Inventory System Presentation with EOQ , MRP and ABC Analysis

Inventory System Presentation with EOQ , MRP and ABC Analysis

1. Inventory System Kumod Kumar Sah 2025/03/11

2. Introduction to Inventory System Definition: Inventory refers to the stock of goods, raw materials, and finished products held by a business. Purpose: Ensures smooth operations by maintaining necessary materials for production and sales. Example: A Nepali retail store like Bhat- Bhateni Supermarket maintains a variety of stock for daily customers.

3. Importance of Inventory Ensures continuous production and sales. Helps in demand forecasting and meeting customer needs. Reduces lead time and production delays. Enhances supply chain efficiency. Example: Dabur Nepal maintains stock of raw materials like herbs to manufacture its products.

4. Inventory Costs 1. Ordering Costs: Costs of placing an order (e.g., transportation, supplier costs). 2. Holding Costs: Costs to store inventory (e.g., warehousing, insurance, spoilage). 3. Shortage Costs: Costs due to stockouts (e.g., lost sales, customer dissatisfaction). Example: Nepal Telecom incurs high holding costs for maintaining telecom equipment.

5. Independent vs. Dependent Demand Independent Demand: Demand not linked to another item (e.g., finished goods like laptops at ITTI Computers Nepal). Dependent Demand: Demand dependent on another item (e.g., raw materials like iron rods in construction projects).

6. Types of Inventory 1. Raw Materials – Unprocessed materials (e.g., Unilever Nepal's stock of ingredients for shampoo production). 2. Work-in-Progress (WIP) – Partially completed goods (e.g., furniture under production in Kathmandu Furniture). 3. Finished Goods – Ready-for-sale items (e.g., motorbikes at Jagadamba Motors). 4. MRO (Maintenance, Repair, Operations) – Supporting materials (e.g., machine lubricants in Hulas Steel factory).

7. Inventory System Concepts Lead Time: Time taken to receive inventory after placing an order. Safety Stock: Extra inventory to avoid stockouts. Economic Order Quantity (EOQ): Optimal order quantity to minimize costs. J ust-In-Time (JIT): Receiving inventory only when needed to reduce holding costs (used by CG Electronics).

8. Economic Order Quantity (EOQ) The Classic Inventory Model Balances ordering and holding costs Assumes constant demand, fixed costs Formula: EOQ = √(2DS/H) D = Annual demand S = Setup/ordering cost H = Annual holding cost per unit

9. EOQ Example A Nepalese paper manufacturer orders wood pulp Annual demand: 10,000 kg Ordering cost: NPR 2,000 per order Holding cost: NPR 4 per kg per year EOQ = √(2×10,000×2,000/4) = 1,414 kg

10. Types of Inventory Systems 1. Perpetual Inventory System – Continuous tracking (e.g., supermarkets like Big Mart using POS systems). 2. Periodic Inventory System – Stock counted at intervals (e.g., Small Kirana Stores in Nepal). 3. ABC Analysis: Categorizing inventory into A (high value), B (medium value), C (low value) based on importance.

11. ABC Analysis Categorizing inventory based on value/importance A items : High value (70-80% of value, 10-20% of items) B items : Medium value (15-20% of value, 30% of items) C items : Low value (5-10% of value, 50-60% of items) Example: A Nepalese electronics retailer categorizing products for differentiated control

12. Material Requirement Planning (MRP) Definition: A system for determining material needs based on production schedules. Components: Master Production Schedule (MPS), Bill of Materials (BOM), Inventory Records. Example: Himalaya Distillery uses MRP to plan raw materials for liquor production.

13. MRP Components 1. Master Production Schedule (MPS) What to make and when 2. Bill of Materials (BOM) Product structure showing components 3. Inventory Records Current stock levels 4. MRP Processor Software calculating requirements

14. MRP Components Example Product: Wooden Chair 1. Master Production Schedule 100 chairs needed in week 5 2. Bill of Materials (per chair) 1 seat, 1 backrest, 4 legs, 8 screws 3. Current Inventory 20 seats, 30 backrests, 150 legs, 400 screws 4. Lead Times Seats: 2 weeks, Backrests: 2 weeks, Legs: 1 week, Screws: 3 weeks

15. MRP Calculation Need to order: 80 seats (in week 3) 70 backrests (in week 3) 250 legs (in week 4) 400 screws (in week 2)

16. Modern Trends in Inventory Management Inventory Management Software Example: Kathmandu retail chains implementing POS systems QR Code and Barcode Systems Example: Pharmaceutical distributors tracking expiration dates Just-in-Time Approaches Example: Electronics assembly operations minimizing component inventory

17. Case Study: Dairy Industry in Nepal Inventory Challenges and Solutions Seasonal milk production High in winter, low in summer Solution: Production of longer-shelf-life products (cheese, butter) Cold storage requirements Limited electricity in rural areas Solution: Solar-powered cold storage facilities Distribution challenges Terrain difficulties, limited transportation Solution: Decentralized processing units, local distribution networks

18. Case Study: Handicraft Industry in Nepal Inventory Strategy Raw Material Sourcing Local materials (wood, clay, metals) vs. imported materials Forward buying during favorable seasons Production Planning Make-to-stock for common items Make-to-order for premium, customized products Market Distribution Increased inventory before tourist season and festivals Safety stock for export orders to counter shipping delays

19. Summary & Conclusion Inventory management ensures smooth production and cost efficiency. Proper classification and control systems improve business operations. Example-driven approach helps understand inventory systems practically.