HML AnalysisHML AnalysisVED Analysis VED Analysis SDE AnalysisSDE Analysis

EOQ EOQ MUSIC-3DMUSIC-3D

HML AnalysisHML Analysis

High, Low Medium (Price criterion)High, Low Medium (Price criterion) Cut off lines are fixed by management Cut off lines are fixed by management HML Analysis helps toHML Analysis helps too Assess storage and security requirementsAssess storage and security requirementso To keep control over consumption at the To keep control over consumption at the

departmental head leveldepartmental head levelo Determine the frequency of stock verificationDetermine the frequency of stock verificationo To evolve buying policies to control purchasesTo evolve buying policies to control purchaseso To delegate authorities to different buyers to To delegate authorities to different buyers to

make petty cash purchases. make petty cash purchases.

VED AnalysisVED Analysis

Vital, Essential DesirableVital, Essential Desirable Based on criticality.Based on criticality. Vital Vital – production would come to halt. Essential Essential –– whose stock out cost is very high.whose stock out cost is very high. Desirable Desirable – items which do not cause any – items which do not cause any

immediate loss of productionimmediate loss of production It is advantageous to use more than one It is advantageous to use more than one

method. E.g. ABC and VED analysis together.method. E.g. ABC and VED analysis together.

SDE AnalysisSDE Analysis Scare Difficult and EasyScare Difficult and Easy Based on problems of procurement:Based on problems of procurement:o Non-availabilityNon-availabilityo ScarcityScarcityo Longer lead timeLonger lead timeo Geographical location of suppliers andGeographical location of suppliers ando Reliability of suppliers etcReliability of suppliers etc Scare: short in supply, imported or canalized Scare: short in supply, imported or canalized

through government agencies.through government agencies.o Best to procure once in a year in spite of effort and Best to procure once in a year in spite of effort and

expenditures involved in the procedure of import.expenditures involved in the procedure of import. Difficult: available indigenously but not easy to Difficult: available indigenously but not easy to

procureprocure

EOQ (Economic Ordering Quantity)EOQ (Economic Ordering Quantity)Important assumptionsImportant assumptions Demand is known, constant, and independentDemand is known, constant, and independent Lead time is known and constantLead time is known and constant Receipt of inventory is instantaneous and completeReceipt of inventory is instantaneous and complete Quantity discounts are not possibleQuantity discounts are not possible Only variable costs are setup and holdingOnly variable costs are setup and holding Stock outs can be completely avoidedStock outs can be completely avoided If the quantity ordered is 500 units all 500 hundred arrive at If the quantity ordered is 500 units all 500 hundred arrive at

one timeone time Quantity jumps from 0 to 500 (Q) Quantity jumps from 0 to 500 (Q) Demand is constant and hence inventory drops at uniform Demand is constant and hence inventory drops at uniform

raterate

Inventory Usage Over TimeInventory Usage Over TimeIn

ven

tory

leve

lIn

ven

tory

leve

l

TimeTime

Order Order quantity = Q quantity = Q (maximum (maximum inventory inventory

level)level)

Inve

nto

ry le

vel

Inve

nto

ry le

vel

TimeTime

Usage rateUsage rate Average Average inventory inventory on handon hand

QQ22

Minimum Minimum inventoryinventory

Minimizing CostsMinimizing Costs

Objective is to minimize total costsObjective is to minimize total costsA

nn

ual

co

stA

nn

ual

co

st

Order quantityOrder quantity

Curve for total Curve for total cost of holding cost of holding

and setupand setup

Holding cost Holding cost or Inventory or Inventory carrying cost carrying cost

curvecurve

Setup (or order) Setup (or order) cost curvecost curve

Minimum Minimum total costtotal cost

Optimal Optimal order order

quantityquantity

The EOQ ModelThe EOQ ModelQQ = Number of pieces per order = Number of pieces per order

EOQ= Optimal number of pieces per order (EOQ)EOQ= Optimal number of pieces per order (EOQ)

DD = Annual demand in units for the Inventory item = Annual demand in units for the Inventory item

SS = Setup or ordering cost for each order = Setup or ordering cost for each order

HH = Holding or carrying cost per unit per year = Holding or carrying cost per unit per year

Annual setup costAnnual setup cost = (Number of orders placed per year) = (Number of orders placed per year)

x (Setup or order cost per order)x (Setup or order cost per order)

Annual demandAnnual demand

Number of units in each orderNumber of units in each orderSetup or order Setup or order cost per ordercost per order

==

= (= (SS))DDQQ

Annual holding cost Annual holding cost == ((Average inventory levelAverage inventory level) ) x (x (Holding cost per unit per yearHolding cost per unit per year))

Order quantityOrder quantity

22= (= (Holding cost per unit per yearHolding cost per unit per year))

= (= (HH))QQ22

Optimal order quantity is found when annual setup cost Optimal order quantity is found when annual setup cost equals annual holding costequals annual holding cost

DDQQ

SS = = HHQQ22

Solving for Q*Solving for Q*22DS = QDS = Q22HHQQ22 = = 22DS/HDS/H

EOQ = EOQ = 22DS/HDS/H

EOQ – ADVANTAGESEOQ – ADVANTAGES

OPTIMISED DECISION REGARDING QUANTITY TO BE ORDERED & ORDERING FREQUENCY APPLICABLE TO SINGLE ITEM AS WELL AS GROUP OF ITEMS WITH SIMILAR HOLDING AND ORDERING COSTS TOTAL PROCUREMENT COST LOWER THAN FOR ANY OTHER SYSTEM

EOQ – LIMITATIONSEOQ – LIMITATIONS

RESULTS MISLEADING IN CASE OF ERRATIC USAGE, FAULTY BASIC INFORMATION REGARDING ORDERING AND CARRYING COSTS COSTLY CALCULATIONS

MUSIC-3d RuleMUSIC-3d Rule(Multi Unit Selective Inventory Control) - a three dimensional approach(Multi Unit Selective Inventory Control) - a three dimensional approach Major portion of effective managerial time is Major portion of effective managerial time is

spent on those materials which are most spent on those materials which are most important.important.

This approach is based on:This approach is based on:

- Cost - Cost (High/Low Annual Consumption Value-80/20 Rule: Top 20% of item, (High/Low Annual Consumption Value-80/20 Rule: Top 20% of item, accounting for about 80% of consumption values shall be deemed as high accounting for about 80% of consumption values shall be deemed as high consumption value and balance 80% of the items accounting for about 20% consumption value and balance 80% of the items accounting for about 20% of the consumption value shall be deemed as low consumption value item.)of the consumption value shall be deemed as low consumption value item.)

- Criticality - Criticality (Critical/Non-critical)(Critical/Non-critical)

- Availability - Availability (Short/Long-lead Time)(Short/Long-lead Time)