Inventory Pom

8/3/2019 Inventory Pom

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Inventory

Management

Er.Sartaj Singh Bajwa


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Types of InventoriesTypes of Inventories

y Raw materials & purchased parts

y Partially completed goods calledwork in progress

y Finished-goods inventories



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Functions of InventoryFunctions of Inventory

y To meet anticipated demand

y To smooth production requirements

y To protect against stock-outs

y To take advantage of order cycles

y To hedge against price increases

y To take advantage of quantity discounts



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y

Lead time:

time interval between ordering andreceiving the order

y Holding (carrying) costs: cost to carry an item in

inventory for a length of time

y Ordering costs: costs of ordering and receiving

inventory

y Shortage costs: costs when demand exceeds supply

Key Inventory TermsKey Inventory Terms



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ORDERING COST FACTORS CARRYING COST FACTORS

Developing and sending purchase orders Cost of capital

Processing and inspecting incoming inventory Taxes

Bill paying Insurance

Inventory inquiries Spoilage

Utilities, phone bills, and so on, for thepurchasing department

Theft

Salaries and wages for the purchasingdepartment employees

Obsolescence

Supplies such as forms and paper for thepurchasing department

Salaries and wages for warehouse employees

Utilities and building costs for the warehouse

Supplies such as forms and paper for the

warehouseEr.Sartaj Singh Bajwa


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Inventory Counting SystemsInventory Counting Systems

y Periodic System

Physical count of items made at periodic

intervals

y Perpetual Inventory SystemSystem that keeps track

of removals from inventory

continuously, thus

monitoringcurrent levels of

each item



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Inventory Counting SystemsInventory Counting Systems

y Two-Bin System - Two containers of inventory;reorder when the first is empty

y Universal Bar Code - Bar code

printed on a label that has

information about the item

to which it is attached

0

214800 232087768



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ABCClassification SystemABCClassification System

ALWAYSBETTER CONTROL

Classifying inventory according to some measure ofimportance and allocating control efforts

accordingly.AA - very important

BB - mod. important

CC - least importantAnnual$ valueof items

AA

BB

CC

High

Low

Few Many

Number of ItemsEr.Sartaj Singh Bajwa


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ABC Item ClassificationABC Item Classification

y ClassA Items: 20% of items which account for approximately 60-80% of thetotal inventory cost

y Tight control, keep inventories as low as possible;

y Monitor continuously (continuous review);

y Purchase/manufacture in small, frequent batches.

y ClassB Items: 30% of items which account for approximately 20-30% of thetotal inventory cost

y Moderate control;

y Good records, monitor periodically (periodic review);

y Purchase/manufacture in medium size batches.

y ClassC Items: 50% of items which account for remaining 5-15% of total

inventory cost

y Minimal control;

y Simple manual records, occasional review;

y

Purchase/manufacture in large, infrequent batches.Er.Sartaj Singh Bajwa


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Economic Order QuantityEconomic Order Quantity



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y Only one product is involved

y Annual demand requirements known

y Demand is even throughout the year

y Lead time does not vary

y Each order is received in a single delivery

y There are no quantity discounts

Assumptions of EOQ ModelAssumptions of EOQ Model



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The Inventory CycleThe Inventory Cycle

Profile of Inventory Level Over Time

Quantityon hand

Q

Receiveorder

Placeorder

Receiveorder

Placeorder

Receiveorder

Lead time

Reorderpoint

Usagerate

Time



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TotalCostTotalCost

Annualcarryingcost

Annualorderingcost

Total cost = +

Q

2 H

D

QSTC = +ACC = average number of units * carrying cost per unit per year

AOC = (number of orders per year) * (ordering cost)

Number Of Orders per year = annual demand inunits(D)

ordered quantity(Q)

Average number of Units = Q/2

Er.Sartaj Singh BajwaS = ordering cost per order

H = Holding / carrying cost perunit per year


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Inventory Costs in theInventory Costs in the EOQEOQ SituationSituation

MinimumTotal Cost

Optimal

OrderQuantity

Curve of Total CostCurve of Total Cost

Carrying Cost CurveCarrying Cost Curve

Ordering Cost CurveOrdering Cost Curve

Cost

Order Quantity

Optimal Order Quantity is when the Total Cost curve is at its

lowest . This occurs when the Ordering Cost = Carrying Cost



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Finding theFinding the EOQEOQ

y When the EOQassumptionsare met, total cost isminimized when Annual ordering cost = Annualholding

cost

HQ

S

Q

D

2

!

Solving forQ HQDS 22 !

22 QHDS !

*2QQ

H

DS!!! EOQ



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SumcoSumco Pump Company ExamplePump Company Example

y Company sells pump housings to other companies

y Would like to reduce inventory costs by finding

optimal order quantity

y Annual demand = 1,000 units

y Ordering cost = $10 per order

y Average carrying cost per unit per year = $0.50

units200000,4050.0

)10)(000,1(22*!!!!

H

DSQ



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SumcoSumco Pump Company ExamplePump Company Example

Total annual cost = Order cost + Holding cost

H

Q

SQ

DTC

2

!

).()(,

502

20010

200

0001!

1005050 $$$ !!



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When to Reorder withEOQ OrderingWhen to Reorder withEOQ Ordering

y ReorderPoint- When the quantity on hand ofan item drops to this amount, the item isreordered

y Safety Stock - Stock that is held in excess ofexpected demand due to variable demand rateand/or lead time.

y

Service Level - Probability that demand will notexceed supply during lead time.



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Reorder Point:Reorder Point:Determining When To OrderDetermining When To Order

y Once the order quantity is determined, the next decisionis when to orderwhen to ordery The time between placing an order and its receipt is

called the lead timelead time (LL) ordelivery timedelivery timey Inventory must be available during this period to met the

demandy When to order is generally expressed as a reorder pointreorder point

(ROPROP) the inventory level at which an order should beplaced

Demand perday

Lead time for a new orderin daysROP ! v

! dv L



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ProcompsProcomps Computer Chip ExampleComputer Chip Example

y Demand for the computer chip is 8,000 per year

y Daily demand is 40 units

y Delivery takes three working days

ROP ! dv L ! 40units per day v 3 days

! 120units

An order is placed when the inventory reaches120units

The order arrives 3 days later just as theinventory is depleted


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Inventory Pom