Inventory model theory ppc module 4 introduction

Ppc

1. 1
Meaning
Inventorygenerallyreferstothematerialsinstock.
Itisalsocalledtheidleresourceofanenterprise.
Inventoriesrepresentthoseitemswhichareeitherstocked
forsaleortheyareintheprocessofmanufacturingorthey
areintheformofmaterials,whichareyettobeutilised
OVERVIEW

2. 2
ReasonsforKeepingInventories
1.Tostabilizeproduction:Thedemandforanitemfluctuatesbecauseofthe
numberoffactors,e.g.,seasonality,productionscheduleetc.Theinventories(raw
materialsandcomponents)shouldbemadeavailabletotheproductionasperthe
demandfailingwhichresultsinstockoutandtheproductionstoppagetakesplace
forwantofmaterials.Hence,theinventoryiskepttotakecareofthisfluctuationso
thattheproductionissmooth.
2.Totakeadvantageofpricediscounts:Usuallythemanufacturersofferdiscount
forbulkbuyingandtogainthispriceadvantagethematerialsareboughtinbulk
eventhoughitisnotrequiredimmediately.Thus,inventoryismaintainedtogain
economyinpurchasing.
3.Tomeetthedemandduringthereplenishmentperiod:Theleadtimefor
procurementofmaterialsdependsuponmanyfactorslikelocationofthesource,
demandsupplycondition,etc.Soinventoryismaintainedtomeetthedemand
duringtheprocurement(replenishment)period.
OVERVIEW

3. 3
ReasonsforKeepingInventories
4.Topreventlossoforders(sales):Inthiscompetitivescenario,onehas
tomeetthedeliveryschedulesat100percentservicelevel,meansthey
cannotaffordtomissthedeliveryschedulewhichmayresultinlossof
sales.Toavoidtheorganizationshavetomaintaininventory.
5.Tokeeppacewithchangingmarketconditions:Theorganizations
havetoanticipatethechangingmarketsentimentsandtheyhavetostock
materialsinanticipationofnon-availabilityofmaterialsorsuddenincrease
inprices.
6.Sometimestheorganizationshavetostockmaterialsduetootherreasons
likesuppliersminimumquantitycondition,seasonalavailabilityof
materialsorsuddenincreaseinprices.
OVERVIEW

4. 4
Meaning
Inventorycontrolisaplannedapproachofdetermining
whattoorder,whentoorderandhowmuchtoorderand
howmuchtostocksothatcostsassociatedwithbuyingand
storingareoptimalwithoutinterruptingproductionand
sales.
Inventorycontrolbasicallydealswithtwoproblems:
(i)Whenshouldanorderbeplaced?(Orderlevel),and
(ii)Howmuchshouldbeordered?(Orderquantity).
OVERVIEW

5. 5
ObjectivesofInventoryControl
1.Toensureadequatesupplyofproductstocustomerandavoidshortages
asfaraspossible.
2.Tomakesurethatthefinancialinvestmentininventoriesisminimum
3.Efficientpurchasing,storing,consumptionandaccountingformaterials
isanimportantobjective.
4.Tomaintaintimelyrecordofinventoriesofalltheitemsandtomaintain
thestockwithinthedesiredlimits.
5.Toensuretimelyactionforreplenishment.
6.Toprovideareservestockforvariationsinleadtimesofdeliveryof
materials.
7.Toprovideascientificbaseforbothshort-termandlong-termplanning
ofmaterials.
OVERVIEW

6. 6
BenefitsofInventoryControl
1.Improvementincustomer’srelationshipbecauseofthetimelydeliveryof
goodsandservice.
2.Smoothanduninterruptedproductionand,hence,nostockout.
3.Efficientutilisationofworkingcapital.Helpsinminimisinglossdueto
deterioration,obsolescencedamageandpilferage.
4.Economyinpurchasing.
5.Eliminatesthepossibilityofduplicateordering.
OVERVIEW

7. 7
Independentdemandisdemandforafinished
product,suchasacomputer,abicycle,orapizza.
Dependentdemand,ontheotherhand,isdemand
forcomponentpartsorsubassemblies.For
example,microchipsinthecomputer,thewheels
onthebicycle,orthecheeseonthepizza.
TYPES OF INVENTORIES

8. 8
IndependentDemand
Aninventoryofanitemissaidtobefallingintothecategoryof
independentdemandwhenthedemandforsuchanitemisnot
dependentuponthedemandforanotheritem.
FinishedgoodsItems,whichareorderedbyExternalCustomersor
manufacturedforstockandsale,arecalledindependentdemanditems.
IndependentdemandsforinventoriesarebasedonconfirmedCustomer
orders,forecasts,estimatesandpasthistoricaldata.
TYPES OF INVENTORIES

9. 9
DependentDemand
Ifthedemandforinventoryofanitemisdependentuponanotheritem,
suchdemandsarecategorizedasdependentdemand.
Rawmaterialsandcomponentinventoriesaredependentuponthe
demandforFinishedGoodsandhencecanbecalledasDependent
demandinventories.
TaketheexampleofaCar.Thecarasfinishedgoodsisanheld
producedandheldininventoryasindependentdemanditem,whilethe
rawmaterialsandcomponentsusedinthemanufactureoftheFinished
Goods-CarderivesitsdemandfromthedemandfortheCarandhence
ischaracterizedasdependantdemandinventory.
TYPES OF INVENTORIES

10. 10
1.Costsofordering
2.Costsofsetupsandchangeovers
3.Costsofcarryinginventory
4.Costsofdiscounts
5.Out-of-stockcosts
6.Costsofrunningtheinventorysystem
INVENTORY-RELATED COSTS

11. 11
CostsofOrdering
Thecostoforderingincludesthosecostitemsthatgointomakingupand
placinganorder,followingupoftheorderandreceivingtheorder.
Itconsistsofwritingupthepurchaserequisitionform,makingphonecallsin
connectionwithspecifications,andordering,e-mailing,faxing,ormailing
purchaseorderstothesupplier.
Allcoststhatincreaseasafunctionofthenumberofpurchaserequisitions
qualifyforinclusion.
CostsofSetupsandChangeovers
Inamanufacturingsituation,theorderingcostisreplacedbythecostofsetting
upthemachinestodoaproductionrun.
Thisrequirescleaningupfromthepriorjob,whichalsoiscalledtakingdown.
Theprocessisknownaschangeover,andthecostscanbesignificant.
Anumberofpartsmayhavetobemadebeforethesetupiscomplete.
Whenacquiringequipment,changeovertimesandcostscanbeasimportantto
considerasoutputrates.
INVENTORY-RELATED COSTS

12. 12
CostsofCarryingInventory
Inventoryisaformofinvestment.Capitalistiedupinmaterialsandgoods.
ThealternativeusesofinventoryincludespendingforR&D,newproductand/orprocess
development,advertising,promotion,andgoingglobal.
Somefirmsevenputthemoneyintofinancialinstruments,thestockmarket,orthesavings
bank.
Expandedcapacityanddiversificationaretypicalopportunitiesthat,whenignored,incur
thecostofnotdoingthatmuchbetterwiththeinvestmentfunds.
Byholdinginventory,thecompanyforegoesinvestingitscapitalinthesealternativeways.
Suchopportunitycostsaccountforalargepartofthecostsofcarryinginventory.
CostsofDiscounts
Acceptingdiscountsbybuyingatleastacertainamountofmaterialinvolvesextracosts
thatmaymaketakingthediscountunprofitable.
Anappropriateinventorycostanalysismustbeusedtodeterminewhetheradiscountthatis
offeredshouldbetaken.
Theextracostsfortakingthediscountarecomparedtothesavingsobtainedfromthe
discount.
Extraexpensesincludeadditionalcarryingcosts.Partofthesecarryingcostsisincurredfor
additionalstoragespace.
INVENTORY-RELATED COSTS

13. 13
Out-of-StockCosts
Whenthefirmdoesnothavestocktofillanorder,thereisapenaltytobepaid.
Perhapsthecustomergoeselsewhere,butwillreturnforthenextpurchase.Then
thepenaltyisonlythevalueoftheorderthatislost.
Ifthecustomerisirritatedbytheout-of-stocksituationandfindsanewsupplier,
thecustomermaybelostforever.
Thelossofgoodwillmustbetranslatedintoacostthatisequivalenttothe
terminationoftherevenuegenerationofthatcustomer.
Thespecificcostishowmuchlowerthelifetimevalueofthatcustomer
becomes,ortherevenuefromthatcustomermayterminateentirely.
CostsofRunningtheInventorySystem
Processingcoststhatareassociatedwithrunningtheinventorysystemare
referredtohereassystemiccosts.Thesecostsareoftenassociatedwith
informationsystemcostscalledITcosts.Thiscategoryofcostsisusuallya
functionofthesizeoftheinventorythatiscarriedandtheimportanceof
knowingexactstocklevelson-lineimmediately.
Thestatusofworkinprocess(WIP)canbemonitoredbymeansofbarcodes,
radiofrequencyidentification(RFID),andopticalreaders.
INVENTORY-RELATED COSTS

14. 14
Thedifferenttechniquesofinventorycontrolare:
(1)ABCanalysis
(2)HMLanalysis
(3)VEDanalysis
(4)FSNanalysis
(5)SDEanalysis
(6)GOLFanalysis
(7)SOSanalysis
TECHNIQUES OF INVENTORY
CONTROL

15. 15
TECHNIQUES OF INVENTORY
CONTROL

16. 16
TECHNIQUES OF INVENTORY
CONTROL

17. 17
ABCanalysis/SelectiveInventoryControl
Inthisanalysis,theclassificationofexistinginventoryisbasedon
annualconsumptionandtheannualvalueoftheitems.
Hereweobtainthequantityofinventoryitemconsumedduringtheyear
andmultiplyitbyunitcosttoobtainannualusagecost.Theitemsare
thenarrangedinthedescendingorderofsuchannualusagecost.
A-Item:Verytightcontrol,theitemsbeingofhighvalue.Thecontrol
needbeexercisedathigherlevelofauthority.
B-Item:Moderatecontrol,theitemsbeingofmoderatevalue.The
controlneedbeexercisedatmiddlelevelofauthority.
C-Item:Theitemsbeingoflowvalue,thecontrolcanbeexercisedat
grossrootlevelofauthority,i.e.,byrespectiveuserdepartment
managers.
TECHNIQUES OF INVENTORY
CONTROL

18. 18
'A'itemsareveryimportantforanorganization.Becauseofthehigh
valueofthese'A'items,frequentvalueanalysisisrequired.Inadditionto
that,anorganizationneedstochooseanappropriateorderpattern(e.g.
'just-in-time')toavoidexcesscapacity.
'B'itemsareimportant,butofcourselessimportantthan'A'itemsand
moreimportantthan'C'items.Therefore,'B'itemsareintergroupitems.
'C'itemsaremarginallyimportant.
ExamplesofABCclassare
‘A'items–20%oftheitemsaccountsfor70%oftheannualconsumption
valueoftheitems
'B'items–30%oftheitemsaccountsfor25%oftheannualconsumption
valueoftheitems
'C'items–50%oftheitemsaccountsfor5%oftheannualconsumption
valueoftheitems
TECHNIQUES OF INVENTORY
CONTROL

19. 19
TECHNIQUES OF INVENTORY
CONTROL

20. 20
TECHNIQUES OF INVENTORY
CONTROL

21. 21
TECHNIQUES OF INVENTORY
CONTROL

22. 22
TECHNIQUES OF INVENTORY
CONTROL

23. 23
TECHNIQUES OF INVENTORY
CONTROL

24. 24
TECHNIQUES OF INVENTORY
CONTROL