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Lesson 8-Inventory Management

Lesson 8

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9 views

Lesson 8-Inventory Management

Lesson 8

Uploaded by

agrawaldinesh20
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

Supply Chain Inventory

Management
UNIT IV
In this session

 Economic order quantity models


 Reorder point models
Introduction

 Inventory refers to raw materials, goods-in-process, finished goods, or merchandise.


It is one of the most valuable assets for a company dealing with tangible goods.
 When faced with disruptions, companies need the ability to adapt their inventories
to always match the demand.
 That means ensuring the goods aren’t overstocked, understocked, or delivered after
substantial delays, regardless of disruptions like pandemics, cyberattacks, or
natural disasters.
 Inventory management is the process that ensures the adequate availability of
these goods across the supply chain of a company — manufacturing facilities,
warehouses, and the last point of sale. (the process of ordering, storing, using, and
selling a company's inventory.)
Inventory Management Methods

Depending on the type of business or the product involved, a company


may use various inventory management methods. These include
 just-in-time (JIT) manufacturing,
 materials requirement planning (MRP),
 days sales of inventory (DSI), and.
 economic order quantity (EOQ)
Inventory Management Methods

1. Just-in-Time Management (JIT)


 This allows companies to save significant amounts of money and
reduce waste by purchasing and keeping on hand only the inventory
they need to produce and sell products within a certain time frame.
 This approach reduces storage and insurance costs, as well as the cost
of liquidating or discarding excess inventory.
 If demand unexpectedly spikes, the manufacturer may not be able to
source the inventory it needs to meet that demand, damaging its
reputation with customers and driving business to competitors. Thus
highly risky.
Inventory Management Methods

2. Materials Requirement Planning (MRP)


This inventory management method is sales-forecast dependent, meaning that
manufacturers rely on detailed sales records to anticipate their inventory needs and
communicate those needs to suppliers on time.

3. Days Sales of Inventory (DSI)


This financial ratio indicates the average time in days that a company takes to turn
its inventory, including goods that are a work in progress, into sales.
Indicating the liquidity of the inventory, the figure represents how many days a
company's current stock of inventory will last.
Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the
inventory, though the average DSI varies from one industry to another.
Inventory Management Methods

4. Economic Order Quantity (EOQ)


 Includes calculating the number of units a company should add to its
inventory with each batch order to reduce the total costs of its inventory
while assuming constant consumer demand.
 The costs of inventory in the model include holding and setup costs.
 The EOQ model seeks to ensure that the right amount of inventory is
ordered per batch so a company does not have to make orders too
frequently and there is not an excess of inventory sitting on hand.
 The EOQ model seeks to determine an optimal order quantity, where the
sum of the annual order cost and the annual inventory holding cost is
minimized.
Economic Order Quantity Model

 Order cost is the direct variable cost associated with placing an order with the
supplier and includes managerial and clerical costs for preparing the purchase, as
well as other incidental expenses that can be traced directly to the purchase.
whereas
 Holding cost or carrying cost is the cost incurred for holding inventory in storage.
Examples of holding costs include warehousing expenses, handling charges,
insurance, pilferage, shrinkage, taxes, and the cost of capital.
 Trade-off between annual inventory holding costs and annual order costs :
 When order sizes for an item are small, orders have to be placed on a frequent basis,
causing high annual ordering cost. However, the firm has a low average inventory level for
this item, resulting in low annual inventory holding cost. When order sizes for an item are
large, orders are placed less frequently, causing lower annual order costs. Unfortunately,
this also causes the average inventory level for this item to be high, resulting in higher
expenses to hold the inventory.
EOQ Model -Assumptions

 The demand must be known and constant.


 Delivery time is known and constant.
 Replenishment is instantaneous. The entire order is delivered at one
time, and partial shipments are not allowed.
 Price is constant. Quantity or price discounts are not allowed
 The holding cost is known and constant.
 Ordering cost is known and constant.
 Stock-outs are not allowed. Inventory must be available at all times.
Setup costs refer to all of the costs associated with actually ordering the inventory,
such as the costs of packaging, delivery, shipping, and handling. Demand rate is
the amount of inventory a company sells each year.
Reorder point models

 A reorder point is the inventory level at which a business should place a new
order or run the risk that stock will drop below a comfortable level, or even down
to zero — leaving customers unhappy and orders unfulfilled.
 Reorder points are important for two main reasons:
1. Allows a business to make fast, low-stress, data-driven decisions about ordering
inventory, which saves time and reduces the possibility of costly mistakes in inventory
management.
2. Helps a business operate more efficiently by balancing two competing needs- ordering
more and paying the inventory holding cost or not ordering at the right time and taking
a risk of stock out.
Such a system uses information regarding order quantity and demand forecast that
are unique to each item or part number maintained in inventory.
Reorder point calculation

Three key variables, or inputs, to consider in a basic reorder point


calculation are:
• Daily sales velocity: The number of sales made in an average day of
a particular item
• Lead time: Time taken (in days) for your vendor to fulfill your order
• Safety stock: The amount of extra stock, if any, that is kept in the
inventory to help avoid stockouts
Lead time = 7 days To reorder when inventory equals the amount you expect
to sell during the time it takes to get your order from the
Safety stock = 5 days x 200 supplier, plus your safety stock (which serves as a cushion
bottles = 1000 bottles for unexpectedly high demand or slow deliveries).
ROP = (200 x 7) + 1000 = 2400
bottles

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