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Inventory Control

Inventory management is integral Part of Production industry

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12 views28 pages

Inventory Control

Inventory management is integral Part of Production industry

Uploaded by

altaf ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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operat!

ons
management

Afzaal
January 31, 2013
I n v e n t o r y C o n t r o l
Inventory Control
Definitions

Inventory is the stock of any item or resource used in an


organization and can include: raw materials, finished products,
component parts, supplies, and work-in-process.

Inventory system is the set of policies and controls that monitor


levels of inventory and determines what levels should be
maintained, when stock should be replenished, and how large
orders should be
Inventory Control
Purpose
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw material
delivery time
5. To take advantage of economic purchase-order size
Inventory Costs- I
 Holding (carrying) cost
● storage facilities● handling ● insurance● pilferage
● breakage ● obsolescence ● depreciation
 Setup (production change) cost
● arranging specific equipment set-ups ● paperwork costs
● material transport
 Ordering cost
● calculating quantities ● managerial costs (purchase
orders, tracking)
 Shortage cost
● lost profits ● lost customers ● lateness penalties
Inventory Costs- II
 Holding (carrying) cost
- high holding costs favor
 low inventory levels &
 frequent replenishments
 Setup (production change) cost
-small set-up times/ cost favor
 small production batches
 reduced inventory levels
 Ordering cost
- high holding costs favor
 high inventory levels
 Shortage cost
- balance between cost of holding & cost of
stock out required
Independent Vs
Dependent Demand
Independent Demand
Demand for the final end-product or demand not related
to other items, e.g. different models of car.
Dependent Demand
Derived demand items for:
component parts,
subassemblies,
raw materials, etc.
Inventory Systems
Single-Period Inventory Model
One time purchasing decision (Example: vendor selling
t-shirts at a football game)
– Seeks to balance the costs of inventory overstock and under
stock
Multi-Period Inventory Models
Fixed-Order Quantity Models
- event triggered (Example: running out of stock)
Fixed-Time Period Models
- time triggered (Example: Monthly sales call by sales
representative)
Single-Period Inventory Model
 P: Probability of not selling
 1 - P: Probability of selling
 Co: Cost per unit of demand overestimated
 Cu: Cost per unit of demand underestimated
 P . Co: Probability of loss due to overestimate
 (1 – P ) . Cu: Probability of loss due to underestimate
P . Co < (1 – P) . Cu
Continue to increase the size of the Cu
inventory so long as the probability of P
selling the last unit added is equal to or C0  Cu
greater than the ratio of: Cu / Co + Cu
Multiperiod Inventory Systems
 Fixed-order quantity models (Q-models)
● event triggered ● no review period ● smaller inventories,
favors expensive and key items (with better book keeping)

 Fixed-time period models (P-models)


● time triggered ● has review period ● larger inventories
Multiperiod Model

Assumptions
 Demand for the product is constant and uniform throughout the
period
 Lead time (time from ordering to receipt) is constant
 Price per unit of product is constant
 Inventory holding cost is based on average inventory
 Ordering or setup costs are constant
 All demands for the product will be satisfied (No back orders are
allowed)
Inventory Control

Profile of Inventory Level Over Time


Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
Inventory Control

D: Demand
C: Cost per unit
Annual purchase cost = DC

H: Annual holding cost per unit


Q: Quantity to be ordered
Q/ 2: Average ordering quantity
Holding cost: H . (Q/2)
Inventory Control
No. of orders per year: D/Q
S: Cost of placing order/ (Set-up cost?)
Ordering cost: (D/ Q) . S

Total Annual Cost = annual purchase cost


+ annual cost
+ annual holding cost
D Q
TC DC  S  H
Q 2
Economic Order Quantity
By adding the item, holding, and ordering costs together, we
determine the total cost curve, which in turn is used to find the
Qopt inventory order point that minimizes total costs.
Cost Optimization (Stevenson)
The Total-Cost Curve is U-Shaped
Q D
TC  H  S
2 Q
Annual Cost

Ordering Costs

QO (optimal order quantity)


Economic Order Quantity
Determining Economic Order Quantity

D Q
TC DC  S  H
Q 2
Optimization:
Differentiating & dTC   DS  H
0   2   0
dQ  Q  2
equating to zero
2 DS
Qopt 
H
Reorder Point
Determining Reorder Point- R

L:
_
Lead time (time from ordering to receipt)
d : Average _daily demand
R =d . L

Example 15.2
Establishing Criteria for
Safety Stocks

Safety Stocks: Definition


Amount of inventory carried in addition to the expected demand.

 Surplus (weeks of) supply

 Probability approach
Fixed Order Quantity Model
- with safety stock
Reorder Point _
R d .L  z. L

 L   1   2   3  ....   L

z: No. of Standard deviations for a specified service probability

σL: Standard deviation of usage during lead time.


Fixed Order Period Models
- with safety stock
Safety Stock
Safety stock = z . σT+L
q: quantity to be ordered
T: No. of days between review
σT+L : Standard deviation of demand during review & lead time

Order quantity = Average demand (over T+L) Safety stock


- inventory currently on hand (and
order) _
d
q= . (T + L) + z σT+L - I
Inventory Turn

Inventory Turn = cost of goods sold/ Average inventory value

Cost of goods sold = DC


Average inventory value = (Q/2 + SS)

DC D
Inventory Turn  
(Q / 2)  SSC (Q / 2)  SS
Inventory Systems & Issues

 Optional Replenishment system


 Two-bin system
 One-bin system
Inventory Planning

ABC Inventory Planning

ABC Classification
Inventory Planning

ABC Inventory Planning

ABC Classification
Inventory Accuracy &
Cycle Counting
ABC Inventory Planning

ABC Classification
Inventory on A Grand Scale

ABC Inventory Planning

ABC Classification
I n v e n t o r y C o n t r o l

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