PRESENTED BY:-

RICHI SAVLA PRIYANKA

Inventory

• Any stored resource used to satisfy a current or future need (raw materials, work-in-process, finished goods, etc.)

• Represents as much as 50% of invested capitol at some companies

• Excessive inventory levels are costly

• Insufficient inventory levels lead to stockouts

Types of Inventory:

1 • Raw materials

2 • Work In Progress

3 • Finished Goods

Reasons to hold inventory:

•To meet unexpected demand

•To safeguard against shortages

•To benefit from discounts

•To facilitate production process

How much to order?

Economic order quantity

When to order?

Reorder point

Economic Order Quantity (EOQ)

•Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs.

• It is one of the oldest classical production scheduling models.

•Based on a number of assumptions

Assumptions of the EOQ model Seasonal fluctuation in demand are ruled out

Zero lead time – Time lapsed between purchase order and inventory

usage

Cost of placing an order and receiving are same and independent of

the units ordered

Annual cost of carrying the inventory is constant

Total inventory cost = Ordering cost + carrying cost

Approaches to find EOQ

Trial and error method

Graphical approach

Order- formula approach

Assumptions:-Annual requirement (C)=1200 unitsCarrying cost (I) = Rs.1Ordering cost (O) =Rs.37.5

Trial and error method

Graphical method

Order formula approach

Carrying cost= ordering cost(Q*/2) x CC = (D/Q*) x Co

Rearranging to solve for Q*:

Q* = (2𝐷𝐶𝑂/𝐶𝐶)

EXAMPLE:- Sumco Pump Co.

Buys pump housing from a manufacturer and sells to retailersD = 1000 pumps annuallyCo = $10 per orderCC = $0.50 per pump per yearP = $5

Q* = 200

Average value of inventory= Px(Q*/2) =$1000

Calculating Ordering and Carrying Costs for a Given Q

Sometimes Co and Cc are difficult to estimateWe can use the EOQ formula to calculate the value of Co or Cc that would make a given Q optimal:

Co = Q2 x Cc/(2D)Cc = 2DCo/Q2

Reorder PointThe reorder point(ROP) is the level of inventory when an order should be made with suppliers to bring the inventory up by the Economic Order Quantity(EOQ).

The two factors that determine the appropriate order point are • The delivery time stock which is the Inventory needed during the lead time (i.e., the difference

between the order date and the receipt of the inventory ordered) • The average daily usage rate or daily demandTherefore:

Reorder Point = lead-time in days x daily demand

Example:- Sumco Pumps Co.

Assume lead time, L = 3 business daysAssume 250 business days per yearThen daily demand,

d = 1000 pumps/250 days = 4 pumps per day

ROP = (4 pumps per day) x (3 days)= 12 pumps

Economic Production Quantity

EPQ determines the quantity a company should place with the supplier to minimize the total inventory cost by balancing the inventory holding cost and averaging fixed ordering cost.

Assumptions of EPQ:• Production is done in lots or batches

• Each order is delivered at a single point of time

•Usage is constant

•Usage occurs continuously

• Production rate is constant

• All demands must be met

•No shortages are allowed

•Quantity discounts are not available

Determining EPQ

Parameters

Q* = Optimal production quantity (or EPQ)

Cs = Setup cost

D = annual demand

d = daily demand rate

p = daily production rate

Finding Q*As in the EOQ model, at the optimal quantity Q* we should have:

Setup cost = Carrying cost

(D/Q*) x Cs = [½ Q* x (1- d/p)] x Cc

Rearranging to solve for Q*:

Q* = )]/1(/[2( pdCDC cs

EPQ for Brown ManufacturingProduces mini refrigerators (has 167 business days per year)

D = 10,000 units annually

d = 1000 / 167 = ~60 units per day

p = 80 units per day (when producing)

Cc = $0.50 per unit per year

Cs = $100 per setup

P = $5 to produce each unit

Safety Stock

• Safety stock (SS) is extra inventory held to help prevent stockouts

• Frequently demand is subject to random variability (uncertainty)

• If demand is unusually high during lead time, a stockout will occur if there is no safety stock

Use of Safety Stock

Classification of inventory

• ABC Classification

• HML Classification

• VED Classification

• SDE Classification

• FSN Classification

• XYZ Classification

ABC Analysis

• Always Better Control

• ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost

• It's a system of categorization into three classes with each class having a different management control associated

A 10% items70% of annual

inventory consumption

B 20 % items20% of annual

inventory consumption

C 70 % items 10% of annual

inventory consumption

ABC Analysis

HML Classifications

• The High, medium and Low (HML) classification follows the same procedure as is adopted in ABC classification.

• The items of inventory should be listed in the descending order of unit value and it is up to the management to fix limits for three categories.

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

VED Classification

• Vital, Essential and Desirable categorization.• The VED analysis is done to determine the criticality of an item and

its effect on production and other services. • It is specially used for classification of spare parts. • For Vital items, a large stock of inventory is generally maintained,

while for desirable items, minimum stock is enough.

SDE Classification• ‘S’ refers to scarce items which are generally imported, and those

which are in short supply.• ‘D’ refers to difficult items which are available indigenously but

are difficult items to procure. • ‘E’ refers to items which are easy to acquire and which are

available in the local markets.• The SDE classification, based on problems faced in procurement,

is vital to the lead time analysis and in deciding on purchasing strategies.

FSN Analysis• FSN stands for fast moving slow moving and non-moving.

classification is based on the pattern of issues from stores. • To carry out an FSN analysis, the date of receipt or the last date of

issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction. The items are usually grouped in periods of 12 months.

• FSN analysis is helpful in identifying active items which need to be reviewed regularly and surplus items which have to be examined further. Non-moving items may be examined further and their disposal can be considered.

• X class items which are critically important and require close monitoring and tight control – while this may account for large value these will typically comprise a small percentage of the overall inventory count.

• Y class are of lower criticality requiring standard controls and periodic reviews of usage.

• Z class require the least controls, are sometimes issues as “free stock” or forward holding.

XYZ classification

Thank you