INVENTORY PLANNING AND

CONTROL

INVENTORY Few examples for inventory that we see in everyday

life – Napkin/Tissue getting replaced.A refrigerators at your house, where you store food

and drink necessary for a period. Water Tank that stocks that water Look at all above situations and you will find out

that Inventory means stocking. What is inventory ?Inventory is known as stock.

We do inventory for:1.Rawmaterils

2.work-in-progress 3.finished goods

For example Manufacturing company will have the stock of

materialsTax company will have the stock information.

The role of inventory

Follow the example of a refrigerator:1. Increased the speed – if guest arrives, we can respond

to the need quickly with the stored items.2. Increase flexibility – helps to arrange different menu

according to the stock and avoid last minute purchase. 3. Increases quality – often we purchase and stock, due

to the great quality of items. 4. Cost- there is a system of discounts, when purchasing

higher quantity 5. dependability – helps to avoid out of stock.

Advantages and disadvantages of inventory

Advantages Disadvantages

Provides security It is involving working capital

Can manage high demand It incurs storage costs

Satisfy customers with dependability Consuming time

Can be helpful for planning and control Inventory can be damaged or deteriorate

Smoothens the supply and demand relationship

Inventory uses the space

Avoid shortages Inventory costs admin and insurance costs

Avoid outdates items Value depreciation of inventory

The importance of inventory

Inventory is used to balance relationship between the supply and demand.

Proper inventory satisfies the customer.If supply is limited or less, the inventory is a must

situation for smooth operation. When supply increases, the rate of demand and

inventory increases. When demand increases, the rate of supply and decreases.

Types of inventory

There five types of inventory 1. Buffer inventory – something that smoothens

the demand and supply. For example supermarket, where demand cannot

be predicted exactly. So keeping a minimum level of inventory is kept,

to avoid the shortages. So the inventory that keeps a minimum level of

inventory is know buffer inventory.

Cycle inventory

Cycle inventory happens, because one or more stages in the process cannot supply all the items it produces at the same.

For example ABC bakery making three types of bread and customers love it. However, the bakery cannot process three types of breads at the same time. Because it is a batch process.

De-coupling inventory

• It happens with process layout. Where transformed resources move between departments.

This increases the speed of process. De-coupling inventory is used allow the work stations or processes to work independently.

Anticipation inventory

• it is used to adjust with demand variations or supply variations.

• Here, goods produced ahead of demand. It is used when demand changes are too high.

Pipeline inventory This inventory exists because material cannot be transported

immediately, once ordered. For example a supermarket ordering fixed amount of items from the suppliers and suppliers first allocate the same in their ware house, pack, load and send to the supermarket. So pipeline inventory is allocated amount . The moment it is allocated, it becomes the inventory of the supermarket.

What are the day-to-day inventory decisions

How much to order When to order How to control I. How much to order Refer the example of fridge, we order items as it is

finished. So here the order quantity is basic concern. We take the

decision of how much to order based on the cost factors:

1. Cost of purchase 2. Cost of stock

Inventory costs

• cost of placing orders- example clerical works, documentation, transactions arrangement of pay.

• Price-discount costs – large order brings big discounts and vice versa.

• Stock-out-cost- no stock will affect the customer satisfaction.

• working capital lost- we place order and pay money to the suppliers. So this money can be retrieved only when customer pays. Opportunity cost and interest to the bank for borrowing happens here.

Storage cost- for storing, renting, lighting, cooling, insurance

• Obsolescence cost – items may lost, damage or get old fashioned.

• Operating in-efficiency – high inventory hide operational problems.

There are two methods for taking the decision as how much to order:

• EOQ OR Economic Order Quantity formula • EBQ – THE ECONOMIC BATCH QUANTITY 1. EOQ This is the formula to decide, how much of any

particular item to be ordered. This is to balance the advantages and disadvantages of inventory. To do the EOQ we should find out the cost of stocking, cost of placing order.

Holding cost

• working capital cost • Storage cost • Obsolescence cost Order cost cost of placing the order Price discount cost

2. Economic Batch quantity or EBQ

The amount of items to be produced by a machine or process that is supposed to minimize the cost is EBQ.

II. When to place the order Re-order – point The point of time at which more items ordered,

usually it is calculated to make sure that inventory doesn’t run out before the next batch of inventory items.

Lead-time-usage

Having the safety stock to manage the shortages.

Methods for fixing when to order:1. Continuous review approach – review the

stock continuous, order when the stock reaches the re-order point.

2. Periodic review Order for stock at fixed or regular times.

Two-bin and three-bin systems

This is a system to track the inventory. Two bin – storing the reorder point quantity +

the safety inventory in the second bin and using from the first bin. So when first bin empties the ordering happens.

Three –bin Safety inventory + reorder point + items used

Inventory control

There are 2 steps:1. Find out the difference in value between different stocked items

or prioritize 2. Invest in information processing system

Inventory priority Many items are having different priorities, some items are more

important than others. Some items value will be high, so high inventory will be expensive.

Methods for prioritizing :Usage value – quantity of item used multiplied by price Pareto law- A 20% of something causing 80% of something else.

ABC inventory control

• Class A – High usage items • Class B – Medium Usage items • Class C- Low-usage items 2. Inventory information systems More inventories are happening by

computerized systems. For example bar code reading, point-of-sale recording e.t.c

1. Updating the stock records

Any time the transaction happens the position, status, value of stock is changes this is to be recorded.

2. Generating order Deciding how much to order and when to order by computer

systems. 3. Generating inventory reports Inventory control systems can generate regular reports of

stock value or different items stored. 4.Forecasting The inventory control systems can compare actual demand

against the forecast.