Group 1_Operations Research presentation.pptx

Operation research

1. Inventory Management – EOQ and ABC/VED Analysis Group 1: Aditi Sharma 1450 Anushruti Saxena 1467 Aprajita 1469 Archana Jangid 1470 Archana Sharma 1472 Ashutosh Pal 1479 Avik Kumar Ghosh 1480 Chandan Gupta 1488 Muskan Kaushik 1548 Rashi Mohan Shirke 1579 Sheetal Sharma 1605 Surjyendu Ganguly 1636

2. Definition : Inventory management is the systematic approach to sourcing, storing, and selling inventory—both raw materials (components) and finished goods (products). It involves tracking inventory levels, orders, sales, and deliveries to prevent product shortages and ensure just-in-time provision of goods. The goal is to balance the competing requirements of maximizing customer service levels with minimal inventory investment to reduce costs associated with excess stock or stockouts. Good inventory management optimizes the inventory turnover rate and enhances a business's responsiveness to market demands, ultimately contributing to improved profitability and operational efficiency. Inventory Management

3. Demand Forecasting: Predicting future sales to determine how much stock to keep Stock Optimization: Balancing adequate stock levels to meet demand without overstocking. Purchase Order Management: Timing orders with suppliers to ensure replenishment aligns with inventory levels and demand. Reorder Point Calculation: Determining when to reorder based on lead times and safety stock requirements Inventory Tracking: Monitoring stock levels, locations, and movements, often via barcodes or RFID technology. Stock Storage and Warehousing: Organizing inventory storage for efficient retrieval and minimal waste due to obsolescence. 1 3 2 5 4 6 Functions of Inventory Management :

4. Accurate Data: Reliable data on stock levels, sales, and supply chain movement is essential for making informed decisions. Real-time Tracking: Systems that update inventory levels instantly help in timely restocking and customer satisfaction. Skilled Personnel: Trained staff who understand inventory principles and can operate management systems effectively. Supplier Relationships & Management: Strong relationships and communication with suppliers to ensure reliable supply chains Clear Processes and Policies: Defined procedures for procurement, receiving, warehousing, shipping, and handling returns or damaged goods. Technology Infrastructure: Systems like Enterprise Resource Planning (ERP), and barcode scanners. 1 3 2 5 4 6 Requirements of Inventory Management :

5. Supplier Lead Time For manufactured items, this includes the time needed for setup, production, inspection, and packaging. Production or Manufacturing Lead Time . Time taken to place an order, approve it, and process the paperwork The time from placing an order with a supplier to when the goods are received Receiving and Inspection Time Additional time built into the schedule to accommodate potential delays or unexpected events. Buffer Time Transportation Time The time required for the goods to be transported from the supplier or manufacturer to your location Time spent on receiving, unboxing, inspecting, and entering goods into the inventory system. Ordering or Pre-processing Time Key Components Lead Time:

6. Ordering Costs Ordering cost is the cost associated with placing and receiving an order for inventory. This cost includes preparing invoices, checking for quality must be done for each order Ordering Cost (OC) = D/Q Holding cost A lso known as carrying cost, refers to the cost of holding or storing inventory over a certain period. Holding Cost (HC)= Q/2*Holding cost per unit Shortage costs O ften referred to as stockout costs or out-of-stock costs C osts associated with not having enough inventory to meet demand. Cost Information:

7. Fixed Costs Fixed cost are cost that can not be changed even though the level of product or services changes. This means that the cost value is in a constant position although the volume of output is lowering or increasing.     Eg : Salary, building rent Variable Costs Variable cost refers to a cost that is altered depending on the changes in output levels. This means the variable costs can increase or decrease along with the changes in production level. It will increase if production levels also increase. Otherwise, if the output level decreases, then the cost will decrease as well. Eg : R aw material cost, direct labor cost Total Costs Total cost represent the sum of fixed costs and variable costs. Total Cost = Fixed Costs + Variable Costs Cost Information: (contd.)

8. ECONOMIC ORDER QUANTITY (EOQ) MODEL EOQ calculates optimal order quantity in terms of minimizing the sum of certain annual costs that vary with the order costs — namely, inventory's holding and ordering costs.

9. The first step of the model is to identify the holding and ordering costs associated with an item, while keeping the model assumptions in mind. Annual holding cost is computed by multiplying the average amount of inventory in stock by the cost to carry one unit for one year. Annual holding cost = (Q/2)*H Holding costs are a linear function of Q: holding costs increase or decrease in direct proportion to changes in the order quantity Q. Ordering costs are relatively insensitive to order size and pretty much fixed, because regardless of the amount of an order. Annual ordering cost = (D/Q)*S . The total cost can be expressed as the sum of annual holding cost and annual ordering cost: TC =(Q/2)*H+(D/Q)*S ECONOMIC ORDER QUANTITY (EOQ) MODEL

10. The total cost curve is U - shaped and that it reaches its minimum at the quantity where carrying and ordering costs are equal. The mathematical solution to find this minimum point gives the EOQ (Economic Order Quantity) formula as: Qo=√2DS/H

11. Quantity Discount Model If the supplier offers the following quantity discount structure what effect will this have on the order quantity? The concept of Economic Order Quantity fails in certain cases where there is a discount offered when purchases are made in large quantities. Certain manufacturers offer reduced rate for items when a larger quantity is ordered. It may appear that the inventory holding cost may increase if large quantities of items are ordered. But if the discount offered is so attractive that it even outweighs the holding cost, the probably the order at levels other than the EOQ would be economical. Total annual cost : [(1/2) Q*HI + [DS/Q*I + DC (holding + ordering + purchase)

12. Determine the largest (cheapest) feasible EOQ value: The most efficient way to do this is to compute the EOQ for the lowest price first, and continue with the next higher price. Stop when the first EOQ value is feasible (that is, within the correct interval). Compare the costs: Compare the value of the average annual cost at the largest feasible EOQ and at all of the price breakpoints that are greater than the largest feasible EOQ. The optimal Q is the point at which the average annual cost is a minimum 1 2 Steps:

13. Example: A hospital uses 12,000 disposable syringes a year. Order costs have been estimated to be Rs. 500 per order and inventory holding cost is estimated at 20% of the cost of a component per year. The supplier of the syringes offers price discount on lager orders as below: Order Quantity Price/Unit 0 — 4999 Rs. 5.0 5000 or more Rs. 4.0 What would be the recommended order quantity?

14. Inventory items are placed in one of the three classes: A accounts for 15 to 20% of the items in total inventory B items are moderate in terms of inventory percentage C items may represent two-thirds of the items Philosophy behind ABC analysis is the 80/20 rule ABC Analysis

15. A B C Criteria 10% 20% 70% Annual Usage 70% 20% 10% Control Very strict Moderate Less Safety Stock Less Moderate High Shelf life monitoring Priority Regularly Routine Handled by Senior officers Middle management Fully Delegated Features of ABC Analysis: Problem on ABC Analysis.xlsx

16. VED Analysis: V E D Vital drugs Potentially life saving Supply is mandatory Critical to basic health needs Essential drugs Effective against less severe but significant form of illness Desirable/ Non desirable For minor or self limited disease

17. Conclusion: EOQ and ABC/VED analysis, when used together, provide a powerful tool for optimizing inventory management, leading to: Reduced inventory costs Improved service levels Enhanced operational efficiency Increased profitability

18. THANKYOU! Questions?