Pom Chapter 8(a)

8/6/2019 Pom Chapter 8(a)

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INVENTORY MANAGEMENT

K. Aswathappa, K. Shridhara Bhat

8/9/2011 1A.J INSTITUTE OF MANAGEMENT


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Inventory:

It includes- raw, in process, finished packaging, spares & others

stocked in order to meet an unexpected demand or distribution in

the future.

Inventory Cost includes:Inventory Cost includes:

(Ordering Cost, Carrying Cost, Storage Space Costs, Handling

Equipment Costs etc.)



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Factors Influencing Inventory Management &

Control:

-- Type of the Product:Type of the Product:

If the materials used in the manufacture of the product have a

high unit value when purchased, a much closer control is usually

in order.

-- Type of Manufacture:Type of Manufacture:

Where continuous manufacture is employed the rate of

production is the key factor.

-- Volume of Production:Volume of Production:

( E.g. Manufacture of a large locomotive involves the planning& control of thousands of items of inventory.

- The objectivesobjectives of the company as they relate to inventories

- The capabilities of personnelcapabilities of personnel who will be responsible for

managing the system on a continuing basis8/9/2011 3A.J INSTITUTE OF MANAGEMENT


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Benefits of Inventory Management & Control:

- Inventory Control ensures an adequate supply of materials,

stores etc, minimizes stock-outs, shortages, & avoid costly

interruptions in operations;

- It permits a better utilization of available stocks by facilitatinginter-department transfers within a company;

- It provides a check against the loss of materials through

pilferage;

- It eliminates the duplication in ordering by centralizing the

source from which purchase requisitions give out;

- It enables management to make cost & consumption

comparisons between operations & periods.



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Inventory Control Techniques:

-- ABC Analysis:ABC Analysis:

ABC Analysis is a basic analytical management tool which

enables top management to place the efforts where the results will

be greatest. The technique tries to analyze the distribution of any

characteristic by money value of importance in order to

determine priority.



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Procedure for developing ABC Analysis:Procedure for developing ABC Analysis:

- List each item carried in inventory by number or some other

designation;

- Determine the annual volume of usage & rupee value of each

item;

- Multiply each items annual volume of usage by its rupee value;- Compute each items percentage of the total inventory in terms

of annual usage in rupees;

- Select the top 10% of all items which have the highest rupee

percentages & classify them as A items;

- Select the next 20% of all items with the next highest rupee

percentages & designate them B items;

- The next 70% of all items with the lowest rupee percentages are

C items.



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Advantages ofABCAnalysis:

* This approach helps the materials manager to exercise selective

control & focus his attention only on a few item when he is

confronted with lakhs of stores items.

* Many organizations have claimed that the ABC Analysis has

helped in reducing the clerical cost & resulted in better planning& improved inventory turnover.

Limitations:

* ABC Analysis in order to be fully effective, should be carried

out with standardization & codification.

* Some items, though negligible in monetary value may be vital

for running the plant & constant attention is needed.



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Problems:



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ROL:ROL:

Re-order level is predetermined point, & when the existing stock

of inventories reaches this point or falls below it, the purchase

action is initiated to replenish them. It fundamentally deals with

When to order to replenish the inventories. Generally ROL lies

between minimum stock level & maximum stock level. Itdepends on various considerations

- Lead time; ( Is the time taken to receive the delivery after

placing order with the supplier. OR the number of days required

to receive the inventory from the date of placing order. )

- Average periodic consumption;- Safety stock. ( To avoid stock out firm may require to maintain

safety stock or to safeguard against shortages. Stock out occurs

when demand exceeds the available inventory in stock. )



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Service Level:Service Level:

There are several ways to determine the amount of the safety

stock. 1 Popular method is to establish a safety stock that will

meet a specified service level. The service level is the probability

that the amount of inventory on hand during the lead time is

sufficient to meet expected demand i.e. the probability that a

stock out will not occur. A service level of 90% means that there

is a 0.90 probability that demand will be met during the lead time,& the probability that a stock out will occur is 10%.



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EOQ:EOQ:

In EOQ there are 2 issues: When to order, & How much to order.

The problem of When to order is decided by prescribing re-order level. Other issue is How much to order, which means

what should be the size of order. In bulk buying there is a high

carrying cost, & in small quantities reduces holding cost but adds

to ordering cost. EOQ strikes a balance between the ordering

cost & the carrying cost. It devices such a quantity of each orderat which the total ordering cost & carrying cost would be

minimum. As both these costs are mutually exclusive the total of

both costs will be minimum at a point where ordering cost

equates carrying costs.8/9/2011 13A.J INSTITUTE OF MANAGEMENT


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VED Classification:VED Classification:

The VED Analysis is done to determine the criticality of an item

& its effect on production & other services. It is specially usedfor classification of spare parts. If a part is vital, it is given V

classification, if it is essential then it is given E classification &

if it not so essential the part is given D classification. For V

items a large stock of inventory is generally maintained, while

D Desirable items minimum stock is enough.



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Just-In-Time System:

JIT meansJIT means- producing the quantity of units that is needed, no more, or less,

- producing them on the date & at the time required, not before &

not after,

- that a supplier delivers the exact quantity demanded, at the

scheduled time & date. Any deviations from these requirements

mean that either resources are being unnecessarily wasted or thatcustomers needs are not being respected.



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Benefits ofJIT System:

- Inventory levels are drastically reduced;

- Product quality is improved & hence the cost of scrap is

reduced;- With less-in-process inventory, less space is taken up by

inventory & material handling equipment;

- Elimination of unpleasant suppliers such as those with late

deliveries & unacceptable quality;

- Reduction in floor space needs due to lesser work-in-processinventory & smaller lot sizes.


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