ppt 01 inventory management introduction
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PPT 01 Inventory Management IntroductionPPT 01 Inventory Management IntroductionPPT 01 Inventory Management IntroductionTRANSCRIPT
Inventory ManagementInventory Management
Introduction Introduction Sanjay Choudhari
Indian Institute of Management Indore
Importance of Inventory Importance of Inventory
Importance of Inventory Importance of Inventory
Balance the advantages and disadvantages of small and large inventories
Pressures for small inventories Inventory holding cost Cost of capital Storage and handling costs Taxes, insurance, and shrinkage
Importance of Inventory Importance of Inventory
Pressures for large inventories Customer service Ordering cost Setup cost Labor and equipment utilization Transportation cost Payments to suppliers
Reasons for Holding InventoryReasons for Holding Inventory
To meet anticipated customer demand To protect against stock outs To take advantage of economic order
cycles To maintain independence of operations To allow for smooth and flexible
production operations To guard against price increases
In Short,In Short,
Buffer against uncertainty in…..Buffer against uncertainty in…..
Supply (Raw material inventories)
Production process ( Work in process inventories)
&
Demand (Finished good inventories)
Type of Inventory Type of Inventory
Process stage
Demand Type Others
Raw Materials WIP Finished Goods
Independent Dependent
Spares Consumable
Purpose
CycleSafetySeasonalPipeline
Independent Demand(demand for item is independent of demand for any other item)
Dependent Demand(demand for item is dependent upon the demand for some other item)
Independent vs. Dependent Independent vs. Dependent DemandDemand
Independent vs. Dependent Independent vs. Dependent Demand..Demand..
ItemMaterials With
Independent Demand
Materials WithDependent Demand
DemandSource
Company Customers Parent Items
MaterialType
Finished Goods WIP & Raw Materials
Method ofEstimatingDemand
Forecast & BookedCustomer Orders
Calculated
PlanningMethod
EOQ & ROP MRP
Inventory Type : Purpose Inventory Type : Purpose • Seasonal stocks
– These are accumulated to absorb seasonal fluctuations in supply or demand.
• Cycle stocks– Due to fixed transportation and handling charges or
set up requirements, it is economical to order or produce large quantities at a time.
• Safety stocks– These are built as a hedge against uncertainties in
supply or demand.
• Pipeline stocks– Inventories in-transit.
ABC AnalysisABC Analysis
Stock-keeping units (SKU) Identify the classes so management can
control inventory levels A Pareto chart
10 20 30 40 50 60 70 80 90 100
Percentage of SKUs
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
Class C
Class A
Class B
ABC AnalysisABC Analysis
ABC ProblemABC Problem
Booker’s Book Bindery divides SKUs into three classes, according to their dollar usage.
Calculate the usage values of the following SKUs and determine which is most likely to be classified as class A.
SKU Number Description Quantity Used per Year
Unit Value ($)
1 Boxes 500 3.00
2 Cardboard (square feet)
18,000 0.02
3 Cover stock 10,000 0.75
4 Glue (gallons) 75 40.00
5 Inside covers 20,000 0.05
6 Reinforcing tape (meters)
3,000 0.15
7 Signatures 150,000 0.45
ABC ProblemABC Problem
SKU Number Description
Quantity Used per
Year
Unit Value ($)
Annual Dollar Usage ($)
1 Boxes 500 3.00 = 1,500
2 Cardboard (square feet)
18,000 0.02 = 360
3 Cover stock 10,000 0.75 = 7,500
4 Glue (gallons) 75 40.00 = 3,000
5 Inside covers 20,000 0.05 = 1,000
6 Reinforcing tape (meters)
3,000 0.15 = 450
7 Signatures 150,000 0.45 = 67,500
Total 81,310
ABC ProblemABC Problem
Percentage of SKUs
Pe
rce
nta
ge
of
Do
lla
r V
alu
e
100 –
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –10 30 40 50 60 70 80 90 10020
Class C
Class A
Class B
Inventory Cost Inventory Cost
• Holding costs - associated with holding or “carrying” inventory over time
• Ordering costs - associated with costs of placing order and receiving goods
• Setup costs - cost to prepare a machine or process for manufacturing an order
• Shortage cost
Terms used in InventoryTerms used in Inventory
• Material cost = Ci (Average price paid per unit purchased is a key cost in
the lot-sizing decision )
• Fixed ordering cost = Co (Fixed ordering cost includes all costs that do
not vary with the size of the order but are incurred each time an order is
placed)
• Holding cost = CH = %*Ci (Holding cost is the cost of carrying one unit
in inventory for a specified period of time i.e. $ CH/Unit/Year)
• Quantity in a lot or batch size = Q (Quantity is either produced or
purchased at a time, EOQ* = Q* )
• Demand per unit time = D (i.e. Demand in one 1 year, d = average
demand per week, So, D = d *52 / year)
Inventory Cost Inventory Cost Holding Costs Holding Costs (CH)
• Obsolescence• Insurance• Extra staffing• Interest• Pilferage• Damage• Warehousing• etc.
Ordering Costs Ordering Costs (Co)
• Supplies• Forms• Order processing• Clerical support• etc.
• Clean-up costs• Re-tooling costs• Adjustment costs• etc.
Setup Costs Setup Costs (Cs)
Holding cost (CH)
• Cost of Capital
• Obsolescence cost
• Handling cost
Vary with quantity of product received , ZERO otherwise
• Occupancy cost
Vary with quantity of product stored, ZERO otherwise
• Miscellaneous costs
Theft, security, damage, tax, insurance
Inventory CostInventory Cost
Ordering cost (Co)
• Buyer time
Time of buyer for placing extra order, ZERO otherwise
Internet and communication has reduced this cost significantly
• Receiving costs
Administrative work such as purchase order matching with
updating inventory records
Quantity dependent should not be included here
• Transportation costs
Fixed cost should be included here
Inventory CostInventory Cost