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    Inventory Management

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    pranjali shinde
    The document discusses inventory management costs including carrying costs and ordering costs. Carrying costs include interest, storage, administrative, insurance, and obsolescence costs. Ordering costs include identification of suppliers, price negotiation, purchase order generation, and receiving inventory. The economic order quantity (EOQ) model balances carrying and ordering costs to determine the optimal order quantity. The EOQ is calculated using demand rate, ordering cost, and carrying cost percentage. Safety stock is also discussed to account for demand uncertainty using the normal distribution.

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    Inventory Management

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    9 views33 pages
    The document discusses inventory management costs including carrying costs and ordering costs. Carrying costs include interest, storage, administrative, insurance, and obsolescence costs. Ordering costs include identification of suppliers, price negotiation, purchase order generation, and receiving inventory. The economic order quantity (EOQ) model balances carrying and ordering costs to determine the optimal order quantity. The EOQ is calculated using demand rate, ordering cost, and carrying cost percentage. Safety stock is also discussed to account for demand uncertainty using the normal distribution.

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    The document discusses inventory management costs including carrying costs and ordering costs. Carrying costs include interest, storage, administrative, insurance, and obsolescence costs. Ordering costs include identification of suppliers, price negotiation, purchase order generation, and receiving inventory. The economic order quantity (EOQ) model balances carrying and ordering costs to determine the optimal order quantity. The EOQ is calculated using demand rate, ordering cost, and carrying cost percentage. Safety stock is also discussed to account for demand uncertainty using the normal distribution.

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    9 views33 pages

    Inventory Management

    Uploaded by

    pranjali shinde
    The document discusses inventory management costs including carrying costs and ordering costs. Carrying costs include interest, storage, administrative, insurance, and obsolescence costs. Ordering costs include identification of suppliers, price negotiation, purchase order generation, and receiving inventory. The economic order quantity (EOQ) model balances carrying and ordering costs to determine the optimal order quantity. The EOQ is calculated using demand rate, ordering cost, and carrying cost percentage. Safety stock is also discussed to account for demand uncertainty using the normal distribution.

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    of 33

    Inventory

    Management

    Shivom Chakravarty
    Costs to be Balanced

     Cost of Ordering
     Cost of Storing
    Costs in Inventory Planning
    Carrying Cost

     Interest for short-term borrowals for working capital
     Cost of stores and warehousing
     Administrative costs related to maintaining and
    accounting for inventory
     Insurance costs, cost of obsolescence, pilferage,
    damages and wastage

     All these costs are directly related to the level of


    inventory
    Computation of
    Carrying Cost
    Sl. No.
    1
    2

    Item of Expenditure (Annual)
    An illustration
    Stationary
    Insurance premium
    Amount (₹)
    75,000.00
    375,000.00
    3 Establishment expenses & Overheads 275,000.00
    4 Salary of Stores Personnel 1,100,000.00
    Total expenditure 1,750,000.00
       
    Average Value of the inventory in Stores 35,000,000.00
    Warehousing cost (in % inventory value) 5.00%
       
    a Cost of warehousing 5.00%
    b Cost of capital (assumed) 15.00%
    c Obsolescence (estimated historically) 2.00%
    Damages, spoilage etc. (estimated
    d historically) 1.00%
      Carrying cost (%) 23.00%
    Costs in Inventory Planning
    Ordering Cost
     Search and identification of appropriate sources of supply


     Price negotiation, contracting and purchase order
    generation
     Follow-up and receipt of material
     Eventual stocking in the stores after necessary accounting
    and verification
     A larger order quantity will require less number of orders
    to meet a known demand & vice versa

    Cost of carrying and cost of ordering are fundamentally two opposing cost
    structures in inventory planning
    Computation of
    Ordering Cost
    Sl. No.
    1

    An illustration
    Item of Expenditure (Annual)
    Stationary
    Amount (₹)
    80,000.00
    2 Telephone 40,000.00
    3 Other communication Expenses 60,000.00
    4 Salary of Purchase Department Personnel 1,100,000.00
    5 Inwards Goods Inspection Section Expenses 350,000.00
    6 Other expenses & Overheads 200,000.00
      Total Expenditure 1,830,000.00

      No. of purchase orders generated 600.00


      Average Cost of Ordering 3,050.00

    Two important
    Questions 
    in Inventory
     How much to order? (Quantity)
     When to order? (A> Fixed Time + Fixed Quantity or
    B> Fixed Review Period + Variable Quantity or C>
    Reorder Level + Continuous Monitoring)

    EOQ – Economic Order Quanity

    EOQ Model
    A graphical representation


    Sum of the two costs
    Cost of Inventory

    Total cost of carrying

    Minimum Cost

    Total cost of ordering

    Economic Level of Inventory


    Order Qty.
    Inventory Control for deterministic
    demand:
    EOQ Model

    Order quantity

    Demand during the planning period
    =Q
    =D

    The cost of ordering per order = Co


    Inventory carrying cost per unit per unit time =C c
    Q
    The average inventory carried by an organisation=
    2
    Q 
    The cost associated with carrying inventory =  * C c 
    2 
    D 
    The total ordering cost is given by  * C o 
    Q 
    Total cost of the plan =
    Total cost of carrying inventory + Total cost of ordering
    Q  D 
    TC(Q) =  * C+c  
     * C o 

    2  Q 
    Inventory Control for deterministic
    demand:
    EOQ Model

    When the total cost is minimum, we obtain the most economic
    order quantity (EOQ). By taking the first derivative of with
    respect to Q and equating it to zero we can obtain the EOQ
    Differentiating total cost equation with respect to Q we obtain,
    dTC (Q) C c C o D
      2
    dQ 2 Q
    The second derivative is positive and hence we obtain the
    minimum cost by equating the first derivative to zero.
    2C o D
    Denoting EOQ by Q , we obtain the expression of Q as: Q
    * * *

    Cc
    D
    The optimal number of orders =
    Q*
    Q*
    Time between orders =
    D
    Inventory Planning Models
    Example (EOQ)
    Mean of weekly demand 
    Unit cost of the raw material
    : 200
    : Rs. 300/-
    Ordering cost : Rs. 460/- per order
    Carrying cost percentage : 20% per annum
    Inventory Planning Models
    Example (EOQ)
    Mean of weekly demand
     : 200
    Standard deviation of weekly demand : 40
    Unit cost of the raw material : Rs. 300/-
    Ordering cost : Rs. 460/- per order
    Carrying cost percentage : 20% per annum
    Lead time for procurement : 2 weeks

    EOQ Model
    Weekly demand = 200
    Number of weeks per year = 52
    Annual demand, D = 200*52 = 10,400
    Carrying cost, Cc = Rs. 60.00 per unit per year
    2Co D 2 * 460 *10,400
    Economic Order Quantity =   399.33  400
    Cc 60
    400 2
    Time between orders =   2 weeks
    10400 52
    The Assumptions

    Issues in using EOQ Model

    EOQ Model assumptions



    1. The demand is known with certainty
    2. There is an instantaneous replenishment of items
    3. Assumptions about order quantity
    a) There are no preferred order quantities for the items
    b) No price discount is offered when the order size is large
    5 Minutes Break?

    Removing Assumption 3
    – Order Quantity
    (Price Change : Discounts!)

    AAA

    AAA
    AAA

    AAA
    AAA
    Removing Assumption 2
    – Lead Time (Not instantaneous arrival)

     Lead Time = 5 Days
     Use previous example data, to find ‘When to Order’
    Reorder Level
    (Considering Lead Time)

    Removing Assumption 1
    -Exact demand is uncertain
     (Probability!)
     Desired Level of ‘No Stockouts’ in % , ex 90%, 95%
    Some Terms

     Review Period
     Level of Protection – Alpha (% of occasions we will
    not be out of stock, ex 95%)
     Current Inventory Position
     Order Upto Level
     Mean
     Standard Deviation
    Introduction to
    NORMAL DISTRIBUTION

    Computing Safety Stock
    Using Normal Distribution

    Mean demand during lead-time =  (L )
    Standard deviation of
    demand during lead-time =  (L )

    Safety stock (SS) is given by SS = Z  *  ( L )

    ,
    Normal Distribution Table


    Inventory Graph

     Draw(X – Time, Y – Inventory Level)
    Steps – In Case of
    Demand Uncertainty

     Step 0 : Decide on the level of protection (alpha)
     Step 1 : Calculate Mean and Std Deviation
    during R eview +L ead time Period
     Step 2: Compute Safety Stock (use norm.s.inv
    excel or normal distr. table)
     Step 3: Compute ‘Order Upto Level ’ (Mean
    Demand + Safety Stock)
     Step 4 : How Much to Order = Q = Order Upto
    Level – Inventory in Hand
    Numerical Example


    Classification of
    Inventory (Optional)
    ABC Classification
    A graphical illustration


    100%

    90%
    Class C
    80%
    Class B
    Consummption value (%)

    70%

    60%
    Class A
    50%

    40%

    30%

    20%

    10%

    0%

    0% 10
    %
    20
    %
    30
    %
    40
    %
    50
    %
    60
    %
    70
    %
    80
    %
    90
    %
    0 0%
    1
    No. of items (% )

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