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    11 Inventory Control

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    Abhishek Mishra
    This document discusses inventory control and various inventory management systems. The objectives of inventory control are to maintain optimal stock levels to meet demand while minimizing costs like holding and shortage costs. Different types of inventories include raw materials, work in progress, and finished goods. Factors that influence inventory levels include demand, lead times, costs, and quantity discounts. Systems like economic order quantity and economic production quantity models aim to determine optimal order sizes and times to minimize total inventory costs.

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    11 Inventory Control

    Uploaded by

    Abhishek Mishra
    126 views30 pages
    This document discusses inventory control and various inventory management systems. The objectives of inventory control are to maintain optimal stock levels to meet demand while minimizing costs like holding and shortage costs. Different types of inventories include raw materials, work in progress, and finished goods. Factors that influence inventory levels include demand, lead times, costs, and quantity discounts. Systems like economic order quantity and economic production quantity models aim to determine optimal order sizes and times to minimize total inventory costs.

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    This document discusses inventory control and various inventory management systems. The objectives of inventory control are to maintain optimal stock levels to meet demand while minimizing costs like holding and shortage costs. Different types of inventories include raw materials, work in progress, and finished goods. Factors that influence inventory levels include demand, lead times, costs, and quantity discounts. Systems like economic order quantity and economic production quantity models aim to determine optimal order sizes and times to minimize total inventory costs.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    126 views30 pages

    11 Inventory Control

    Uploaded by

    Abhishek Mishra
    This document discusses inventory control and various inventory management systems. The objectives of inventory control are to maintain optimal stock levels to meet demand while minimizing costs like holding and shortage costs. Different types of inventories include raw materials, work in progress, and finished goods. Factors that influence inventory levels include demand, lead times, costs, and quantity discounts. Systems like economic order quantity and economic production quantity models aim to determine optimal order sizes and times to minimize total inventory costs.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 30

    INVENTORY CONTROL

    (INDEPENDENT DEMAND)
    Inventory is the store of goods and stock

    Inventory control is the activity that


    maintains stocks at desired level
    OBJECTIVES OF INVENTORY

    •To maintain overall investment at the


    lowest

    •To supply items to users at right time and


    right place

    •To keep waste and surplus at minimum

    •To minimize shortage and handling cost

    •To maximize efficiency of production


    FUNCTIONS OF INVENTORY

    •Return on investment
    •Buffer stock
    •Decoupling
    •Production smoothing
    •Reduce material handling
    •Bulk purchasing
    TYPES OF MANUFACTURING INVENTORIES

    •Raw material
    •Work in process
    •Finished goods
    •Spares and consumables
    •Miscellaneous
    PRESSURES FOR LOW INVENTORY

    •Interest
    •Opportunity cost
    •Storage and handling cost
    •Taxes / insurance
    •shrinkage
    PRESSURES FOR HIGH INVENTORY

    •Customer service
    •Ordering cost
    •Setup cost
    •Transportation cost
    •Quantity discounts
    MULTISTAGE INVENTORY

    Items stocked at more than one point in sequential


    production process

    MULTIECHELON INVENTORY

    Inventory of finished products at various levels in


    distribution system
    FACTORS AFFECTING INVENTORY
    •Economic parameters
    •Price
    •Procurement cost
    •Carrying cost
    •Shortage cost
    •Demand
    •Ordering cycle
    •Lead time
    •Number of supply echelons
    •Number of stages of inventory
    •Availability of items
    •Government policy
    INVENTORY COST

    •Cost of items
    •Procurement cost
    •Carrying cost
    •Stock out cost
    •System cost
    Total cost

    TC* Holding cost


    Annual cost

    Ordering cost

    Q* Order quantity
    OPERATING DOCTRINE

    HOW MUCH TO ORDER Q

    WHEN TO ORDER R
    INVENTORY CONTROL SYSTEMS

    FIXED ORDER QUANTITY SYSTEM (QR SYSTEM)


    •Order quantity remains fixed
    •Demand may be constant or variable

    FIXED ORDER TIME SYSTEM (PERIODIC SYSTEM)


    •Time of order is fixed
    •Demand is variable
    FIXED ORDER QUANTITY SYSTEM
    (CONSTANT DEMAND)

    . Q
    Inventory level

    R
    T1 T2 time

    T1 = T2
    Q = Q max
    FIXED ORDER QUANTITY SYSTEM
    Inventory level
    (VARIABLE DEMAND)

    L1 L2 time
    FIXED ORDER TIME SYSTEM
    (VARIABLE DEMAND)

    .
    Inventory level

    T1 T2 T3 time

    T1 = T2 = T3
    Q max is fixed
    NOATATIONS
    D total annual demand
    Q order quantity
    Q* optimal order quantity
    R reorder point
    R* optimal reorder point
    L lead time
    S setup / procurement cost per order
    C cost per unit
    I carrying cost per unit per year
    P production rate
    dL demand per unit time during lead time
    DL total demand during lead time
    TC total annual cost
    TC* minimum total annual cost
    ECONOMIC ORDER QUANTITY
    D is constant
    L is constant
    C is constant
    No stock out is allowed

    No. of orders = D / Q Average inventory = Q / 2

    Order cost = SD / Q Holding cost = ICQ / 2

    Total inventory cost = CD + SD /Q + ICQ / 2


    dTC / dQ = -SD / Q2 + IC / 2

    Total cost is minimum when dTC / dQ = 0


    R = 0 if L = 0
    Q* = 2SD / IC
    R = LdL if L = 0
    SENSITIVITY ANALYSIS FOR EOQ MODEL

    TC 1 q Q
    = +
    TC* 2 Q q

    Total ordering and holding costs are relatively stable


    around the EOQ. A firm is better served by ordering a
    convenient lot size close to EOQ rather than the
    precise EOQ
    GRADUAL REPLACEMENT MODEL
    ECONOMIC BATCH SIZE

    Qmax
    Inventory level

    -d
    p -d

    Tp
    Qmax = (p-d) Q / p
    Tp = Q / p = p–d Q
    p
    GRADUAL REPLACEMENT MODEL
    ECONOMIC BATCH SIZE
    Average inventory = Q p-d
    2 p
    TC = CQ + SD / Q + ICQ/2 p-d
    p

    Total cost is minimum when dTC / dQ = 0


    dTC / dQ = -SD / Q + IC / 2 ( p-d / p )
    Q* = 2DS p
    IC p-d

    2DS P
    IC P-D
    QUANTITY DISCOUNT
    Price range

    EOQ at lowest price


    range

    feasible Not feasible

    EOQ at next
    Compute total cost
    lowest price

    Total cost at lowest


    Q for each price

    Choose minimum
    total cost
    INVENTORY DECISIONS OF PERISHABLE PRODUCTS
    Cu = cost of shortage
    Co = cost of overstock
    Critical fractile = Cu
    Cu + Co

    Inventory order = minimum demand +


    CF ( maximum demand – minimum demand )
    INVENTORY CONTROL UNDER UNCERTAIN DEMAND

    Safety stock is required to face uncertainty in demand

    if daily demand standard deviation is s,


    The standard deviation б during lead time of n days
    2 2
    = s1 + s22+ s3 + sn2

    R = LdL + zб
    Z = number of standard deviations equivalent
    to confidence level
    Reorder Point

    Service level
    Risk of
    a stock out
    Probability of
    no stock out

    ROP Quantity
    Expected
    demand Safety
    stock
    0 z z-scale
    INVENTORY CLASSIFICATION

    By cost ABC analysis


    By importance VED analysis
    By frequency of use FSN analysis
    VED analysis

    V ( vital ) items which are absolutely essential to the


    operations
    E ( essential ) items, absence of which adversely affects
    productivity or quality or both
    D ( desirable ) items required for smooth operations
    although not essential
    FSN analysis

    F fast moving items


    S slow moving items
    N non moving items
    ABC analysis

    Based on Pareto law

    •10% of items account for 70% of cost


    •20% items account for 20% of cost
    •70% of items account for 10% of cost
    ABC analysis

    .. . . . . . C class items 100


    . B class items
    90

    . 70
    frequency

    A class items %

    items

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