Seminar on inventory management

By: Mr. Kailash V. Vilegave M. Pharm

INTRODUCTION
MEANING OF INVENTORY:
The

meaning of inventory is stock of goods. In

accounting language it may include:

1.RAW MATERIAL: They are required to carry out

production activities uninterruptedly.

2.WORK-IN-PROGRESS: It is a stage of stocks between raw material & finished goods.

3.CONSUMABLES: These are needed to smoothen the process of production.

4.FINISHED GOODS: These are the goods which

are ready for the consumers. 5.SPARES: Form a part of inventory.

 Transaction Motive to facilitate Continuous

Production. Speculative Motive for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts, etc. Precaution Motive for meeting unpredictable changes in demand and supplies of materials

Purpose/ Benefits of Holding Inventories

An efficient system of inventory management will determine What to purchase How much to purchase From where to purchase Where to store

Inventory Management

Objectives Of Inventory Management

To ensure continuous supply of raw material, spares and finished goods.

To avoid both overstocking and under stocking of

inventory.

To maintain investments in inventories at optimum level.

OBJECTIVES OF INVENTORY MANAGEMENT(cntd)

To eliminate duplications in orders To keep material cost under control. To minimize losses through wastage and damages .

INVENTORY MANAGEMENT
It may be defined as a Scientific method of finding out how much stock should be maintained in order to meet the production demands and be able to provide right type of materials at right time, in right quantities and at competitive prices.
It is actually money which is available in the shape of

materials (raw materials and finished products), equipment, storage space, work time etc. it also includes intrest on money invested. output input inventory (money) - goods in stores -work in progress - finished products - equipment etc.

material production dept management

INVENTORY CONTROL
It can be defined as systematic control and regulation of purchase, storage and usage of materials in such a way that so as to maintain an even flow of production, at the same time avoiding excessive investment in inventories. Efficient inventory control cuts out losses and wastes of materials.

CONTROL

AIMS OF INVENTORY

Never run out of stock of any material .

Never build up very large inventory .

Never send out too many small orders for more as such small order turn out to be very costly.
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Objectives of inventory control

Utilizing capital and investment judiciously. Keeping the production on as on going basis. Preventing the idleness of men , machine and morale. Avoiding risk of loss of life. Proper quality. Economy in purchasing. Minimum wastage. No-unde rstocking and No-overstocking. Inducing confidence in customers and to create trust and faith.

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Advantages of Inventory Control

1. . To ensure continuous production by supplying material

2.

It helps the concerned to secure many economics through bulk purchase such as low freight, higher discount, lower price, better use of available resource etc. It ensures timely and continuous supply of goods to customers by maintaining sufficient stock of finished goods.
It eliminates overstocking of the inventories and maintain minimum investment . It helps in optimum utilization of men, money, material, equipments, time and thereby reduce the total cost of the production. 11

3.

5. 6.

INVENTORY CATEGORIES
1] Production Inventories : - materials used are chemicals such as active ingredients and excipients needed to manufacture finished products, i.e, dosage forms. eg: equipment containers, labels, caps and shippers needed for pkg of dosage forms. 2] MRO Inventories ( Maintenance, Repair, and Operating ) : - parts or sub assemblies needed for final assembly of the end product. eg: packing of bulk tablets such as strip packing and blister packing. 3] WIP Inventories (Work In Process) : - items on which work is to be done further. They are semi finished goods. eg: granules waiting for compression and tablets waiting for coating. 4] Finished good inventories : eg: dosage forms, bulk drugs, Physicians samples etc.
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Manufacture process requires relatively long process cycletime.

Procurement of materials has long lead time.

Demand for finished products is some time seasonal and prone to fluctuations.
Material costs are affected by fluctuations in demand and subsequently by fluctuations in manufacturing. These conditions are managed by maintaining reserve stock or safety stock.

FACTORS INFLUENCING INVENTORY

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SELECTIVE INVENTORY CONTROL

Selective inventory control is defined as process of classifying items into different categories and thereby directing appropriate attention to the materials. It is based on the principle of Vital few and trivial many made by Pareto. CLASSIFICATION 1. A-B-C technique 2. V-E-D classification 3. H-M-L 4. F-S-N 5. S-D-E 6. S-O-S 7. G-O-L-F 8. X-Y-Z

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In this technique materials are analyzed according to their value so that costly and more valuable materials are given greater attention and care. They are classified acc. to their high, medium, and low, which are known as A, B and C items respectively.

A-items : - Costly items - Constitute not more than 10% of the total items, but these consume about 70% of the total budget of inventory. - Require proper storage and handling - Overstocking is avoided. 2. B-items : - Neither costly nor cheap. A-B-C Classification - Constitute 20% of the total items and (Always Better Control) consume about 20% of the total inventory budget. - Need moderate control.

1.

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3. C-items : - cheaper - constitute 70% of the total items and consume about 10% of total inventory budget on them. - do not need any control and are given least attention.

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V-Vital :

items without which the activities will come to halt. eg: adrenaline injection, steroid preparations .

E-Essential : items which are likely to coz disruption of the normal activity. eg: life supporting items such as transfusion fluids. D-Desirable : in the absence of which the hospital work does not get hampered. eg: aspirin, other analgesics, vitamins, enzymes.

V-E-D Classification (Vital, Essential and Desirable)

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H-M-L Classification (High, Medium, Low)

It is based on the unit value (in rupees) of items. The items should be listed in decreasing order of unit value and management may fix limits for deciding the three categories.

moving)

F-S-N Classification (Fast, Slow and Non

It takes into account the distribution and handling patterns of items from stores. Used when obsolescence is to be controlled. May be a change in technology or an item is no longer in use. At such time information must ne given to managers so that they can act on it.
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S-D-E Classification
Its based on lead time analysis and availability. S- Scarce : longer lead- time (imported). D- Difficult : long lead -time (indigenous). E-Easy : reasonable lead- time.

S-O-S Classification
Items which are seasonal in nature and hence require special purchasing and stocking categories.

Classification

G-O-L-F

It stands for Government, Ordinary, Local, Foreign.

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It is based on value of inventory stored. If the values are high, special efforts should be made to reduce them. It is done once in a year.

X-Y-Z Classification
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Lead times, Stockouts, Safety stocks

Maximum quantity : upper limit of inventory in the stores. Minimum quantity : lower limit of the inventory in the
stores.

Standard order : it is the difference between maximum and

minimum quantities.

Reorder point : it is the time to initiate a purchase order. If

it is not done, stock will be inventory may exhaust and even the reserve

utilized before the arrival of new items.

Stock holding : it is the buffer stock that should be

available to avoid break down of production schedule.
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It is the time lapse between placement of an order and LEAD TIME

receipt of items including their approval by Q.C dept. It may be calculated on the basis of past experience. Reasons for the lead time may be explained as internalexternal-internal.
Raising of purchase requisition. Inquiries. Tenders. Scrutiny and approval. Placement of orders to suppliers.

Internal

Lead time

Suppliers makes goods ready. Transportation and clearing. Receiving of goods at stores. Taking the stock. Inspection for quantity and quality. Ready for issue to production.

External

Internal
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STOCK-OUTS

Means running out of stocks which leads to back orders. Limits of the stock outs should not be more than 2%.

CAUSES FOR STOCK-OUTS 1] INTERNAL

- Poor control transportation - Improper records situations and demand - Shortage of funds Fire etc. - Poor follow-up - Strikes etc.
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- Faulty planning.

2] EXTERNAL

- Labour problems - Poor selection of - Change in market

- Floods, Strikes and

IMPLICATIONS OF STOCK-OUTS
Loss of sales and customers.

Loss of good will and image.

Decreased use of machine and decreased productivity.

Inter-departmental conflict.
Loss of morale. Emergency purchases at high costs.

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In order to maintain inventory control, it is imp to decide upon various levels of materials. These are: Maximum stock level: Its the upper limit beyond which the qty of any item is not allowed to rise.The max stock level is fixed after considering several points.
1. Rate of consumption of material. 2. Amt of capital needed and available. 3. Nature of material. 4. Market trend. 5. Fashion habits.

6. Govt restrictions.
7. Risk involved due to fire, obsolescence and deterioration.
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below which the stock of any item should not normally be allowed to fall. The main purpose of determination of this limit is to protect against the possibility of particular item going out of stock and there is further danger of stoppage of its production and supplies. The level is fixed taking into consideration: 1. Avg rate of consumption. 2. Lead-time.

Minimum stock level/safety stock: its the lower limit

maximum stock level. when the stock of inventory reaches at this point, the process for the purchase material should be started. Re-order level is slightly more than min stock level to guard against: 1. Abnormal use of item. 2. Abnormal delay in supply.
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Re-order level: its fixed between the minimum and

level. If it reaches this level, urgent action must be taken to prevent the stock-out.

Danger level: this is generally below the minimum stock

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Safety stock or buffer stock is an ideal quantity of materials that has been always maintained and is drawn only in emergency condition. It is considered as tied-up capital. Hence efforts must be made to keep them at he lowest level. 1] 2] 3] 4]

Allow continuation of the production to certain extent even after the lead time lapses. Uncertain consumption and fluctuating demands can be absorbed. Back orders can be kept to a minimum. Best level of customer service can be achieved. For A-items : 15 days B-items : 30 days C-items : 60 days Vital items : more in quantity Scarce items : Fast moving items :

ADVANTAGES

SAFETY-STOCKS
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REORDER QUANTITY METHODS

as to continue production without any interruptions in the future.

Reorder quantity: is qty of items to be ordered so

Fixed quantity system

The reorder qty is a fixed one and therefore the time for ordering varies. When the stock level drops to a predetermined pt known as reorder level, then order is placed. Its calculated using EOQ. Its also calculated as: Reorder level qty = safety stock + (usage rate x lead time)

This eqn. is used to calculate each item independently.

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Open access bin system

The bin is filled with items to the max level as and when required. These items are used without making a record. Restricted usually to C-items.

Two bin system

Consists of two bins. When the first bin is exhausted, it indicates time for reorder. The second bin is the reserve stock & used during the lead time period. After receiving the items, items are distributed equally into the two so as to reach the initial level. Applicable to hospitals and community pharmacies.

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ECONOMIC LOT SIZE (EOQ) FORMULA

How much of items to buy or order at a time? When should the items be made available for production? It is defined as the quantity of the material to be ordered at one time .

This quantity is fixed in such a manner as to minimize the cost of ordering and carrying the stock so that only correct quantity of the material is to be purchased .

EOQ EQUATION
Q = 2AS IU

Rs.

Q= economic lot size. A= annual usage units. S= ordering cost associated with one order,

I= annual inventory carrying costs expressed as decimal per unit. U= Cost of one unit, Rs.
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A & I must be expressed in comparative terms of units writ time and qty.

APPLICATIONS OF EOQ
Good tech for calculating the economical lot size for ordering. EOQ relationship shows, a general way, how much inventories should be increased, if the sales of product is increased by 20%. Acc. to EOQ formula, the max inventory would be square root of 20.

LIMITATIONS
Sometimes, EOQ quantities may not balance with the quantities of all items needed for a lot size. Not a time phased procedure. May not be applicable when demands are irregular and when there is possibility of price rise. Inventory holding cost & the ordering cost cannot be identified properly and calculated accurately. Proper maintenance of stock records. Set up cost is also an imp factor. In such cases, a tech called LIMIT( Lot Size Inventory Management Tech) can be used.
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max inventory level

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inventory consumption

Inventory in 1000 units

25 20

reorder quantity
15 10

B C D

minimum inventory level B C D safety stock 0 Time in weeks R-P L

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Total inventory cost = procurement cost + carrying cost

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COSTS INVOLVED IN EOQ

PROCUREMENT COST: consists of expenditure connected with following, Receiving quotations Processing purchase requisition Receiving and inspecting the items Processing vendors invoice Procurement cost decreases as order qty increases, bcoz fewer orders are possible CARRYING COST: contains of expenditure connected with the following. Interest on capital investment Cost of storage facility, up-keep of material, record keeping etc. Cost involving deterioration Cost of insurance, property tax etc. Carrying cost varies with the qty ordered. If smaller is the order, carrying cost is reduced. In such cases, number of orders increases.

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Relationship between cost and quantity.

Cost per period

50 40 30 Min 20 cost 10 EOQ 100 200 300 400 Procuring costs 500
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Order quantity

REORDER TIME METHODS

They are based on past experience on fixed lead times. Some of these are: 1. Intuitive method Maintenance of a want book. Applicable to small pharmacies. 2. Systematic want-book system Want-books are maintained for each product and each major wholesaler. Attachment of a card to a product. Small pharmacies. 3. Fixed interval system Items are ordered at regular intervals. 4. S & S method Max stock and reorder levels are predetermined. 5. Single order and scheduled part delivery Annual requirements are included in single contract. Specified quantities are delivered in scheduled times. Ideal for items which are used in small quantities, but at regular rate of usage.
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MODERN INVENTORY SYSTEMS 1. Material Requirement Planning (MRP)

Its a computational tech that converts the masterschedule of production into a detailed schedule for materials and components used in production. MRP determines the qty of materials and the date on which these are needed for each phase of production. Its based on the principles if independent and dependent demand. ADVANTAGES 1] Useful when there is sudden change in demand(mkt/qty/date). 2] Minimises unnecessary inventory investment. 3] Machines and material utilizaton can be planned in a better manner and greater productivity can be achieved. 4] Sophisticated and nature approach of inventory control. 5] Improved customer services.
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DISADVANTAGES 1] High procurement costs bcoz each item is processed seperately.

2] Close monitoring of the material stocks is essential. METHOD In MRP systems, 3 sources (files) are required as an input data for computations. a) Master production schedule b) Bill of material file c) Inventory record file

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1. MASTER PRODUCTION SCHEDULE FILE

It is a statement of time phased plan for the total production activities . It is translated to the specific products . For the product , the components and the quantities are listed . The production cycle and the production schedule are generated in stages and includes products likely to go in the shipment . Material requirement can be broken in terms of weeks and days . Smaller the time period, the more effective the material plan will be.
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It represents the actual flow of production in terms of the quantities to be packed .

It determines the quantity of the packing component and the bulk drugs that are needed and is known as the parts list . The stages and the proper sequence through which the product is made is determined .

The production and planning department uses BOM to calculate no of components.

2. BILLS-OF MATERIALS FILE

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Ordering of items at one time is not correct as different substances have different lead times . The computers are thus used for this purpose . The lead time are obtained as follows . 1. Ordering lead times is obtained from the purchase records . 2. Manufacture route time is obtained from the process route sheets.

3.INVENTORY RECORD FILE

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Sales forecast Customer order Master Production Schedule file

Service parts requirement

Engineering changes

Inventory transaction

Bills of Materials file

MRP processor

Inventory Record file

Output reports
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It refers to the strategic financial planning as well as production planning through the use of the simulation capabilities.
It is originally developed for the material orders . Planning and production are integrated with MRP. It is a totally company system in which functional group interact and make joint decisions It includes monitoring inventory level , work force levels .

2.MANUFACTURING RESOURCE PLANNING (MRP-II)

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3. JUST IN TIME(JIT)
It is the process of receiving the material, transforming them into parts, converting the material into sub assemblies, assemblies and the finished products for sale. Product supply is matched with the market demand. It is an attempt to reduce the working capital to the minimum. ADVANTAGES Employees are motivated and better quality of the goods are produced. Inventory levels are reduced and buffer stocks are also reduced . Additional stock buying is not required
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The main need of the JIT is the motivation factor . Motivation is for the following types 1. Motivation for control.

2.
3.

Motivation for the involvement .

Motivation for improvement .

NEEDS OF JIT
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COSTS AND SAVINGS IN INVENTORY

1] ORDERING COSTS: Stationary Clerical and processing, salaries/ rentals Postage Processing of bills Receiving/inspection/documentation 2] HOLDING/ CARRYING COSTS: Storage space Property tax on warehousing Insurance Deterioration/obsolescence Material handling and maintenance, equipments. Q.C

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3] STOCK OUT COSTS Loss of business/profit/market/advice. Additional expenditure due to urgency of purchase. Telephone charges. Loss of labour hours. Air transport charges.

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1. 2. 3.

4.

Savings are affected by various means: Material substitution Reduction in inventory levels. Variety reduction. Standardization.

SAVINGS
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Valuation of Inventory

FIFO LIFO Average Price Method Base Stock Standard Price & Market Price