INVENTORY

Inventory is defined as a stock or store of goods.

INVENTORY PLANNING
The planning and controlling of inventories in order to meet the competitive priorities of the organization.

WHAT ARE THE RESONS OF MAINTAING LOW OR HIGH INVENTORIES

An inventory manager job is to balance the advantages and disadvantages of both low and high inventories and find a happy medium between the two levels.

Pressures for low inventories

Following are different resons due to which manger want to maintain low inventories 12345Cost of capital Storage and handling cost Taxes Insurance Shrinking

1- Cost of capital
Cost of capital mena opprtunity cost. For example we can invest cash in inventory but at the same time we have other alternatives such as we can deposit cash into bank from where we can get interest or we can invest it in other businesses or securities from where we can get handsome return. If we invest huge amount into inventory then these benefits will be lost. It is the first reason due to which manger want to maintain low inventory and also invest in other alternatives to get maximum advantage.

2- Storage and handling cost

If inventory is purchased in large quantity then the next problem is to hold it. For holding inventory company has two options purchased their own building are rented a building. To minimize storage and handling cost company try to maintain minimum level of stock.

3- To reduce taxes
Ending inventory is deducted while calculating cost of goods sold. If ending inventory increased then cost of goods sold will be decreased and company profit will be shown higher and higher taxes will be imposed. Its a pressure to maintain low inventory.

4- Insurance
It is necessary to avoide from future losses to make the insurance of inventory. High inventory means high insurance cost. This lead to maintain low inventory.

5- Shrinkage
Shrinkage takes three forms. The first pilferage, or theft of inventory by customers or employees. The second form of shrinkage is obsolescence. It occrus when when inventory cannot be used or sold at full value, owing to model changes, engineering modification, or unexpectedly low demand. Finally, deterioration through physical spoilage or damage results in lost value. Food and veverages, for example, lose value and might even have to be discarded when their shelf life is reaced. When the rate of deterioration is high, building large inventories may be unwise.

Pressures for High inventories

Following are the reasons of maintiag high inventories. 123456Custoemr service Ordering cost Setup cost Labour and equipment utilization Transportation cost Payments to suppliers

1- Customer service
Creating inventory can speed delivery and improve the firms on-time delivery of goods. High inventory levels reduce the potential for stockouts and backorders, which are key concerns of wholesalers and retailers. A stockout occures when an item that is typiclly stocked is not available to stisfy a demand the moment it occurs, resulting in loss of the sale. A backorder is a customer order that cannot be filled when romised or denanded but is filled later. Customers dont like waiting for backorders to be filled. Many of them will take their business elsewhere. Sometimes customers are given discoutns for the invonvenience of waiting.

2- Ordering cost

Each time a firm places a new order, it incurs an ordering cost, or the cost of preparing a purchase order for a supplier or a production order for the shop. For the same item, the ordering cost is the same, regardless of the order size: The purchasing agent must take the time to decide how much to order and, perhaps, select a supplier and negotiate terms. Time also is spent on paperwork, follow-up, and receiving the itmss. In the case of a production order for a manufactured item, a blueprint and roouting instructions oftern must accompany the shop order. The internaet steamlines the order process and reduces the costs of placing order, hower.

3- Setup cost
The cost involved in chaging over a machine to produce a different item is the setup cost. It includes labour and time to make the chagover, cleanign, and sometimes new tools or equipment. Scrap or rework costs are also higher at the start of the production run. Setup cost also is independent of order size, which creates pressure to make or order a large supply of the items and hold them in inventory rather than smaller batches.

4- Labour and equipment utilization

By creating more inventory, management can increse workforce productivity and facility utilization in three ways. First, placing larger, less frequent production orders reduces the number of unprodctive setups, which add no vlaue to a service or product. Second, holding inventory reduces the chance of the costly rescheduling of productin orders because the components needed to make the product are not in inventory. Third, buindling inventories improves resource utilization by stablizing the output rate when demand is cyclical or seasonal. The firm uses inventory built during slack peridos to handle extra demand in peak seasons. This approach minimizes the need for extra shifts, hiring, overtime and additional equipment.

5- Transportation cost
Sometimes, outbound transportation cost can be reduced by increasing inventory levels. Having inventory on hand allows more carload shipments to be made and minimizes the need to expedite shipments by more expensive modes of transportation. The forward placement of inventory can also reduce outbound transportation costs, even though the inventory pooling effect is lessened and more inventory is necessary. Inbound transportation costs can also be reduced by creating more inventory. Sometimes, several items are ordered from the same supplier. Placing these orders at the same time may lead to rate disxounts, thereby decreasing the costs of transportation and raw materials.

6- Payment to suppliers

A firm often can reduce total payments to suppliers if it can tolerate higher inventory levels. Suppose that firm learns that a key supplier is about to increase its prices. In this case, it might be cheaper for the firm to order a larger quantity than usual. A firm can also take advantage of quantity discounts this way. A quantity discount, whereby the price per unit drops when the order is sufficiently large, is an incentive to order larger quantities.

INVENTORY TYPES

Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near a business's location so that the firm may meet demand and fulfill its reason for existence. Following are different types of inventory.

Raw materials
Raw materials are inventory items that are used in the manufacturer's conversion process to produce components, subassemblies, or finished products. These inventory items may be commodities or extracted materials that the firm or its subsidiary has produced or extracted. They also may be objects or elements that the firm has purchased from outside the organization. Even if the item is partially assembled or is considered a finished good to the supplier, the purchaser may classify it as a raw material if his or her firm had no input into its production. Typically, raw materials are commodities such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However, items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be regarded as raw materials if they are purchased from outside the firm. A part that goes into making another part is known as a component, while the part it goes into is known as its parent. Any item that does not have a component is regarded as a raw material or purchased item

Work-in-process
Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and subassemblies that are being processed or are waiting to be processed within the system. This generally includes all materialrom raw material that has been released for initial processing up to material that has been completely processed and is awaiting final inspection and acceptance before inclusion in finished goods. Any item that has a parent but is not a raw material is considered to be work-in-process.

Finished goods
A finished good is a completed part that is ready for a customer order. Therefore, finished goods inventory is the stock of completed products. These goods have been inspected and have passed final inspection requirements so that they can be transferred out of work-in-process and into finished goods inventory. From this point, finished goods can be sold directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centers, or held in anticipation of a customer order. Any item that does not have a parent can be classified as a finished good.

Transit / Pipeline inventory

Transit inventories result from the need to transport items or material from one location to another, and from the fact that there is some transportation time involved in getting

from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility. Some large firms, such as automobile manufacturers, employ freight consolidators to pool their transit inventories coming from various locations into one shipping source in order to take advantage of economies of scale. Of course, this can greatly increase the transit time for these inventories, hence an increase in the size of the inventory in transit.

Safety stock or Buffer inventory

As previously stated, inventory is sometimes used to protect against the uncertainties of supply and demand, as well as unpredictable events such as poor delivery reliability or poor quality of a supplier's products. These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is any amount held on hand that is over and above that currently needed to meet demand. Generally, the higher the level of buffer inventory, the better the firm's customer service. This occurs because the firm suffers fewer "stock-outs" (when a customer's order cannot be immediately filled from existing inventory) and has less need to backorder the item, make the customer wait until the next order cycle, or even worse, cause the customer to leave empty-handed to find another supplier. Obviously, the better the customer service the greater the likelihood of customer satisfaction.

Anticipation inventory
Oftentimes, firms will purchase and hold inventory that is in excess of their current need in anticipation of a possible future event. Such events may include a price increase, a seasonal increase in demand, or even an impending labor strike. This tactic is commonly used by retailers, who routinely build up inventory months before the demand for their products will be unusually high. For manufacturers, anticipation inventory allows them to build up inventory when demand is low (also keeping workers busy during slack times) so that when demand picks up the increased inventory will be slowly depleted and the firm does not have to react by increasing production time (along with the subsequent increase in hiring, training, and other associated labor costs). Therefore, the firm has avoided both excessive overtime due to increased demand and hiring costs due to increased demand. It also has avoided layoff costs associated with production cut-backs, or worse, the idling or shutting down of facilities. This process is sometimes called "smoothing" because it smoothes the peaks and valleys in demand, allowing the firm to maintain a constant level of output and a stable workforce.

Decoupling inventory

Very rarely, if ever, will one see a production facility where every machine in the process produces at exactly the same rate. In fact, one machine may process parts several times faster than the machines in front of or behind it. Yet, if one walks through the plant it may seem that all machines are running smoothly at the same time. It also could be possible that while passing through the plant, one notices several machines are under repair or are undergoing some form of preventive maintenance. Even so, this does not seem to interrupt the flow of work-in-process through the system. The reason for this is the existence of an inventory of parts between machines, a decoupling inventory that serves as a shock absorber, cushioning the system against production irregularities. As such it "decouples" or disengages the plant's dependence upon the sequential requirements of the system (i.e., one machine feeds parts to the next machine).

Cycle inventory
Those who are familiar with the concept of economic order quantity (EOQ) know that the EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery. When large quantities are ordered or produced, inventory holding costs are increased, but ordering/setup costs decrease. Conversely, when lot sizes decrease, inventory holding/carrying costs decrease, but the cost of ordering/setup increases since more orders/setups are required to meet demand. When the two costs are equal (holding/carrying costs and ordering/setup costs) the total cost (the sum of the two costs) is minimized. Cycle inventories, sometimes called lotsize inventories, result from this process. Usually, excess material is ordered and, consequently, held in inventory in an effort to reach this minimization point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly as needed.

MRO goods inventory

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support and maintain the production process and its infrastructure. These goods are usually consumed as a result of the production process but are not directly a part of the finished product. Examples of MRO goods include oils, lubricants, coolants, janitorial supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and key stock. Even office supplies such as staples, pens and pencils, copier paper, and toner are considered part of MRO goods inventory

What are dependent and independent demand items

Inventory Management deals essentially with balancing the inventory levels. Inventory is categorized into two types based on the demand pattern, which creates the need for inventory. The two types of demand are Independent Demand and Dependant Demand for inventories.

Independent Demand
An inventory of an item is said to be falling into the category of independent demand when the demand for such an item is not dependant upon the demand for another item. Finished goods Items, which are ordered by External Customers or manufactured for stock and sale, are called independent demand items. Independent demands for inventories are based on confirmed Customer orders, forecasts, estimates and past historical data.

Dependant Demand
If the demand for inventory of an item is dependant upon another item, such demands are categorized as dependant demand. Raw materials and component inventories are dependant upon the demand for Finished Goods and hence can be called as Dependant demand inventories. Take the example of a Car. The car as finished goods is an held produced and held in inventory as independent demand item, while the raw materials and components used in the manufacture of the Finished Goods - Car derives its demand from the demand for the Car and hence is characterized as dependant demand inventory. This differentiation is necessary because the inventory management systems and process are different for both categories. While Finished Goods inventories which is characterized by Independent demand, are managed with sales order process and supply chain management processes and are based on sales forecasts, the dependant demand for raw materials and components to manufacture the finished goods is managed through MRP -Material Resources Planning or ERP -Enterprise Resource Planning using models such as Just In Time, KANBAN and other concepts. MRP as well as ERP planning depends upon the sales forecast released for finished goods as the starting point for further action. Managing Raw Material Inventories is far more complicated than managing Finished Goods Inventory. This involves analyzing and co-coordinating delivery capacity, lead times and delivery schedules of all raw material suppliers, coupled with the logistical processes and transit timelines involved in transportation and warehousing of raw materials before they are ready to be supplied to the production shop floor. Raw material management also involves periodic review of the inventory holding, inventory

counting and audits, followed by detailed analysis of the reports leading to financial and management decisions. Inventory planners who are responsible for planning, managing and controlling Raw Material inventories have to answer two fundamental questions, which can also be termed as two basic inventory decisions. a. Inventory planners need to decide how much of Quantity of each Item is to be ordered from Raw Material Suppliers or from other Production Departments within the Organization. b. When should the orders be placed ? Answering the above two questions will call for a lot of back end work and analysis involving inventory classifications and EOQ determination coupled with Cost analysis. These decisions are always taken in co-ordination with procurement, logistics and finance departments

INVENTORY CONTROL SYSTEM

Following are two different types of managing independent inventory.

1- Continuous Review system 2- Periodic Review system 1- CONTINUOUS REVIEW SYSTEM A system designed to track the remaining inventory of an item each time a withdrawal is made to determine whether it is time to reorder. Continuous inventory system is also called Q system, Reorder point system and perpetual inventory system. In continuous review system a minimum level of stock is determined as indicator for placing a new order. That minimum level is called Reorder point (R). After each withdrawal inventory position is checked to determine whether its a time to place an order or not. Inventory position can be calculated as follow. Inventory position (IP) = OH + SR BO On Hand Inventory (OH) On hand inventory means inventory currently available in the store room. Schedule Receipt (SR) Order that have been placed but not yet been received. Its also called open order. Back Order (BO) Customer orders which cannot be fulfilled now and for which the customer is ready to wait some time. Following criteria can be applied to check the time of order. If If For example if IP = 1000 Units And R = 800 Units Then by applying above criteria we can decide whether its a time place an order or not 1000 Units > 800 Units Its not a time to place order because IP is greater than Reorder point. If inventory position reached at reorder point then a fixed quantity Q of the item is ordered. In a continuous review system, although the order quantity Q is fixed, the time between orders can vary. Demand can be certain or uncertain. In both the conditions Reorder point is different. Selecting the Reorder point when Demand is certain When both demand and lead times are certain then IP > R (Its not a time to place order) IP R (Its a time to place an order)

R = Demand during lead time For example if weekly demand is 10 units and lead time is 2 days then R = 10 units 2 days = 20 units Following figure shows how system operates when demand and lead times are constant. From above diagram following points can be analyzed. No safety stock is maintained Inventory position reaches to zero before new order is arrived TBO is same for each cycle If demand and lead times are certain then there is no need to maintain safety stock. Above figure shows that an order is placed when demand reaches to reorder point. Inventory is continually used until it reaches to zero. When inventory reaches to zero at the same time new order is arrived.

Selecting the Reorder point when Demand is uncertain In reality, demand and lead times are not always predictable. In case when demand is uncertain then reorder point will be R = Average demand during lead time + Safety stock Following figure shows how system operates when demand is uncertain From above diagram following points can be analyzed. Safety stock is maintained Inventory does not drop to zero TBO is not same Reorder point is higher

When demand is uncertain then safety stock maintained due to which inventory position does not drop to zero at any time. Demand varies due to which TBO is not same. If demand is uncertain reorder point is higher because of safety stock.

Total Q system cost can be calculated as follows Total cost = Annual cycle inventory cost + Annual ordering cost + Annual safety stock holding cost

C = Q/2 (H) + D/Q (S) + Hz PERIODIC REVIEW SYSTEM A system in which an items inventory position is reviewed after a fixed period of time. It is also called P system, Fixed interval reorder system or Periodic reorder system. Characteristics of a Periodic review system Number of units in a lot (Q) may change time to time But time between orders (P) is remain same An example of a periodic review system is that of a soft-drink supplier making weekly rounds of grocery stores. Each week, the supplier reviews the stores inventory of soft drinks and restocks the store with enough items to meet demand and safety stock requirements until the next week. Following are the four assumption of periodic review system. 1234No constraints are placed on the size of the lot The relevant costs are holding and ordering costs Decisions for one item are independent of decisions for other items Lead times are certain and supply is known

Figure shows the periodic