Inventory Management, Control

and Models

Presented by
Group 2

Contents

Inventory Management Its Purpose

Types of Inventory
Inventory Planning and Control
Inventory Control Decisions
Types of Inventory
Micro Issues in Managing Inventory
Inventory Costs
Inventory control systems
Inventory Control Models
EOQ Models

Inventory Management
Activities employed in maintaining the optimum
number or amount of each inventory item.
Objective
To provide uninterrupted production, sales, and/or
customer-service levels at the minimum cost.
Item in the current assets category, inventory
problems can and do contribute to losses or even
business failures

Purpose of Inventory
Management

Predictability
Fluctuation in demand
Unreliability of Supply
Price protection
Quantity discounts
Lower ordering costs

Types of Inventory
Raw Materials
Components
Work In Progress (WIP)
Finished Goods
Distribution Inventory
Maintenance, repair and Operating supplies (MROs)

Inventory Planning and

Control

Inventory control
Decisions
How much to order
When to replenish

Basic inventory concepts

Suppliers
Raw
Materials

Finished

Work In

Process

Goods

Consumers

Nature of Inventory

Types of inventory
Cycle Inventory
Safety Stock Inventory / Buffer Inventory
Anticipation Inventory
Transit Inventory
MRO(Maintenance, Repair and
Operating) Inventory

Managing inventories :
micro issues
Order Quantity
Economic Order Quantity : the order quantity
of inventory that minimizes the total cost of
inventory management.
Order Timing
Re Order Point : that inventory level at
which an order should be placed to replenish
the inventory

Inventory cost
Ordering
cost

Material cost
COST
Stock out
cost

Carrying cost

Cont...
Ordering cost

Carrying cost

Stock out cost

Cost of
ordering
process
Inbound
logistics cost

Capital cost
Storage
space cost
Inventory
service cost
Inventory
risk cost

Back order
Lost order

INVENTORY CONTROL SYSTEM

IT CONTROLS THE LEVEL OF INVENTORY BY
DETERMINING:

HOW MUCH TO ORDER

WHEN TO ORDER
MAINTAINS OPTIMUM STOCK LEVEL AND AVOIDS
STOCK OUT CONDITIONS
TYPES- CONTINEOUS INVENTORY SYSTEM
PERIODIC INVENTORY SYSTEM

CONTINEOUS INVENTORY
SYSTEM
Also called fixed order quantity system.
Order is placed, when inventory reaches reorder
point.
The order placed is called Economic Order Quantity.

Advantage
The inventory level is continuously monitored.

The exact availability of raw material and

supplies
is always known.

Continuous Review System

(Q,r)
Amount used during first lead time

Reorder point, ROP

Average lead time usage, dL

Safety stock, SS

d1

Order quantity, EOQ

Inventory on hand

EOQ

d3
d2 EOQ

First lead
time, LT1

Order 1 placed

LT2

LT3

Time
Order 2 placed

Shipment 1 received

Order 3 placed

Shipment 2 received

Shipment 3 received

PERIODIC INVENTORY SYSTEM

Also called Fixed time period system.
Inventory is counted at specific time interval.
Order is placed in order to bring back the
inventory to a desired level.
Advantage No record keeping is required.

Periodic Review System

(order-up-to)
Inventory on Hand
Review period
Target inventory level, TIL

RP

RP

RP

First order quantity, Q1

Q3

Q2

d3

d1

Amount used during

first lead time

d2

Safety stock, SS

First lead time, LT1

LT2

LT3
Time

Order 1 placed

Order 2 placed

Shipment 1 received

Order 3 placed

Shipment 2 received Shipment 3 received

Inventory Control Model

An analysis of the inventories based on
selected criterion will help in selecting the
vital few and trivial many in respect of
control for achieving the objective.
Methods of Inventory Control
ABC Analysis - based on annual consumption.
VED Analysis - criticality for production.
SDE Analysis - availability.
HML Analysis - weight / cost permit.
FSN Analysis - consumption rate.

ABC Analysis
The ABC classification processis an analysis of a
range of objects, such as finished products ,items lying in
inventory into three categories
Each class having a different management control
associated
Similar to Pareto analysis (80/20 rule)
ABC analysis is based on annual consumption
10% of the items ('A' class) account for 70% of the
consumption
Next 20% ('B' class) account for 20% of the consumption
Balance 70% ('C' class) account for 10% of the
consumption

Characteristics
Category A items
Most costly and valuable
Closer control is needed
Have large investments but not much in number
Category B items
Less important than A class items
lesser degree of control
Category C items
quantities can be relatively large
Can be managed in a little casual manner

Step involved in implementing

the ABC analysis
Classify ,determine expected use & price
of the inventories
Determine total value of item(expected
unitXunit price)
Rank the items (according to total value)
Compute the ratios (no.of unit/total unit) &
(each value of item/total value of all item)
Combine on the basis of relative values
(A,B,C)

Example
Item number

Annual Demand

Unit Price (Rs)

101

10000

30.4

102

5000

51.2

103

16000

5.5

104

14000

5.14

105

30000

1.7

106

15000

1.5

107

10000

0.65

Item
number

Annual
Demand

Unit
(Rs)

Price Annual
Usage (Rs)

Annual
Usage(%)

101

10000

30.4

304000

38.0019

102

5000

51.2

256000

32.0016

103

16000

5.5

88000

11.00055

104

14000

5.14

71960

8.99545

105

30000

1.7

51000

6.375319

106

15000

1.5

22500

2.812641

107

10000

0.65

6500

0.812541

Item
number

Annual
Demand

Unit
Price
(Rs)

Annual
Usage
(Rs)

101

10000

30.4

304000

102

5000

51.2

256000

103

16000

5.5

88000

104

14000

5.14

71960

105

30000

1.7

51000

106
107

15000
10000

1.5
0.65

22500
6500

Annual
cumulati
Usage(%) ve %
38.001900
38.0019
1
70.003500
32.0016
18
81.004050
11.00055 2
89.999499
8.99545
97
96.374818
6.375319 74
99.187459
2.812641 37
0.812541 100

Step 3 Label the Category as per analysis

Item
number

Annual
Demand

Unit
Price
(Rs)

Annual
Usage
(Rs)

101

10000

30.4

304000

102

5000

51.2

256000

103

16000

5.5

88000

104

14000

5.14

71960

105

30000

1.7

51000

106
107

15000
10000

1.5
0.65

22500
6500

Annual
Usage(% cumulati
)
ve %
Category
38.00190
38.0019
01
A
70.00350
32.0016
01
A
81.00405
11.00055 02
B
89.99949
8.99545
99
B
96.37481
6.375319 87
C
99.18745
2.812641 93
C
0.812541 100
C

Graph
120

100

80

60

40

20

VED Analysis
Based on criticality of the material or the
nuisance value.
The nuisance Value is the cost associated with
materials due to their absence
In case they are not available, the whole production
system may come to standstill and involve high cost
of loss of production.
The investment in these materials may be small but
for non availability of the item the costs or losses
the company going to involve will be very high
Degree of criticality-V stands for vital, E stands for
essential and D stands for desirable items.

Hospital inventory
management Example
V is for vital items without which a hospital can
not function, E for essential items without which
a hospital can function but may affect the quality
of the services, and D for desirable items,
unavailability of which with not interfere with
functioning
By combining ABC and VED analysis, the medicines
can be coupled into the following group
Class I: AV+BV+CV+AE+AD
Class II: BE+CE+BD
Class III: CD

COMBINATION OF ABC
&VED ANALYSIS
V

AV

AE

AD

BV

BE

BD

CV

CE

CD

90%

80%

70%

95%

85%

75%

SDE ANALYSIS
Based upon the availability of items
S refers to scarce items, generally
imported, and those which are in short
supply. e.g. OIL
D refers to difficult items which are
available indigenously but are difficult items
to procure.e.g. Items which have to come
from distant places
E refers to items which are easy to acquire
and which are available in the local markets .

HML ANALYSIS
In (HML) High, Medium and low, the classification
unit value is the criterion.
The items of inventory should be listed in the
descending order of unit value and it is up to the
management to fix limits for 3 categories.
For example,
The management may decide:
All units with unit value of Rs. 2000 and above will be H
items,
Rs.1000 to 2000 will be M items
and less than Rs.1000 will be L items.

FSN ANALYSIS
Based on the consumption pattern
Classification depends on the pattern of issues
from stores.
F Fast moving
S Slow moving
N Non Moving
The items are usually grouped in periods of 12
months.
It helps to avoid investments in non moving or
slow items.
It is also useful in facilitating timely control.

EOQ Model
The ordering cost is constant.
The rate of demand is known, and spread evenly
throughout the year.
The lead time is fixed.
The purchase price of the item is constant i.e. no
discount is available
The replenishment is made instantaneously, the whole
batch is delivered at once.
Only one product is involved.

c = purchase price, unit production cost

Q = order quantity
Q* = optimal order quantity
D = annual demand quantity
K = fixed cost per order, setup cost (not per unit, typically cost of ordering and
shipping and handling. This is not the cost of goods)
h = annual holding cost per unit, also known as carrying cost or storage cost
(capital cost, warehouse space, refrigeration, insurance, etc. usually not related
to the unit production cost)

The single-item EOQ formula finds the minimum point of the following
cost function:
Total Cost = purchase cost or production cost + ordering cost + holding
cost
Purchase cost: This is the variable cost of goods: purchase unit price
annual demand quantity. This is c D
Ordering cost: This is the cost of placing orders: each order has a fixed cost
K, and we need to order D/Q times per year. This is K D/Q
Holding cost: the average quantity in stock (between fully replenished and
empty) is Q/2, so this cost is h Q/2

To determine the minimum point of the total cost curve, partially differentiate
the total cost with respect to Q (assume all other variables are constant) and set
to 0:

Solving for Q gives Q* (the optimal order

quantity):

Q* is independent of c; it is a function of only K, D, h.

The optimal value Q* may also be found by recognizing that

where the non-negative quadratic term disappears

for

The above expression provides minimum cost to be :

 Ordering Cost Constant

Optimum plan is calculated only for one product
The demand rate for the year is known and
evenly spread throughout the year

Thank You