Description
This is a presentation about the concepts of inventory management, different types of inventory, nature of inventories, objective of inventory management, classification of inventories, EOQ model.
Inventory Management
1
Inventory Definition
?
?
A stock of items held to meet future demand Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.
1/27/2013
2
Introduction
? ?
? ?
?
?
Constitute significant part of current assets On an average approximately 30% of current assets A considerable amount of fund is required Effective and efficient management is imperative to avoid unnecessary investment Improper inventory management affects long term profitability and may fail ultimately 10 to 20% of inventory can be reduced without any adverse effect on production and sales by using simple inventory planning and control techniques 1/27/2013 3
Types of Inventory
Work in process
Vendors
Raw Materials Work in process
Work in process
Finished Customer goods
1/27/2013
4
Nature of Inventories
?
?
?
?
Raw Materials – Basic inputs that are converted into finished product through the manufacturing process Work-in-progress – Semi-manufactured products need some more works before they become finished goods for sale Finished Goods – Completely manufactured products ready for sale Supplies – Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment.
1/27/2013 5
Needs for Inventories
?
Meet variations in customer demand:
? ?
Meet unexpected demand Smooth seasonal or cyclical demand Temporary price discounts Hedge against price increases Take advantage of quantity discounts Internal – upsets in parts of or our own processes External – delays in incoming goods
?
Pricing related:
? ? ?
?
Process & supply surprises
? ?
1/27/2013
6
Cont…..
?
?
Process or movement inventories are required because it takes time to compleate a process / operations and to move a product from 1 stage to another The average quantity of such inventories would be equal to Avg.output of process X time req. for process
Objective of Inventory Management
?
?
?
To maintain a optimum size of inventory for efficient and smooth production and sales operations To maintain a minimum investment in inventories to maximize the profitability Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality
1/27/2013
8
An effective inventory management should
?
?
?
? ?
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 Control investment in inventories and keep it at an optimum level
1/27/2013 9
An optimum inventory level involves three types of costs
Ordering costs:? Quotation or tendering ? Requisitioning ? Order placing ? Transportation ? Receiving, inspecting and storing ? Quality control ? Clerical and staff Stock-out cost ? Loss of sale ? Failure to meet delivery commitments
1/27/2013
Carrying costs:? Warehousing or storage ? Handling ? Clerical and staff ? Insurance ? Interest ? Deterioration,shrinkage, evaporation and obsolescence ? Taxes ? Cost of capital
10
Basic EOQ Model
Assumption • Seasonal fluctuation in demand are ruled out • Zero lead time – Time lapsed between purchase order and inventory usage • Cost of placing an order and receiving are same and independent of the units ordered • Annual cost of carrying the inventory is constant • Total inventory cost = Ordering cost + carrying cost
Order- Formula approach
1/2 EOQ =(2CO/I) C = Annual demand O = Ordering cost per order I = Carrying cost per unit 1/2 EOQ =(2*1200*37.5/1) = 300 units
1/27/2013
12
Graphical method to find EOQ
Cost in RS.
0
EOQ Order quantity
ABC Classification
•
•
•
•
In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity. A typical manufacturing operation shows that the top 15% of the line items, in terms of annual rupees usage, represent 80% of total annual rupees usage. Next 15% of items reflect 15% of annual rupees Next 70% accounts only for 5% usage
GRAPH OF CUMULATIVE % OF ITEMS & CUMULATIVE %OF USAGE
a
b
c
Cumulative % of items
Functions of Inventory Management
-Track inventory –How much to order –When to order
1/27/2013
16
Just In Time Inventory Control
?
?
?
Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs. Just-intime production method is also called the Toyota Production System. The philosophy of JIT is simple: inventory is waste. JIT inventory systems expose hidden cost of keeping inventory, and are therefore not a simple solution for a company to adopt. The company must follow an array of new methods to manage the consequences of the change. The ideas in this way of working come from many different disciplines including statistics, industrial engineering, production management, and behavioral science. The JIT inventory philosophy defines how inventory is viewed and how it relates to management. Just in time is difficult to implement as it requires inter alia:
? ? ?
A strong & dependable buyer/ supplier relationship, A reliable transportation system, An easy physical access in the form of enough doors & conveniently located docks & storage areas to dovetail incoming supplies to the needs of assembly lines,
Classification of inventory
•
•
• • •
ABC Classification HML Classification XYZ Classification VED Classification FSN Classification
XYZ Classification
?
?
?
?
?
On the basis of value of inventory stored Whereas ABC was on the basis of value of consumption to value. X – High Value Y – Medium value Z – Least value Aimed to identify items which are extensively stocked.
VED Classification
•
•
•
•
Mainly for spare parts because their consumption pattern is different from raw materials. Raw materials on market demand Spare parts on performance of plant and machinery. V – Vital, E – Essential, D – Desirable
FSN Classification
?
?
? ? ?
According to the consumption pattern To combat obsolete items F – Fast moving S – Slow moving N – Non Moving
Different approaches
?
?
? ?
Certainty approach Uncertain variables and risk are addressed separately Uncertainty approach Uncertain variables and risk are addressed simultaneously Deterministic approach Probabilistic approach
EOQ – Three Approaches
? Trial
and Error method ? Order-formula approach ? Graphical approach
1/27/2013
23
EOQ & Re-order point
– gives answer to question “How much to Order” ? Re-order point – gives answer to question “when to order”
? EOQ
1/27/2013 24
Certainty case of the inventory cycle
Inventory level order quantity
Q Average inventory = Q/2
0
T1
T2 Time
T3
T4
1. Here the negative slope from Q to T1 represents the inventory being used up 2. T1, T2, T3, T4 represents the replenishment points 3. The inventory varies between 0 and Q
Emerging trends in inventory management
•
• •
• •
•
•
Entering into log term contract at a fixed price to reduce uncertainties Just-in-time Kanbans – Japanese technique (Only produce when demand comes) Internet based ordering system Supply chain management Vendor development Investment in plant and machinery
Inventory control responsibility
•
•
•
•
•
Purchasing naturally has vest interest in inventories, even to the extend that in some companies the purchasing and stores functions are combined. In effect the responsibility cannot be kept Production looks after the work in progress on one head since inventory management Logistics plays a major role effort is a integrated in inventory control Inventories are economic importance to finance department The fact that materials must be moved from one place to another is of importance to materials department
THANK YOU
doc_991326204.pptx
This is a presentation about the concepts of inventory management, different types of inventory, nature of inventories, objective of inventory management, classification of inventories, EOQ model.
Inventory Management
1
Inventory Definition
?
?
A stock of items held to meet future demand Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.
1/27/2013
2
Introduction
? ?
? ?
?
?
Constitute significant part of current assets On an average approximately 30% of current assets A considerable amount of fund is required Effective and efficient management is imperative to avoid unnecessary investment Improper inventory management affects long term profitability and may fail ultimately 10 to 20% of inventory can be reduced without any adverse effect on production and sales by using simple inventory planning and control techniques 1/27/2013 3
Types of Inventory
Work in process
Vendors
Raw Materials Work in process
Work in process
Finished Customer goods
1/27/2013
4
Nature of Inventories
?
?
?
?
Raw Materials – Basic inputs that are converted into finished product through the manufacturing process Work-in-progress – Semi-manufactured products need some more works before they become finished goods for sale Finished Goods – Completely manufactured products ready for sale Supplies – Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment.
1/27/2013 5
Needs for Inventories
?
Meet variations in customer demand:
? ?
Meet unexpected demand Smooth seasonal or cyclical demand Temporary price discounts Hedge against price increases Take advantage of quantity discounts Internal – upsets in parts of or our own processes External – delays in incoming goods
?
Pricing related:
? ? ?
?
Process & supply surprises
? ?
1/27/2013
6
Cont…..
?
?
Process or movement inventories are required because it takes time to compleate a process / operations and to move a product from 1 stage to another The average quantity of such inventories would be equal to Avg.output of process X time req. for process
Objective of Inventory Management
?
?
?
To maintain a optimum size of inventory for efficient and smooth production and sales operations To maintain a minimum investment in inventories to maximize the profitability Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality
1/27/2013
8
An effective inventory management should
?
?
?
? ?
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 Control investment in inventories and keep it at an optimum level
1/27/2013 9
An optimum inventory level involves three types of costs
Ordering costs:? Quotation or tendering ? Requisitioning ? Order placing ? Transportation ? Receiving, inspecting and storing ? Quality control ? Clerical and staff Stock-out cost ? Loss of sale ? Failure to meet delivery commitments
1/27/2013
Carrying costs:? Warehousing or storage ? Handling ? Clerical and staff ? Insurance ? Interest ? Deterioration,shrinkage, evaporation and obsolescence ? Taxes ? Cost of capital
10
Basic EOQ Model
Assumption • Seasonal fluctuation in demand are ruled out • Zero lead time – Time lapsed between purchase order and inventory usage • Cost of placing an order and receiving are same and independent of the units ordered • Annual cost of carrying the inventory is constant • Total inventory cost = Ordering cost + carrying cost
Order- Formula approach
1/2 EOQ =(2CO/I) C = Annual demand O = Ordering cost per order I = Carrying cost per unit 1/2 EOQ =(2*1200*37.5/1) = 300 units
1/27/2013
12
Graphical method to find EOQ
Cost in RS.
0
EOQ Order quantity
ABC Classification
•
•
•
•
In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity. A typical manufacturing operation shows that the top 15% of the line items, in terms of annual rupees usage, represent 80% of total annual rupees usage. Next 15% of items reflect 15% of annual rupees Next 70% accounts only for 5% usage
GRAPH OF CUMULATIVE % OF ITEMS & CUMULATIVE %OF USAGE
a
b
c
Cumulative % of items
Functions of Inventory Management
-Track inventory –How much to order –When to order
1/27/2013
16
Just In Time Inventory Control
?
?
?
Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs. Just-intime production method is also called the Toyota Production System. The philosophy of JIT is simple: inventory is waste. JIT inventory systems expose hidden cost of keeping inventory, and are therefore not a simple solution for a company to adopt. The company must follow an array of new methods to manage the consequences of the change. The ideas in this way of working come from many different disciplines including statistics, industrial engineering, production management, and behavioral science. The JIT inventory philosophy defines how inventory is viewed and how it relates to management. Just in time is difficult to implement as it requires inter alia:
? ? ?
A strong & dependable buyer/ supplier relationship, A reliable transportation system, An easy physical access in the form of enough doors & conveniently located docks & storage areas to dovetail incoming supplies to the needs of assembly lines,
Classification of inventory
•
•
• • •
ABC Classification HML Classification XYZ Classification VED Classification FSN Classification
XYZ Classification
?
?
?
?
?
On the basis of value of inventory stored Whereas ABC was on the basis of value of consumption to value. X – High Value Y – Medium value Z – Least value Aimed to identify items which are extensively stocked.
VED Classification
•
•
•
•
Mainly for spare parts because their consumption pattern is different from raw materials. Raw materials on market demand Spare parts on performance of plant and machinery. V – Vital, E – Essential, D – Desirable
FSN Classification
?
?
? ? ?
According to the consumption pattern To combat obsolete items F – Fast moving S – Slow moving N – Non Moving
Different approaches
?
?
? ?
Certainty approach Uncertain variables and risk are addressed separately Uncertainty approach Uncertain variables and risk are addressed simultaneously Deterministic approach Probabilistic approach
EOQ – Three Approaches
? Trial
and Error method ? Order-formula approach ? Graphical approach
1/27/2013
23
EOQ & Re-order point
– gives answer to question “How much to Order” ? Re-order point – gives answer to question “when to order”
? EOQ
1/27/2013 24
Certainty case of the inventory cycle
Inventory level order quantity
Q Average inventory = Q/2
0
T1
T2 Time
T3
T4
1. Here the negative slope from Q to T1 represents the inventory being used up 2. T1, T2, T3, T4 represents the replenishment points 3. The inventory varies between 0 and Q
Emerging trends in inventory management
•
• •
• •
•
•
Entering into log term contract at a fixed price to reduce uncertainties Just-in-time Kanbans – Japanese technique (Only produce when demand comes) Internet based ordering system Supply chain management Vendor development Investment in plant and machinery
Inventory control responsibility
•
•
•
•
•
Purchasing naturally has vest interest in inventories, even to the extend that in some companies the purchasing and stores functions are combined. In effect the responsibility cannot be kept Production looks after the work in progress on one head since inventory management Logistics plays a major role effort is a integrated in inventory control Inventories are economic importance to finance department The fact that materials must be moved from one place to another is of importance to materials department
THANK YOU
doc_991326204.pptx