Inventory management

1. INVENTORY MANAGEMENT By : Kuldeep Uttam Production and Industrial Engineer

2. Demand rate Time Lead time Lead time Order placed Order placed Order receipt Order receipt Inventory Level Reorder point, R Order quantity, Q

3. C o - cost of placing order D - annual demand C c - annual per-unit carrying cost Q - order quantity Annual ordering cost = C o D Q Annual carrying cost = C c Q 2 Total cost = + C o D Q C c Q 2

4. TC = + C o D Q C c Q 2 = + C o D Q 2 C c 2  TC  Q 0 = + C D Q 2 C c 2 Q opt = 2 C o D C c Deriving Q opt Proving equality of costs at optimal point = C o D Q C c Q 2 Q 2 = 2 C o D C c Q opt = 2 C o D C c - -

5. Order Quantity, Q Annual cost ($) Total Cost Carrying Cost = C c Q 2 Slope = 0 Minimum total cost Optimal order Q opt Ordering Cost = C o D Q

6. p = production rate d = demand rate Maximum inventory level = Q - d = Q 1 - Q p d p Average inventory level = 1 - Q 2 d p TC = + 1 - d p C o D Q C c Q 2 Q opt = 2 C o D C c 1 - d p

7. TC = + + PD C o D Q C c Q 2 where P = per unit price of the item D = annual demand

8. Q opt Carrying cost Ordering cost Inventory cost ($) Q ( d 1 ) = 100 Q ( d 2 ) = 200 TC ( d 2 = $6 ) TC ( d 1 = $8 ) TC = ($10 ) ORDER SIZE PRICE 0 - 99 $10 100 – 199 8 ( d 1 ) 200+ 6 ( d 2 )

9. R = dL

10. Reorder point, R Q LT Time LT Inventory level

11. Reorder point, R Q LT Time LT Inventory level Safety Stock

12. ABC Analysis Divides inventory into three classes based on Consumption Value Consumption Value = (Unit price of an item) (No. of units consumed per annum) Class A - High Consumption Value Class B - Medium Consumption Value Class C - Low Consumption Value

13. ABC Analysis Item Stock Number Percent of Number of Items Stocked Annual Volume (units) x Unit Cost = Annual Consumption value Percent of Annual consumption value Class #10286 20% 1,000 $ 90.00 $ 90,000 38.8% A #11526 500 154.00 77,000 33.2% A #12760 1,550 17.00 26,350 11.3% B #10867 30% 350 42.86 15,001 6.4% B #10500 1,000 12.50 12,500 5.4% B 72% 23%

14. ABC Analysis Item Stock Number Percent of Number of Items Stocked Annual Volume (units) x Unit Cost = Annual cons. value Percent of Annual cons. value Class #12572 600 $ 14.17 $ 8,502 3.7% C #14075 2,000 .60 1,200 .5% C #01036 50% 100 8.50 850 .4% C #01307 1,200 .42 504 .2% C #10572 250 .60 150 .1% C 8,550 $232,057 100.0% 5%

15. C Items ABC Analysis A Items B Items % of Consumption Value 80 – 70 – 60 – 50 – 40 – 30 – 20 – – | | | | | | | | | | 10 20 30 40 50 60 70 80 90 100 % of inventory items

16. Some time with the view of doing Lean inventory management Within ABC category VED ( Vital , essential & desirable factor) is introduced with the view of further having effective control of inventory on the basis if its being critical. V (Vital) is the inventory where neither Substitute nor Variation Gap is allowed . E (Essential) is the inventory which allows either of the one to be changed D (Desirable ) is the one which can have variation in both of the parameters

17. Cox, James F., III, and John H. Blackstone, Jr.  APICS Dictionary.  9th ed. Falls Church VA: American Production and Inventory Control Society, 1998. Anupindi , Ravi, et al.  Managing Business Process Flows: Principles of Operations Management.  2nd ed. Upper Saddle River, NJ: Pearson Prentice Hall, 2004. Meredith, Jack R., and Scott M. Shafer.  Operations Management for MBAs.  2nd ed. New York: John Wiley & Sons Inc., 2002. Stevenson, William J.  Production/Operations Management.  8th ed. Boston: Irwin/McGraw-Hill, 2005.

18. Thank You