Inventory Inventory Management SystemManagement System

Job ThomasJob Thomas

#8, MBA (PT)#8, MBA (PT)

Word meaningWord meaning

Inventory = Inventory = stock at a particular stock at a particular locationlocation

classification of inventoryclassification of inventory• raw materials, raw materials, • work-in-progress, work-in-progress, • finished goods and finished goods and • MRO (Maintenance, Repairs and MRO (Maintenance, Repairs and

Operating supplies)Operating supplies)

Overview of developmentOverview of development

CARDEX (bin card) CARDEX (bin card) systemsystem

MM (material MM (material management) management) module in ERPmodule in ERP

WMS (warehouses WMS (warehouses management management system) in ERPsystem) in ERP

RF tags IDsRF tags IDs

Inventory decision ruleInventory decision rule

Q,R policyQ,R policy

Fixed quantity, variable time

Q

Q

T1 T2

S,T policyS,T policyVariable quantity, Fixed time

Q1 Q2Q3

S,R policyS,R policyVariable quantity, variable time

INVENTORY CLASSIFICATIONSINVENTORY CLASSIFICATIONS

ABC ClassificationsABC Classifications High, Medium and Low (HML) High, Medium and Low (HML)

ClassificationsClassifications Vital, essential and Desirable (VED) Vital, essential and Desirable (VED)

ClassificationsClassifications Scare, Difficult and Easy to obtain (SDE) Scare, Difficult and Easy to obtain (SDE)

ClassificationsClassifications Fast moving. Slow moving and Non-Fast moving. Slow moving and Non-

moving (FSN) Classificationmoving (FSN) Classification Multi-criteria classificationMulti-criteria classification

ABC ClassificationABC Classification

0

20

40

60

80

100

0

10

0

20

0

30

0

40

0

50

0

60

0

70

0

80

0

90

0

10

00

Number of items (N)

To

tal

Va

lue

($

) B

A

C

N $A 10% 70%B 20% 20%C 70% 10%

Classification based on relative importance

Risk of inventory in ABC Risk of inventory in ABC classificationclassification

Controlling based on ABC inventory Controlling based on ABC inventory classificationclassification

Control Control AA BB CC

Ordering Ordering controlcontrol

Very careful Very careful and accurateand accurate

NormalNormal SimpleSimple

Type of Type of inventory inventory controlcontrol

Very Very accurate accurate

GoodGood None or None or simplesimple

Cycle Cycle counting counting frequencyfrequency

6-12 times 6-12 times per yearper year

3-4 times 3-4 times per yearper year

1-2 times 1-2 times per yearper year

Priority Priority controlcontrol

High priorityHigh priority Normal Normal prioritypriority

Low priorityLow priority

High, Medium and Low (HML) High, Medium and Low (HML) classification classification

The items of the inventory are to be The items of the inventory are to be listed in the listed in the descending order of the descending order of the unit value.unit value.

The HML analysis is useful for The HML analysis is useful for keeping control over consumption at keeping control over consumption at departmental levels, for deciding the departmental levels, for deciding the frequency of physical verification, frequency of physical verification, and for and for controlling purchasescontrolling purchases

Vital, Essential and Desirable Vital, Essential and Desirable (VED) Classifications.(VED) Classifications.

based on based on criticalitycriticality of the items and of the items and its effect on other its effect on other productionproduction

For V items, a large stock of For V items, a large stock of inventory is generally maintained, inventory is generally maintained, while for D items, minimum stock is while for D items, minimum stock is enoughenough

Scarce, Difficult and Easy to obtain Scarce, Difficult and Easy to obtain (SDE)(SDE)

availabilityavailability of items of items vital to lead time analysisvital to lead time analysis of of

procurementprocurement

Fast-moving. Slow moving and Fast-moving. Slow moving and Non-moving (FSN) ClassificationNon-moving (FSN) Classification

classification is based on the classification is based on the pattern pattern of issuesof issues from stores from stores

In and out date of items are In and out date of items are evaluated.evaluated.

The items are usually grouped in The items are usually grouped in periods of 12 monthsperiods of 12 months

Multi-criteria ClassificationMulti-criteria ClassificationItem Value

(w1=0.2)Lead

time(w2=0.2)

Criticality(w3=0.4)

Substitutable

(w4=0.2)

Total (w=1.0)

101 A(100)

B(50)

C(10)

C(10)

B(36)

102 B(50)

A(100)

B(50)

B(50)

A(60)

103 B(50)

B(50)

A(100)

C(10)

A(62)

104 C(10)

C(10)

B(50)

A(100)

B(44)

105 C(10)

A(100)

C(10)

C(10)

C(28)

INVENTORY MODELSINVENTORY MODELS

Deterministic modelsDeterministic models• Economic Order Quantity (EOQ) modelEconomic Order Quantity (EOQ) model• Sensitivity analysisSensitivity analysis• A price-break Model A price-break Model

Probabilistic Inventory modelsProbabilistic Inventory models• Single-period inventory modelsSingle-period inventory models• A fixed order quantity modelA fixed order quantity model• A fixed time period modelA fixed time period model

Inventory fluctuations as a function Inventory fluctuations as a function of timeof time

IDEAL

ACTUAL

Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) modelmodel

Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) modelmodel

Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) modelmodel

Economic order quantity Economic order quantity = (2 x setup cost x demand rate/ = (2 x setup cost x demand rate/

carrying cost)^0.5carrying cost)^0.5

Limitation of the economic order Limitation of the economic order quantity model is that the quantity model is that the demands demands remain constantremain constant throughout the throughout the year. It is also necessary that the year. It is also necessary that the inventory be delivered in full when inventory be delivered in full when the inventory levels reach zerothe inventory levels reach zero

Re-order points and lead time Re-order points and lead time

Safety stock in inventory Safety stock in inventory managementmanagement

Sensitivity analysisSensitivity analysis

Production inventory modelProduction inventory model

Backorder inventory modelsBackorder inventory models

Price-break ModelPrice-break Model

EOQ Model with Price Breaks EOQ Model with Price Breaks

Incremental unitsIncremental units: discount is applied : discount is applied to the additional units beyond the to the additional units beyond the breakpoint breakpoint

All unitsAll units: discount is applied to all : discount is applied to all units beyond the certain level of units beyond the certain level of orderorder

EOQ Model with Price Breaks EOQ Model with Price Breaks

$3.2 /unit

$2.9 /unit

$2.8 /unit

Feasible cost

Order quantity

Total annual cost

Single period inventory modelSingle period inventory model

Order seasonalOrder seasonal The Newsboy Problem:The Newsboy Problem:

Fixed order quantity modelFixed order quantity model

Item must have a reasonable stable usageItem must have a reasonable stable usage Lead time should not have radical variationLead time should not have radical variation Supplier should be able to accept Supplier should be able to accept

irregularly timed and unscheduled ordersirregularly timed and unscheduled orders

Fixed time period modelFixed time period model

VENDOR MANAGED INVENTORY VENDOR MANAGED INVENTORY (VMI)(VMI)

the vendor (the Manufacturer) manages the vendor (the Manufacturer) manages the inventory of the distributor.the inventory of the distributor.

manufacturer has access to the manufacturer has access to the distributor’s inventory data used for distributor’s inventory data used for generating purchase ordersgenerating purchase orders

The manufacturer reviews this information The manufacturer reviews this information and decides when it is appropriate to and decides when it is appropriate to generate a Purchase Ordergenerate a Purchase Order

symbiotic relationship

INVENTORY ON WHEELSINVENTORY ON WHEELS

freight on board (FOB)freight on board (FOB) Rule of ownershipRule of ownership

• FOB shipping pointFOB shipping point. If the shipment is . If the shipment is designated as freight on board (FOB) designated as freight on board (FOB) shipping point, ownership transfers to shipping point, ownership transfers to the buyer as soon as the shipment the buyer as soon as the shipment departsdeparts the seller. the seller.

• FOB destinationFOB destination. If the shipment is . If the shipment is designated as freight on board (FOB) designated as freight on board (FOB) destination, ownership transfers to the destination, ownership transfers to the buyer as soon as the shipment buyer as soon as the shipment arrivesarrives at at the buyer.the buyer.

Thank you for your kind attentionThank you for your kind attention