PROJECT ON

INVENTORY MANAGEMENT

SUBMITTED TO: SUBMITTED BY:-

PROF:-SUBIR GUHA CHANDAN PRASAD
ROLL NO:-40014
PGDM (MRK)
INVENTORY MANAGEMANT

Inventory management is the branch of business management concerned with planning and
controlling inventories

Inventory is stock of items held to meet future demander

Inventory is vitally important to almost every type of business of whether product or service
oriented; in the business of water and electric utilities, inventory management touches almost
every facet of operation. Raw materials such as coal and fuel oil must be scheduled and
stockpiled for production of electricity. Operation supplies such as hydrogen, chlorine, and
fireside, treatment chemical must be delivered and on hand is the proper quantities for the
operation of the power plant and the water treatment plant. Large stocks of materials such as
poles, wire, valves, and pipe must be kept to operate, maintain, and expand the extensive
distribution system required to deliver electricity and water to the customer. If the proper
materials are not available when needed, construction crews will not be able to extend service to
new customer in a timely fashion. During a los e of power or water pressure, the lack of a proper
repaid part could mean that a customer might be without service for an extended period of time.
On a daily basis, even stocks of blank forms and envelopes must be kept on hand for the
preparation of monthly bills.
Since the health and welfare of a community is involved, it would be easy to take the approach
that large volumes must be a shortage. But customers also like low rates, and costs of inventory
on hand can easily exceed 5 percent of the annual revenues of the utility. Thus the proper balance
must be struck to maintain proper inventory with the minimum financial impact on the customer.

Inventory management offers comprehensive reporting capabilities to keep you on top of

inventorystatus.Generate reports on item pricing, stock status, detailed sales history, back order
information, reorder points and recommendation, valuation, turnover, sales analysis, and much.
And adding the business alerts module can keep your staff on top of quantity changes to critical
inventory items, to keep stocking levels precisely where you want them. Properly used, the,
inventory management module can help bring about the formulation of new or improved
purchasing policies, sale policies pricing methods, and even enhanced customer service.
Inventory management could also provide your company with an additional edge over
competitors who are unable to access the same strategic information.

Types of Inventory
 Raw materials

 Purchased parts and supplies

  Lab our

 In-process (partially completed) products (WIP – work in progress)

 Component parts

 Tools, machinery, and equipment

 Finished goods

Why We Want to Hold Inventories

The fundamental reason for carrying inventories is that it is physically impossible and
economically impractical for each stock Arrive exactly where it is needed exactly when it is
needed. Even if were physically possible for a supplier to deliver raw materials every few hours,
for example, it could still be prohibitively expensive. The manufacturer must therefore keep
extra supplies of raw material inventory to use when they are needed in the conversion process.
Other reasons for carrying inventories are-----

 Improve customer service

 Reduce certain costs such as

 ordering costs

 stock out costs

 acquisition costs

 start-up quality costs

 Contribute to the efficient and effective operation of the production system

 Finished Goods

 Essential in produce-to-stock positioning strategies

 Necessary in level aggregate capacity plans

 Products can be displayed to customers

 Work-in-Process

 Necessary in process-focused production

  May reduce material-handling & production costs

 Raw Material

 Suppliers may produce/ship materials in batches

 Quantity discounts and freight/handling $$ savings

Why We Do Not Want to Hold Inventories

 Certain costs increase such as

 carrying costs

 cost of customer responsiveness

 cost of coordinating production

 cost of diluted return on investment

 reduced-capacity costs

 large-lot quality cost

 cost of production problems

Variables in inventory models---

Variables in inventory models in developing and discussion models, we will use the following
notation.

D = Total annual demand (in units)

Q =Quantity ordered (in units); order quantity

Q*=Optimal order quantity (in units)

R =recorder point (in units)

R*=Optimal recorder point in units)

L = Lead time in time units)

S =Setup or procurement cost (per order)

G =Cost of the individual item; cost per units

I = Carrying cost per unit carried, expressed as a percentage of unit cost C

K =Stock out cost per unit out of stock

P =Production rate; output per time unit (in units);or delivery rate

dL=Demand per time unit during lead time (in units)

DL=Total demand during lead time (in units)

TC=Total annual relevant costs

TC*=Minimum total annual relevant costs

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of
inventory. Many small business owners fail to appreciate fully the true costs of carrying
inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of
money tied up in inventory. This fine line between keeping too much inventory and not enough
is not the manager's only concern. Others include:

 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin;
 Increasing inventory turnover -- but not sacrificing the service level;
 Keeping stock low -- but not sacrificing service or performance.
 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory; and
 Having an adequate inventory on hand -- but not getting caught with obsolete items.
The degree of success in addressing these concerns is easier to gauge for some than for others.
For example, computing the inventory turnover ratio is a simple measure of managerial
performance. This value gives a rough guideline by which managers can set goals and evaluate
performance, but it must be realized that the turnover rate varies with the function of inventory,
the type of business and how the ratio is calculated (whether on sales or cost of goods sold).
Average inventory turnover ratios for individual industries can be obtained from trade
associations

INVENTORY SYSTEMS
There are basically two systems followed

 Q/R Inventory system

  Periodic review system

Q/R Inventory system

O/R Inventory system one practical way to establish an inventory system is to keep count of
every item issued from inventory and place an order for more stock when inventories dwindle to
a predetermined level, the reorder point. The reorder quantity, also called the economic order
quantity, is fixed in size (volume), size having been predetermined in the figure such Q/R
Inventory system. For the system show in the figure, the demand for inventories, also called the
usage rate, is known and constant. Replenishment inventories are assumed to be received at the
stock point the moment they have been ordered. Notice that at the beginning of the time axis (far
left), an order has just arrived. As time goes by, inventory is steadily depleted until a level of R
units is reached is the reorder point, also called the trigger level, an order for Q units is placed.
These units arrive at the instant they are ordered. Procurement lead time is zero. The usage
pattern is then repeated, so again at level R, quantity Q is ordered. In simple case like this, there
would be no need to carry buffer stocks. Delivery is instantaneous, and the demand for the
inventory item is know for certain. Thus R is set at zero units.

In Q/R system, both the reorder quantity and the reorder point are fixed. For in the figure, then R
and Q are constant
Periodic review system
In Periodic review (P) system the stock position is reviewed periodically rather than
continuously. A new order is always placed at the end of each review and the time between
orders is fixed. The quantity that is required to replenish the stock back to a fixed predetermined
level is the order quantity for the review point. Demand between two orders varies so the order
quantity varies. So in this system the order quantity varies but the time between orders remains
fixed.

BETTER INVENTORY MANAGEMENT

At time of delivery
 Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt.
 Carefully examine each carton for visible damage -- If damage is visible, note it on the
delivery receipt and have the driver sign your copy.
 After delivery, immediately open all cartons and inspect for merchandise damage.
When damage is discovered
 Retain damaged items -- All damaged materials must be held at the point received.
 Call carrier to report damage and request inspection.
 Confirm call in writing--This is not mandatory but it is one way to protect yourself.
Carrier inspection of damaged items
 Have all damaged items in the receiving area -- Make certain the damaged items have
not moved from the receiving area prior to inspection by carrier.
 After carrier/inspector prepares damage report, carefully read before signing.
After inspection
 Keep damaged materials -- Damaged materials should not be used or disposed of without
permission by the carrier.
 Do not return damaged items without written authorization from shipper/supplier

Two Fundamental Inventory Decisions

 How much to order of each material when orders are placed with either outside suppliers
or production departments within organizations
 When to place the orders
Two Forms of Demand
 Dependent

 Independent

DEPENDENT
 Items whose demand depends on the demands for other items

 For example, the demand for raw materials and components can be calculated from the
demand for finished goods

 The systems used to manage these inventories are different from those used to manage
independent demand items

 Demand for items used to produce final products

 Tires stored at a Goodyear plant are an example of a dependent demand item

INDEPENDENT
 Demand for items used by external customers
 Cars, appliances, computers, and houses are examples of independent demand inventory

 Demand for an item carried in inventory is independent of the demand for any other item
in inventory

 Finished goods inventory

 Demands are estimated from forecasts

INVENTORY COSTS
In operating an inventory system managers should consider only those cost that vary directly
with the operating doctring in deciding when and how mush to to reorders; costs independent of
the operating doctrine are irrelevant. Basically, there are five types of relevant costs:

1. Cost of the item

2. Cost of procuring the item
3. Cost of carrying the item in inventory
4. Cost associated with being out of stock when units are demanded but are
unavailable(stock outs)
5. Cost associated with data gathering and control procedures for the inventory system.

EXAMPLE
Thompson tooling has a department of defense contract for 150,000 bushings a year .Thompson
order the metal for the bushings in lots of 40,000 units from a supplier. It cost Rs 40 to place an
order, and the estimated carrying charge is 20 percent of the unit cost, which is
Rs0.15.thompson, wants to know what percent their order quantity varies from optimal and what
this variation is costing them, if anything .Finding optimal order quantity

2 DS
Q∗¿
√ IC
2(150,000)( 40)
Q∗¿
√
Q∗¿20,000
¿
comparing,optiama ,order,quantityQ*,withcurrent ,order,quantityQ':
Q 40000
= =2 ¿totalcosts
Q∗¿ 20000
TC 1
= ¿¿¿
TC∗¿ 2
¿
This calculation shows that even though order quantity is 100% higher than the optimal
cost are only 25 percent higher than the optimal. the excess (marginal)costs of current
order quantity can be found as follows
 marginal,cost=TC−TC∗¿1.25(TC∗)−TC∗¿ =0.25(TC∗)
=0.25¿ ¿
¿
Marginal cost of the currant policy is Rs 750-rs600or Rs 150

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items, it is
necessary to establish adequate controls over inventory on order and inventory in stock. There
are several proven methods for inventory control. They are listed below, from simplest to most
complex.

 Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required. In very small businesses where this method is used,
records may not be needed at all or only for slow moving or expensive items.
 Tickler control enables the manager to physically count a small portion of the inventory
each day so that each segment of the inventory is counted every so many days on a
regular basis.
 Click sheet control enables the manager to record the item as it is used on a sheet of
paper. Such information is then used for reorder purposes.
 Stub control (used by retailers) enables the manager to retain a portion of the price ticket
when the item is sold. The manager can then use the stub to record the item that was sold.
As a business grows, it may find a need for a more sophisticated and technical form of inventory
control. Today, the use of computer systems to control inventory is far more feasible for small
business than ever before, both through the widespread existence of computer service
organizations and the decreasing cost of small-sized computers. Often the justification for such a
computer-based system is enhanced by the fact that company accounting and billing procedures
can also be handled on the computer.

 Point-of-sale terminals relay information on each item used or sold. The manager
receives information printouts at regular intervals for review and action.
 Off-line point-of-sale terminals relay information directly to the supplier's computer who
uses the information to ship additional items automatically to the buyer/inventory
manager.
The final method for inventory control is done by an outside agency. A manufacturer's
representative visits the large retailer on a scheduled basis, takes the stock count and writes the
reorder. Unwanted merchandise is removed from stock and returned to the manufacturer through
a predetermined, authorized procedure.
A principal goal for many of the methods described above is to determine the minimum possible
annual cost of ordering and stocking each item. Two major control values are used: 1) the order
quantity, that is, the size and frequency of orders; and 2) the reorder point, that is, the minimum
stock level at which additional quantities are ordered. The Economic Order Quantity (EOQ)
formula is one widely used method of computing the minimum annual cost for ordering and
stocking each item. The EOQ computation takes into account the cost of placing an order, the
annual sales rate, the unit cost, and the cost of carrying inventory. Many books on management
practices describe the EOQ model in detail.

DEVELOPMENTS IN INVENTORY MANAGEMENT

In recent years, two approaches have had a major impact on inventory management: Material
Requirements Planning (MRP) and Just-In-Time (JIT and Kanban). Their application is
primarily within manufacturing but suppliers might find new requirements placed on them and
sometimes buyers of manufactured items will experience a difference in delivery.

Material requirements planning are basically an information system in which sales are converted
directly into loads on the facility by sub-unit and time period. Materials are scheduled more
closely, thereby reducing inventories, and delivery times become shorter and more predictable.
Its primary use is with products composed of many components. MRP systems are practical for
smaller firms. The computer system is only one part of the total project which is usually long-
term, taking one to three years to develop.
Just-in-time inventory management is an approach which works to eliminate inventories rather
than optimize them. The inventory of raw materials and work-in-process falls to that needed in a
single day. This is accomplished by reducing set-up times and lead times so that small lots may
be ordered. Suppliers may have to make several deliveries a day or move close to the user plants
to support this plan.