Material Managment Report Inventory Management.pptx

A ppt of inventory management

1. Inventory is the major source of cost in the supply chain and also the basis for improving customer service and enhancing customer satisfaction. Inventory management refers to the process of storing, ordering, and selling of goods and services. The discipline also involves the management of various supplies and processes. One of the most critical aspects of inventory management is managing the flow of raw materials from their procurement to finished products.

2. Excess inventory is a cost burden to industry in terms of capital tied up, the cost of obsolescence and the cost of servicing product in the supply chain. However, having the right amount of inventory to meet customer requirements is critical. Inventory management is about two things: not running out, and not having too much.

3. Different Costs of Inventory

4. Inventory costs involve the expenses associated with purchasing, storing, and managing inventory throughout the ecommerce supply chain. The heart of inventory decisions lies in the identification of inventory costs and optimizing the costs relative to the operations of the organization. Therefore, an analysis of inventory is useful to determine the level of stocks. The resultant stock keeping decision specifies: •When items should be ordered.
• How large the order should be.
• “When” and “how many to deliver.”

5. Holding (or Carrying) Costs It costs money to hold inventory. Such costs are called inventory holding costs or carrying costs. This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favour low inventory levels and frequent replenishment. There is a differentiation between fixed and variable costs of holding inventory. Some of the costs will not change by increase or decrease in inventory levels, while some costs are dependent on the levels of inventory held. The general break down for inventory holding costs has been Shown in Table 8.1.

6. Cost Of Ordering Although it costs money to hold inventory, it also costs, unfortunately, to replenish inventory. These costs are called inventory ordering costs. Ordering costs have two components: •One component that is relatively fixed • Another component that will vary It is good to be able to clearly differentiate between those ordering costs that do not change much and those that are incurred each time an order is placed. The general breakdown between fixed and variable ordering costs is a follows:

7. Cost Of Ordering One major component of cost associated with inventory is the cost of replenishing it. If a part or raw material is ordered from outside suppliers, and places orders for a given part with its Supplier three times per year instead of six times per year, the costs to the organization that would change are the variable costs, and which would probably not are the fixed costs.

8. Setup (or Production Change) Costs In the case of subassemblies, or finished products that may be produced in-house, ordering cost is actually represented by the costs associated with changing over equipment from producing one item to producing another. This is usually referred to as setup costs. Set-up costs reflect the costs involved in obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of materials, in making each different product. If there were no costs or loss of time associated in changing form one product to another, many small lots would be produced, permitting reduction in inventory levels and the resultant savings in costs.

9. The costs that are incurred as result of running out of stock are known as stock out or shortage costs. As a result of shortages, production as well as capacity can be lost, sales of goods may be lost, and finally customers can be lost. In manufacturing, inventory requirements are primarily derived from dependent demand, however, in retailing the requirements are basically dependent on independent demand Shortage or Stock-out Costs

10. Inventory Models

11. Inventory models deal with the time at which orders for certain goods are to be placed, and the quantity of the order Two Types Of Models • Economic Order Quantity (EOQ) • EOQ Model With Purchase Discount Inventory Models

12. Economic Order Quantity (EOQ)

13. EOQ is an important technique of inventory management. The EOQ refers to the optimal order size that will result in the lowest total of order and carrying cost for an item of inventory given its expected usage, carrying cost and ordering cost. By calculating an economic order quantity, The firm attempts to determine the order size that will minimize the total inventory cost. Economic Order Quantity

14. EOQ is simple to understand and use but it has several restrictive assumptions, which are also disadvantages in practice. Even with this weakness, EOQ is a good point to start understanding Inventory systems. EOQ assumes: 1. Demand rate is constant, uniform, recurring, and known
2. Lead time is constant and known in advance
3. Price per unit of product is constant; no discounts are given for large orders
4. Inventory holding cost is based on average inventory
5. Ordering or setup costs are constant
6. All demands will be satisfied; no stock outs are allowed Economic Order Quantity

15. EOQ Model with Purchase Discount

16. Because of the per-unit price of the items purchased changes as the quantity changes, the purchase price must be included in the calculation of total annual inventory management cost. As the purchase price changes, the inventory-holding cost also may change since the investment in inventory is different. Because each discount category may represent a different inventory holding cost, we must calculate the EOQ for each discount category. Steps for calculating EOQ with purchase discount are:
Step 1: Calculate the EOQ using the lowest price. If this EOQ is feasible, this is the best order quantity, so stop. Step 2: Solve the EOQ for the next higher price. If this EOQ is feasible, go to Step 4

17. Step 3: If the EOQ found in Step 2. is not feasible, repeat Step 2. for the next higher price until a feasible EOQ is found. Step 4: Calculate the total annual inventory management cost for the (first) feasible EOQ (found in Step 2.) and for the minimum quantity in all discount categories that are larger than the feasible EOQ.

18. Inventory Control Techniques

19. Inventory control involves various techniques for monitoring how stocks move in a warehouse. Four popular inventory control methods include: •ABC analysis; •Last In, First Out (LIFO) and First In, First Out (FIFO); •Batch tracking; •Safety stock.

20. ABC analysis in inventory control classifies stocks based on their importance, price, and sales volume. These criteria determine the number of items a company will bring to the market.
Just as its name suggests, it consists of the following categories:
A class – expensive, high-class items with tight controls and small inventories
B class – average-priced, mid-priority items with medium sales volume and stocks
C class – low-value, low-cost items with high sales and huge inventories
Applying the ABC analysis of inventory control allows businesses to minimize the costs of carrying products while maximizing their stock returns. ABC Analysis

21. Both inventory control techniques organize how inventory items move in and out of the warehouse based on their arrival date. Priority will depend on the type of products available in the storage facility. Using the LIFO method, the warehouse puts out the most recent batch of items to the customers first. Doing so prevents products from going bad when delivered to the market.

But with the FIFO technique, the warehouse prioritizes older stocks for processing and shipping. This way, they can keep the products fresh when the customer receives them. LIFO and FIFO

22. Batch tracking is also a great way of organizing stock items in a warehouse facility. In this method, goods of the same production date and materials are grouped together. Doing this helps warehouse managers keep track of the following information:

•Where the items come from
•Where the goods are heading
•When the items might expire Batch Tracking

23. Safety stock involves having an additional set of goods on hand as a preventive measure for the market’s volatility. The amount should be over the average demand or use of the product.

It acts as a safety net, should customer demand go above the projected amount. It also covers them for any uncertainty in supply performance, such as shipping delays. Safety Stocks