MSE - UNIT - 3.pptm

UNIT - III
INVENTORY CONTROL IN
MAINTENANCE
 Def : Inventory is the accounting of items, component parts
and raw materials a company uses in production or sells.
 Ex: lubricants, valves, pipe fittings, paints, angle iron,
channel iron, controls, and nuts and bolts.
 In many maintenance organizations, materials account for
one-third to one-half of the operating budget, and more in
some capital-intensive industrial sectors.
 A well-managed inventory system of such items helps reduce
maintenance cost, worker and equipment downtime, and
improves productivity.
 Inventory control plays an important role in maintenance.
What Is Inventory?
The term inventory refers to the raw materials used in
production as well as the goods produced that are
available for sale.
A company's inventory represents one of the most
important assets it has because the turnover of
Inventory represents one of the primary sources of
revenue generation and subsequent earnings for the
company's shareholders.
 There are three types of inventory, including raw
materials, work-in-progress, and finished goods. It is
categorized as a current asset on a company’s balance
sheet.
Understanding Inventory
Inventory is a very important asset for any Company.
It is defined as the array of goods used in production or
finished goods held by a company during its normal course of
business.
There are three general categories of inventory, including raw
materials (any supplies that are used to produce finished
goods), work-in-progress (WIP), and finished goods or those
that are ready for sale.
INVENTORY PURPOSES
Important purposes of inventory

Types of Inventory
The commonly identified types :
raw materials inventory
finished goods inventory
supplies inventory
work-in-process (WIP) inventory
transportation inventory
replacement parts inventory.
BASIC MAINTENANCE INVENTORY-RELATED
DECISIONS
Items/materials to be stored
Amount of items/materials to be stored
Item/material suppliers
Lowest supply levels
Highest supply levels
Time to buy and pay
Place to keep items/materials
Appropriate price to pay
ABC CLASSIFICATION APPROACH FOR
MAINTENANCE INVENTORY CONTROL
 In controlling inventory, one must seek information on areas such
as those listed below:
 Importance of the inventory item
 The way it should be controlled
 Quantity to be ordered at one time
 Specific point in time to place an order
 The ABC (Activity Based Costing) approach classifies in-house

inventory into three categories (i.e., A, B, and C).
 A: Of the items, 20% are responsible for 80% of currency usage.
 B: Of the items, 30% are responsible for 15% of currency usage.
 C: Of the items, 50% are responsible for 5% of currency usage.
STEPS TO BE FOLLOWED FOR ABC
APPROACH:
The following three steps are associated with
the ABC classification approach:
1. Determine the item characteristics that can
influence inventory management results.
Often, this is the annual currency usage.
2. Group items based on the criteria
established above.
3. Practice control relative to the group
importance
Steps for grouping by annual currency usage
CONTROL POLICIES FOR A, B, AND C CLASSIFICATION
ITEMS :
 Classification A items: These are high-priority items.
Practice tight control including: frequent review of
demand forecasts, complete
accurate records, periodic and frequent review by
management, close follow-up, and expediting to minimize
lead time.
 Classification B items: These are medium-priority items.
Practice regular controls including: good records, regular
processing, and normal attention.
 Classification C items: These are low-priority items.
Practice simple controls, but ensure they are sufficient to
meet demand.
ABC Analysis
CATEGORY NO. OF ITEMS(%) ITEM VALUE(%) MANAGEMENT
CONTROL
A 20 80 (HIGHEST) MAXIMUM
B 30 15(MODERATE) MODERATE
C 50 5 (LEAST) MINIMUM
TOTAL 100 100

INVENTORY CONTROL MODELS
 These models are based on the assumption that demand
for an individual item can be either independent or
dependent on the demand for other items.
 The types of costs associated with the models are:
• Holding cost : This is associated with holding or carrying
inventory over time. Ex: cost of insurance, extra staffing,
and interest payments.
• Ordering cost: This is associated with order processing,
clerical support, forms, supplies, etc.
• Setup cost: This is associated with the preparation of an
equipment/machine or process for manufacturing an order.
ECONOMIC ORDER QUANTITY MODEL
 This is the most widely known inventory control methods.
 Some assumptions associated with the model are as follows:
• Constant and known demand
• Instantaneous receipt of inventory
• Constant and known time between order placement and receipt of
the order
• Infeasible quantity discounts
• Stock outs can be avoided by placing orders at the right time
• Two variable costs : holding cost and ordering or setup cost
 The annual setup cost (SUC) is given by,
1
where NOP = number of orders placed per year,
SOC = setup or ordering cost per order,
θ = demand in units for the inventory item annually,
q = number of pieces per order.
The annual inventory holding cost (AHC) is expressed by,
2
Where AIL = average inventory level,
HC = holding or carrying cost per unit per year.
For all optimal order quantity we equate Eqs. (1) and (2) as follows:
Solving Eq. (3), we get,
4
Where q* = optimum number of pieces per order or, specifically, the
economic order quantity (EOQ).
The expected number of orders per year is given by,
Where n = annual expected number of orders.

The expected time between orders (ETBO) is expressed by,
where TWD = total number of working days in a year.

The daily demand (DD) is given by,
The reorder point (ROP) is expressed by,
8
Where LT = lead time for a new order expressed in days. Equation (8)
is valid only if the demand is uniform and constant.
PRODUCTION ORDER QUANTITY MODEL:

• The main assumption is that the manufacturer units cannot
instantaneously produce all the units ordered.
• Consequently, this finite replenishment rate can impact the
calculation of EOQ significantly.
• The production order quantity model considers the time for
producing the quantity ordered. Thus, the replenishment period is :
where RT = replenish time or period,

r = replenish rate expressed in units per day
The usage, U, during the replenishment period is expressed by,
10
The maximum inventory level, MIL, is given by,
11
Consequently, the annual inventory holding cost is,
12
By equating Eqs. (1) and (12) we get,
13
Solving Eq. (13) yields,
14
QUANTITY DISCOUNT MODEL:

• We know that the order quantity can influence the purchase price of a
unit.
• As the discount quantity increases, the unit cost goes down but the
holding cost goes up because of large orders.
• In this case, the important trade-off is between the increased holding
cost and the reduced unit cost.
• We write the total annual inventory cost as follows:
WhereTAIC = total annual inventory cost,
PC = product cost,
Cu = unit cost expressed per unit.
The optimum number of units per order is given by,
where iCu = unit annual holding cost expressed as a

percentage i of the unit price Cu.
SAFETY STOCK
 The main purpose of having the safety stock is to
mitigate the risk of running out of items at the
moment of need.
 One technique for providing safety stock is known as
the “Two-bin system.”
 In this case, a fixed replenishment order is placed as
soon as the stock level hits the preset reorder point.
 The items are stored in two bins, the replenishment
order is placed as soon as the first bin becomes empty,
the items from the second bin are used until receiving
the ordered items.
TWO –BIN SYSTEM
 The two-bin system (sometimes called the min-max system) involves the
use of two bins, either physically or on paper. The first bin is intended for
supplying current demand and the second for satisfying demand during the
replenishment period.
 The factors on which the safety stock required depends:
1. Reorder frequency
2. Desired level of service
3. Ability to forecast/control lead times
4. Demand variability during the lead time
5. Length of the lead time interval.
 The safety stock necessary to get a desired level of service is

given by
where ST = safety stock necessary to get a desired service level,

σ = demand standard deviation during lead time,
z = number of standard deviations from the mean
value required to get desired level of service
The order point is expressed by,
where ODP = order point,

µ = mean demand during lead time.
The value of z is estimated according to the desired level

of service.
Spare Parts Determination Factors
There are a number of factors that tend to increase the
amount of maintenance-related inventory and, ultimately,
the cost of maintenance. Some of them are:
 Cost of production downtime
 Lack of parts standardization
 Poor attention to inventory or order quantities
 Maintenance scheduling requirements
 Existence of multiple storage depots
 Inadequate attention paid to the economics of quantity
purchasing
 Undependable suppliers
 Nature and condition of facilities
SPARE PART QUANTITY ESTIMATION MODEL
In maintenance activity, it is important to estimate the
number of spare parts required for a system. This
directly influences the maintenance inventory.
Often, the following equation, based on the Poisson
distribution, is used to determine the spare part
quantity:
where
Ps = probability of having a spare part available when
needed,
λ = part failure rate,
t = time,
n = number of spare parts carried in inventory,
q = number of parts of a specific type used.
Ps is also referred to as the “safety factor”.

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UNIT - III

Important purposes of inventory

 The ABC (Activity Based Costing) approach classifies in-house

TOTAL 100 100

Solving Eq. (3), we get,

Where n = annual expected number of orders.

where TWD = total number of working days in a year.

The reorder point (ROP) is expressed by,

PRODUCTION ORDER QUANTITY MODEL:

where RT = replenish time or period,

The maximum inventory level, MIL, is given by,

Consequently, the annual inventory holding cost is,

By equating Eqs. (1) and (12) we get,

QUANTITY DISCOUNT MODEL:

where iCu = unit annual holding cost expressed as a

 The safety stock necessary to get a desired level of service is

where ST = safety stock necessary to get a desired service level,

where ODP = order point,

The value of z is estimated according to the desired level

Ps is also referred to as the “safety factor”.

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