Mba subject of markUnit 4 Inventory.pptx

Subject to study

1. Inventory Planning and Control 1 Dr. Mital Bhayani

2. Definition: Inventory: “ All the materials , parts, suppliers, expenses and in process or finished products recorded on the books by an organization and kept in its stocks, warehouses or plant for some period of time” “ Inventories are assets which refers to goods and services that businesses hold in stock” 2 Dr. Mital Bhayani

3. INVENTORY CONTROL: “Inventory control is the technique of maintaining the size of the inventory at some desired level keeping in view the best economic interest of an organization” 3 Dr. Mital Bhayani

4. Need of Inventory Management: Meet variations in demand Inflations rates Taxation Government policies Suppliers Lead time 4 Dr. Mital Bhayani

5. Types of Inventory Merchandising Inventory Manufacturing Inventory Seasonal Inventory Cyclic Inventory Pipeline Inventory Decoupling Inventory Safety Inventory MRO 5 Dr. Mital Bhayani

6. Under stocking: Demand exceeds amount available Lost margin and future sales Overstocking: Amount available exceeds demand Liquidation, Obsolescence, Holding 6 6 Dr. Mital Bhayani

7. Inventory management Task: To balance the both advantages and disadvantages of Low and high inventory by comparing costs Two decisions to be taken: a) How much of an item to ordered. b) When to replenish the inventory of that item. 7 Dr. Mital Bhayani

8. Deciding the maximum- minimum limits of inventory; Determination of Reorder point; Determination of reorder quantity; 8 Dr. Mital Bhayani

9. Types of Inventory Costs 1. Ordering Cost 2. Carrying cost 3. Shortage cost 9 Dr. Mital Bhayani

10. Ordering Cost: It is the total expenses incurred by company in placing orders and receiving inventory. It is made up of two components Fixed cost: Ex. Cost of facilities. Variable cost: Ex. Cost of creating order, reviewing inventory levels, cost involved in receiving and checking items 10 Dr. Mital Bhayani

11. Annual ordering Cost= No. of orders placed* Cost per order = ( Annual Demand/ Order quantity)* Cost per order “ It can be minimized by decreasing number of orders” 11 Dr. Mital Bhayani

12. 2. Carrying Cost or Holding Cost: It refers to the total expenses for Holding the inventory It includes storage, maintenance, space, labor and other direct expenses. “It can be reduced by reducing the quantity” Annual Holding Cost= Average Inventory level * Holding cost per unit = (Order quantity/2) * Holding cost per unit 12 Dr. Mital Bhayani

13. EOQ: Economic Order Quantity Introduced in 1913 by Ford W. Harris, “How Many Parts to order at Once” It is a production scheduling models Two model of EOQ Basic EOQ EOQ with discounts 13 Dr. Mital Bhayani

14. Basic EOQ Model It is a model for determination of optimal order quantity and reorder point Assumptions: Demand is known and constant Cost of ordering remains same Lead time is known and constant Purchase price is constant no discounts 14 Dr. Mital Bhayani

15. Total Cost vs. Order Quantity. Annual Cost Order Quantity Holding cost curve Ordering cost curve Combined curve: holding & setup. Minimum annual cost Optimal order quantity We’ll find an equation for this amount 15 Dr. Mital Bhayani

16. Definition of EOQ Components H = annual holding cost for one unit of inventory S = cost of placing an order, regardless of size P = price per unit d = demand per period D = annual demand L = lead time Q = Order quantity (this is what we are solving for) 16 Dr. Mital Bhayani

17. How does it work? Total annual holding cost = (Q/2)H Total annual ordering cost = (D/Q)S EOQ: Set (Q/2)H = (D/Q)S and solve for Q 17 Dr. Mital Bhayani

18. Solve for Q algebraically (Q/2)H = (D/Q)S Q 2 = 2DS/H Q = square root of (2DS/H) = EOQ 18 Dr. Mital Bhayani

19. Formula for Basic EOQ EOQ = 2SD H 19 Dr. Mital Bhayani

20. EOQ with Discounts Step-I: Calculate basic EOQ Step-II: Decide the quantity to be purchased at each price level Step-III: Calculate annual total cost at the quantities fixed under step-II Step-IV: Select the optimal purchase quantity the one which gives lowest annual cost 20 Dr. Mital Bhayani

21. When should we place an order for Q units? SS = safety stock Reorder point = ROP = d L + SS 21 Dr. Mital Bhayani

22. Inventory Classification Sr. No Classification Criterion Employed 1 ABC Usage Value( Consumption and Price) 2 HML Unit Price 3 VED Criticality 4 SDE Procurement difficulties 5 GOLF Source of procurement 6 S-OS Seasonality 7 FSN Issues from stores 8 XYZ Inventory Investment 22 Dr. Mital Bhayani

23. ABC Classification A B C % of No. of Items 10-20% 20-40% 40-100% Usage Value( Consumption and Price) 70-80% 0-10% < 10 % 23 Dr. Mital Bhayani

24. ABC Analysis 24 Dr. Mital Bhayani

25. Combining ABC and VED Class I: AV+BV+CV+AE+AD Class II: BE+CE+BD Class III: CD 25 Dr. Mital Bhayani