inventory at hand decreases to a
predetermined level, referred to as the
“reorder point”, a new order is placed to
replenish the stock of inventory
 The order that is placed is for a fixed amount
that minimizes the total inventory costs
 This amount of order placed is called the
“economic order quantity”
 Continuous inventory systems often incorporate
information technology tools to improve the
speed and accuracy of data entry. E.g. Barcodes
PERIODIC INVENTORY SYSTEMS

 It is also referred to as “fixed-time-period
system” or “periodic review system”
 In a periodic inventory system, the inventory on
hand is counted at specific time intervals-every
week or at the end of each month
 After the inventory in stock is determined, an
order is placed for an amount that will bring
inventory back up to a desired level
 Since inventory level is not monitored at all
during the time interval between orders, little
or no record keeping is required.
 Disadvantage is less direct control
 Results in larger inventory levels to guard
against unexpected stock outs early in the fixed
period
 Also requires that a new order quantity be
determined each time a periodic order is made
 Used in college library, small retail stores, drug
stores, grocery stores, and offices
THE BASIC EOQ MODEL
 In a continuous system, when inventory reaches
a specific level, referred to as the reorder point,
a fixed amount is ordered
 The most widely used and traditional means of
determining how much to order in a continuous
system is the “Economic Order Quantity (EOQ)
Model”
 The function of EOQ Model is to determine the
optimal order size that minimizes total
inventory costs.
BASIC EOQ MODEL – ASSUMPTIONS

1. Demand is known with certainty and is constant
over time
2. No shortages are allowed
3. Lead time for the receipt of orders is constant
4. The order quantity is received all at once
THE ABC CLASSIFICATION SYSTEM
 The ABC system is a method for classifying
inventory according to several criteria including
its monetary value to the firm
 About 5 % - 15% of all inventory item account
for 70% to 80% of the total value of inventory.
These are classified as class A items
 B items represent approximately 30% of total
inventory units but only about 15% of the total
inventory value
 C items account for 50% - 60% of all inventory
units but represent only 5% - 10% of total value
 A items require a continuous control system,
while for B and C items periodic review system
with less monitoring
 Items kept in inventory are not of equal
importance in terms of:
Profit potential
Sales or usage volume
Stock-out penalties
HML CLASSIFICATIONS
 The high, medium and low (HML) classification
follows the same procedure as is adopted in
ABC classification. Only difference is that in
HML, the classification unit value is the criterion
and not the annual consumption value.
 The items of inventory should be listed in the
descending order of unit value and it is up to
the management to fix limits for three
categories.
 For example, the management may decide that
all units with unit value of Rs 2000 and above
will be H items, Rs 1000 to 2000 M items and
less than Rs 1000, L items
VED CLASSIFICATION
 It is done to determine the criticality of an item
and its effect on production and other services.
It is specially used for classification of spare
parts.
 If a part is vital, it is given ‘V’ classification, if it is
essential, then it is given ‘E’ classification and if
it is not so essential, the part is given ‘D’
classification.
 For ‘V’ items, a large stock of inventory is
generally maintained, while for ‘D’ items,
minimum stock is enough
SDE CLASSIFICATION
 It is based on the availability of items and is very
useful in the context of scarcity of supply.
 ‘S’ refers to scarce items, generally imported,
and those which are in short supply.
 ‘D’ refers to difficult items which are available
indigenously but are difficult items to procure.
 Items which have to come from distant places
or for which reliable suppliers are difficult to
come by, fall into ‘D’ category, ‘E’ refers to
items which are easy to acquire and which are
available in the local markets.
FSN ANALYSIS
 FSN stands for fast moving, slow moving and
non- moving. Here, classification is based on the
pattern of issues from stores and is useful in
controlling obsolescence.
 For FSN analysis, the date of receipt or the last
date of issue, whichever is later, is taken to
determine the number of months, which have
lapsed since the last transaction. The items are
usually grouped in periods of 12 months.
 FSN analysis is helpful in identifying active items
which need to be reviewed regularly and
surplus items which have to be examined
further. Non moving items may be examined
further and their disposal can be considered.

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POM MODULE 3

INDEPENDENT VS DEPENDENT DEMAND

CONTINUOUS INVENTORY SYSTEMS

PERIODIC INVENTORY SYSTEMS

BASIC EOQ MODEL – ASSUMPTIONS

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