Chapter 12 : Inventory Models

What is inventory ?
In short, inventory is the goods that a business keeps on hand in
order to resell to the public. Inventory refers to idle goods or materials that
are held by an organization for use sometime in the future. inventory is made
up of three main divisions -- raw materials , the "work-in-process
and the finished items.

Inventory Modeling ?
Inventory modeling is the use of financial equations to determine
the right quantity of inventory to keep on hand. Inventory models
help companies know when to order new inventory and how much
is necessary. This is done to ensure that the customer does not
have to wait on products and that there is enough, but not too
much, product available.

Characteristics of inventory systems

Types of inventory systems
There are two methods of recording inventory namely:

 Periodic system
 Perpetual system

Periodic inventory system

Under this method, the merchandise company does not maintain a detailed
record of inventory for result the cost of goods sold is calculated at the end
of the accounting period (periodically).
Characteristics:

 Easier to operate in a relatively small firms.

 Lack of control over inventory.
 Less cost to handle the method.
 Does not keep inventory record up-to date.
 The system applies to those concerns usually that sell low-value
items at large quantity, such as stationery items.

Example: Halmark may follow this inventory method because they sell low
value items at a large quantity. They need not maintain record of inventory
each a purchase or sales is made.

Under the periodic inventory system, we must have good concepts of the
following:

 Opening inventory (At the beginning of the accounting period)

 Net purchase cost and
 Ending inventory (At the end of the accounting period)

Perpetual inventory system

Under this method, a detailed record of cost of inventory is maintained
each time a purchase or a sale is made.

As a result, the system consciously shows the up-to date record of

inventory that should be on hand. The cost of goods sold is calculated each
time a purchase or a sale is made, not at the end of an accounting period.

Characteristics:

 It requires more efforts to maintain inventory under this method.

 Close control over inventory
 The method is comparatively costly
 Keeps inventory record up-to date and decent.
 The method applies to those concerns usually that sell high-value
items (Such as car, personal computer, equipments etc.) not at a
large quantity as compared to items under periodic system.
Example: Volvo Car Overseas Corporation AB Sells Volvo car in
Bangladesh. It needs to maintain inventory record each time a car is sold to
a customer.

Five Must-Have Features of Inventory Management

Systems:
1. Monitor Inventory Levels: If you’re lying awake at 3am worrying your
course or publication inventory is too low to fulfill an order, you shouldn’t
need to lose any more sleep before you can find out. Inventory Management
Systems allow for access to publication inventory levels any time, any day.
2. View Product History: Wondering how many course books you ordered
last year? No need to call your vendor. You should be able to check it
yourself easily and free of phone transferring hassles.
3. See Replenishing Points: Using your Inventory Management System, you
should be able to double check your replenishment points for all products.
4. Back Order Status: You should be able to see if any of the products you
ordered are on back order.
5. Ordering and Shipping from Inventory System: Did you forget to order
enough of your instruction manuals? Or are you wondering when you’re
order was shipped? No worries. Inventory Management Systems should
allow you to adjust your order and view shipping information.

The importance of inventory

management
 Inventory management is primarily about specifying the
shape and percentage of stocked goods.
 Inventory management leads to optimal inventory levels.
 Management of the inventories, with the primary objective
of determining/controlling stock levels within the physical
distribution system, functions to balance the need for product
availability against the need for minimizing stock holding and
handling costs.
 Inventory management can also help companies improve
cash flows.
 Inventory management helps in maintaining a trade off between carrying
costs and ordering costs which results into minimizing the total cost of
inventory.

* Inventory management facilitates maintaining adequate inventory for smooth

production and sales operations.

* Inventory management avoids the stock-out problem that a firm otherwise

would face in the lack of proper inventory management.

* Inventory management suggests the proper inventory control system to be

applied by a firm to avoid losses, damages and misuses.

A good inventory management strategy improves the accuracy of

inventory orders.

A good inventory management strategy leads to a more organized

warehouse.

A good inventory management strategy helps save time and money.

A good inventory management strategy increases efficiency and

productivity.

A good inventory management strategy keeps your customers coming

back for more.

Taxes, Profit, Damages & Losses

The Structure of an Inventory

System
An inventory system is a strategy for keeping track of the stock that a
business has on hand. Because most companies use and sell their
inventory on a daily basis, inventory systems must be regularly
updated. Inventory systems can be manual or computerized. Their
success and usefulness depends on their ability to monitor supplies in
ways that make company operations more profitable and less stressful.

Tracking Incoming Inventory

 An inventory system relies on a thorough and accurate process for
tracking supplies as you receive them. Supplies are often stored in a
storage area or warehouse initially, before being stocked in a retail
store or being used to fill customer orders. An inventory system should
track product as your company receives it and add the amount of new
product to the amount you have on hand. Some computer systems do
this automatically. Their accuracy depends on your thoroughness in
reconciling the amount you ordered with the amount that is delivered
when there are discrepancies.

Tracking Stock on Hand

 Tracking stock on hand requires maintaining current records of what your company has
left over from previous orders, as well as how much it adds to this stock through
incoming orders and how much it uses up of its stock through sales and shrinkage. A
successful inventory system will compile this information using records, such as delivery
invoices and sales receipts, and also verify its accuracy by visually counting supplies on
hand. Investigate discrepancies between these two sets of numbers in order to identify
weaknesses in the system.

Tracking Shrinkage

 Shrinkage is the process of losing inventory due to circumstances other than sales or use
in a routine manufacturing process. Employee theft causes shrinkage, as does waste and
breakage. Companies that work with perishable foods have a higher rate of shrinkage
than businesses that deal with items that last. Shrinkage accounts for much of the
inevitable discrepancy between the amount of inventory your company should have
based on its invoices and sales records, and the amount that it actually has. Tracking
shrinkage enables you to identify and address problems of losing useful stock at an
unsustainable rate.

Placing Orders
  An inventory system should provide much of the information that your company needs to
place orders and replenish supplies on hand. If your inventory records show that you had
30 widgets, and you sold 20 in a week and another two broke, this information helps you
to decide to order 22 more widgets, assuming you want to start off each week with 30
widgets on hand.

Characteristic of the structure of inventory system:

1. Inventory level
2. Demand & depletion
3. Reordering
4. Replenishment, shortages & surpluses
5. Safety stock
6. The average inventory
7. Inventory problems & decisions

Inventory Cost: Inventory costs are the costs related to storing and maintaining its
inventory over a certain period of time.

Ordering costs: Ordering costs, also known as setup costs, are essentially costs incurred
every time you place an order. Examples include: Clerical costs of preparing purchase orders,
Cost of finding suppliers and expediting orders, Transportation costs, Receiving costs.

Holding costs: Also known as carrying costs, these are costs involved with storing
inventory before it is sold. They are expenses such as storage, handling, insurance, taxes,
obsolescence, theft, and interest on funds financing the goods. These charges increase as
inventory levels rise. To minimize carrying costs, management makes frequent orders of small
quantities.

Shortage Costs: These costs, also called stock-out costs, occur when businesses become out
of stock for whatever reason. They include sales that are lost, both short and long term, when a
desired item is not available; the costs associated with back ordering the missing item; or
expenses related to stopping the production line because a component part has not arrived.

Chapter-13
MARKOV ANALYSIS: Markov analysis is the
procedure that can be used to describe the behavior of a
system in a dynamic situation. It is statistical technique
used in forecasting the future behavior of a system whose
current state does not depend on its state at any time in
the past in other words, it is random
Markov process can describe movements of people,
inventories, monetary accounts, taxicabs and even
peoples attitude. For example: it helps us to predict
internal employee movement from one year to another
by identifying percentage of employees who remain in
their jobs, get promoted or demoted, transfer and exit out
of the organizations. Or simply how can we say that our
present buyers will buy again our products. So, its
markov analysis which can tell us what will be the result
after certain time period.

CHARACTERISTICS OF MARKOV
ANALYSIS:
1. It is a statistical technique.
2. It is used to predict the future behavior of a
managerial system.
3. Markov chain process is a non-complicated process
can be carried out very rapidly.
4. Describes a system whose states change over time.
5. Changes are governed by a probability distribution.
6. The next state only depends upon the current system
state.
7. Class of random process useful in different areas.
8. It is conducted on a system that can be interpreted in
two different ways:
 i. The fraction of a group
ii. The probability of an individual.

ADVANTAGES OF MARKOV
ANALYSIS:
There are two basic Markov Analysis methods:
 Markov Chain.
 Markov Process.

The Markov Chain assumes discrete states and a discrete

time parameter; With the Markov Process, states are
continuous.
Markov methods offer significant advantages over
other reliability modeling techniques, some of
these advantages are –

1. Simplistic modeling approach – the models are

simple to generate although they do require a more
complicated mathematical approach.

2. Redundancy management techniques – system

reconfiguration required by failures is easily
incorporated in the model.

3. Coverage – covered and uncovered failures of

components are mutually exclusive events. These are
not easily modeled using classical techniques, but are
readily handled by the Markov mathematics.
4. Complex systems – many simplifying techniques
exist which allow the modeling of complex systems.

5. Sequenced events – often the analyst is interested in

computing the probability of an event resulting from a
sequence of sub events. While these types of problems
do not lend themselves well to classical techniques,
they are easily handled using Markov modeling.

The advantage of Markov process is that it neatly

describes the failure of an item and its subsequent repair.
It develops the probability of an item being in a given
state, as a function of the sequence through which the
item has traveled. The Markov process can thus easily
describe degraded states of operation, where the item
has either partially failed or is in a degraded state where
some functions are performed while others are not.
Complete techniques e.g. FMEA and Fault Tree Analysis
(FTA), have a difficult time dealing with degraded states
as contrasted with outright faults.

Advantages of Markov Modeling

 Can model most kinds of system behavior that can
be modeled by combinatorial models (i.e. reliability
block diagrams, fault trees, etc.)
 Can model repair in a natural way:
- Repairs of individual components and groups
 - Variable number of repair persons
- Sequential repair; Partial repair (degraded
components)
 Can model standby spares (hot, warm, cold)
 Can model sequence dependencies:
- Functional dependencies
- Priority-AND
- Sequence enforcement
 Can model imperfect coverage more naturally than
combinatorial models.

 Can model fault/error handling and recovery at a

detailed level.

DISADVANTAGES OF MARKOV
ANALYSIS:
1. The lack of dependence on functional mechanisms
reduces their appeal to the functionally orientated
ecologist.

2. In some areas, the data available will be insufficient to

estimate reliable probability or transfer rates,
especially for rare transitions

3. Like all other successional models, the validation of

Markov models depends on predictions of system
behaviour over time, and is therefore frequently
difficult, and may even be impossible, for really long
periods of time.
4. Departure from the simple assumptions of stationary,
first-order Markov chains while, conceptually possible,
makes for disproportionate degrees of difficulty in
analysis and computation.

5. It may not be possible to observe sufficient transitions

from a given transient set of states to a closed state
where this transition is dependent on a rare climatic
event, even though the value of this parameter is of
vital importance in the dynamics of the community.

Chapter-14
waiting line A waiting line represents items Or
people awaiting service. Waiting in lines is a part of our everyday
life. Waiting in lines may be due to overcrowded, overfilling or due to
congestion. A waiting line system or queuing system is defined by two
important elements: the population source of its customers and the process
or service system.

Characteristics of waiting line

situation

Arrival Characteristics
The input source that generates arrivals or customers for a
service system has three major characteristics:
1. Size of the arrival population: Unlimited (infinite) or limited
(finite)
2. Behavior of arrivals: Scheduled or random, often a Poisson
distribution
3. Pattern of arrivals : Wait in the queue and do not switch lines,
No balking or reneging

Waiting-Line Characteristics
The waiting line itself is the second component of a queuing
system. The length of a line can be either limited or unlimited. A
queue is limited when it cannot, either by law or because of
physical restrictions, increase to an infinite length. A small
barbershop, for example, will have only a limited. Queue discipline
- first-in, first-out (FIFO) is most common

Service Characteristics
The third part of any queuing system are the service
characteristics. Two basic properties are important:
(1) design of the service system: Service systems are usually
classified in terms of theirnumber of channels (for example,
number of servers) and number of phases (for example, number
of service stops that must be made)

(2) the distribution of service times: Service patterns

are like arrival patterns in that they may be either constant or
random. If service time is constant, it takes the same amount of
time to take care of each customer.

The structure of a queuing system

• Queueing systems constitute a central tool in modelling and
performance analysis of e.g. telecommunication systems and
computer systems.
• Describes contention on the resources – in queueing systems
the resources are called servers – in applications, the resources
may be trunks, capacity ...
• The “customers” arriving at a queue may be calls, messages,
packets, tasks ...
• Often the systems are complex (for instance communication
network, operating system) and contains many queues, which
form a network of queues, i.e. a queueing network. – in the
beginning we focus on systems consisting of a single queue –
there are many types of queues, giving rise to a rich theory

The waiting line

Queue discipline: the queue discipline
describes the policies that determine the
manner in which customers are selected for
services. Example of some common
disciplines are:
1. A priority system
2. Emergency systems
3. Last-come, first-served(LCFS)
4. First-come, first-served(FCFS)
5. Queue length:limits on the length of
the length of the queue; in these cases we
talk about a finite queue length.norlamy
we assume no such limitation