CHAPTE R 29
INVENTORY MANAGEMENT
LEARNING OBJECTIVES
2
? Highlight the
need for and nature of inventory ? Explain the techniques of inventory management ? Focus on the need for analyzing inventory problem as an investment decision ? Discuss the process for managing inventory
Nature of Inventory
3
? Stocks
of manufactured products and the material that make up the product. ? Components:
?
?
? ?
raw materials work-in-process finished goods stores and spares (supplies)
Need for Inventories
4
? Transaction
motive ? Precautionary motive ? Speculative motive
Objectives of Inventory Management
5
? To
maintain a large size of inventories of raw material and work-in-process for efficient and smooth production and of finished goods for uninterrupted sales operations. To maintain a minimum investment in inventories to maximize profitability.
?
An effective inventory management should:
6
? ensure
a continuous supply of raw materials, to facilitate uninterrupted production ? maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes ? maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service. ? minimize the carrying cost and time, and ? control investment in inventories and keep it at an optimum level.
7
Inventory Management Techniques
? Economic
?
order quantity (EOQ)
?
?
ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence ordering and carrying costs trade-off:
EOQ = 2AO c
8
9
Inventory Management Techniques
? Reorder point
?
under certainty
lead time ? average usage Reorder point = Lead time x average usage
Cont…
10
? Reorder point
?
under uncertainty
safety stock Reorder point = (Lead time x average usage) + safety stock
11
Inventory Investment Analysis
? Estimation
of incremental operating profit ? Estimation of incremental investment in inventory ? Estimation of the incremental rate of return (IRR) ? Comparison of the incremental rate of return with the required rate of return (RRR) ? Optimum inventory: IRR = RRR
12
INVENTORY CONTROL SYSTEMS
? ABC
Inventory Control System ? Just-in-Time (JIT) Systems ? Out-sourcing ? Computerized Inventory Control Systems
13
Graphic Presentation of ABC Analysis
14
Inventory Management Process
? Explicitly
state the inventory policy ? Create an inventory monitoring cell ? Management group for controlling purchases ? Periodic meetings between purchase, materials planning and production executives ? Monthly reviews of total inventory at plant/corporate level ? Dovetail inventory control to the total budgeting system ? Identify critical inventory items for closer scrutiny
doc_714320189.ppt
INVENTORY MANAGEMENT
LEARNING OBJECTIVES
2
? Highlight the
need for and nature of inventory ? Explain the techniques of inventory management ? Focus on the need for analyzing inventory problem as an investment decision ? Discuss the process for managing inventory
Nature of Inventory
3
? Stocks
of manufactured products and the material that make up the product. ? Components:
?
?
? ?
raw materials work-in-process finished goods stores and spares (supplies)
Need for Inventories
4
? Transaction
motive ? Precautionary motive ? Speculative motive
Objectives of Inventory Management
5
? To
maintain a large size of inventories of raw material and work-in-process for efficient and smooth production and of finished goods for uninterrupted sales operations. To maintain a minimum investment in inventories to maximize profitability.
?
An effective inventory management should:
6
? ensure
a continuous supply of raw materials, to facilitate uninterrupted production ? maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes ? maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service. ? minimize the carrying cost and time, and ? control investment in inventories and keep it at an optimum level.
7
Inventory Management Techniques
? Economic
?
order quantity (EOQ)
?
?
ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence ordering and carrying costs trade-off:
EOQ = 2AO c
8
9
Inventory Management Techniques
? Reorder point
?
under certainty
lead time ? average usage Reorder point = Lead time x average usage
Cont…
10
? Reorder point
?
under uncertainty
safety stock Reorder point = (Lead time x average usage) + safety stock
11
Inventory Investment Analysis
? Estimation
of incremental operating profit ? Estimation of incremental investment in inventory ? Estimation of the incremental rate of return (IRR) ? Comparison of the incremental rate of return with the required rate of return (RRR) ? Optimum inventory: IRR = RRR
12
INVENTORY CONTROL SYSTEMS
? ABC
Inventory Control System ? Just-in-Time (JIT) Systems ? Out-sourcing ? Computerized Inventory Control Systems
13
Graphic Presentation of ABC Analysis
14
Inventory Management Process
? Explicitly
state the inventory policy ? Create an inventory monitoring cell ? Management group for controlling purchases ? Periodic meetings between purchase, materials planning and production executives ? Monthly reviews of total inventory at plant/corporate level ? Dovetail inventory control to the total budgeting system ? Identify critical inventory items for closer scrutiny
doc_714320189.ppt