(S 4) Inventory Management

8/12/2019 (S 4) Inventory Management

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Define inventory management

List out components of inventory

Highlight costs, and benefits of holding inventory

Explain the techniques of inventory management

Just in time inventory


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Stocks of manufactured products and the material

that make up the product.

Components:

Raw Materials

Work-In-Process/ Semi Finished Goods

Finished Goods


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Consists of two counterbalancing parts:

To minimise investment in inventory

To meet the demand for products

That is, to have a trade off in terms of costs and benefits


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Two categories:

i . ORDERI NG/ ACQUI SI TI ON/ SET UP COSTS

Fixed costs of placing and receiving an inventoryorder

It includes:

Preparing purchase orderReceiving, inspecting and recording of goods

received


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i i . CARRYI NG COSTS

Variable cost per unit of holding an item in inventoryIt includes:

Cost due to storing of inventory such asStorage costInsurance of inventoryDeterioration of inventoryServing cost

Opportunity cost of funds

i i i . TOTAL COSTS

Sum of ordering cost and carrying cost of inventory


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Classify inventory into three categories according to value/money investment as

GROUP A

Investment in inventory largest

Inventory control Most rigorous and intensive

Control techniques Most Sophisticated

GROUP C Investment in inventory Relatively small than A

Number of items Large

Attention required Minimum


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INVENTORY BREAKDOWNGroup No. of items (%) Inventory Value (%)

A 15 70

B 30 20

C 55 10

Total 100 100

GROUP B

Stands midway between A and C categories

Deserves less attention than A but more than C


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EOQ M odel: Techniquefor determining theoptimum order quantitythat minimises the total ofits

Ordering cost andCarrying costs

That is, it is the trade off between the ordering andcarrying costs.


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ASSUMPTIONS FOR EOQ MODEL:Annual usage of inventory is known with certainty

The rate of inventory usage is steady over timeThe orders placed are received at the time wheninventory reaches zero

EOQ = (2AB/C)Mathematically,

Where,A = Annual usage of inventory (in units)B = Buying cost per order/ ordering cost, andC = Carrying cost per unit


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Practice Problem 1

A firms inventory planning period is one year. Its inventoryrequirement for this year is 1,600 units. Assume that itsacquisition costs are Rs. 50 per order. The carrying cost isRs. 1 per unit per year for an item. Determine the EOQ.

EOQ = 400 units

Solution

Annual usage, A = 1,600 unitsBuying Cost, B = Rs. 50 per orderCarrying Cost, C = Rs. 1 per unit per year

EOQ = (2AB/C) = (21,600 50/1) = 400


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Level of inventory when fresh order should be placed.

Constant daily usage of inventoryFixed lead time

L ead Time: The time normally taken in receiving thedelivery after placing the order

Mathematically,Reorder Point = Lead time in days average daily

usage of inventory


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Practice Problem 2

The average daily consumption of inventory of a firm is5,000 units. The number of days required to receive thedelivery of inventory after placing the order is 15 days.Determine the reorder point?

Reorder Point = 75,000 unitsThat means the firm should place an order as soon as thelevel of inventory reaches 75,000 units.

Solution

Reorder Point = Lead time in days average daily usageof inventory

= 15 5,000 = 75,000


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The minimum additional inventory to serve as a safetymargin/ buffer/ cushion to meet an unanticipated increasein usage as a result of

unusually high demanduncontrollable late receipt of incoming inventory.

COSTS INVOLVED: two types

a. Stock Out

Associated with shortage (stock out) of inventory

b. Carrying CostAssociated with the maintenance of inventory


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Acquiring materials and manufacturing goods only asneeded to fill customer orders.

It is also called lean production

Is a demand pull manufacturing system


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Practice Problem 3A firm has 7 different items in its inventory. The averagenumber of each of these items held, along with their unit costs,

is listed below The firm wishes to introduce an ABC inventorysystem. Suggest a breakdown of items into A, B and Cclassifications.

Item No. Av. no. of units in

inventory

Av. cost per unit (Rs.)

1 20,000 60.80

2 10,000 102.40

3 32,000 11.00

4 28,000 10.28

5 60,000 3.40

6 30,000 3.00

7 20,000 1.3


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Answer

Category: A B CItem: 1 and 2 3 and 4 5, 6 and 7

(S 4) Inventory Management

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