Models of inventory control

General information

1. Operations Management SUBMITTED BY: Priyanka Mangla SUBMITTED TO: Ms. Jayati Singh

2. LIMITATIONS OF INVENTORY CONTROL While inventory control allows employees at every level of the company to read and manipulate company stock and product inventory, the infrastructure required to build such a system adds a layer of bureaucracy to the process  this means a larger overhead and more layers of management between the owner and the customer . Large supply chain management systems make products more accessible across the globe, and most provide customer service support in case of difficulty, but the increase in infrastructure can often mean a decrease in the personal touch that helps a company stand out above the rest . inventory control systems give you a better handle on the amount of stock you have and have sold, the same systems can hide production problems and cause customer service disasters.

3. MODELS OF INVENTORY CONTROL A.B.C. Analysis EOQ Selection Control Price Break V.E.D

4. A.B.C Analysis The ABC classification of inventories is based on the cost or value of items consumed. Very high value items are “A-class items” and may require tighter control & close monitoring Medium-value items are categorized as “B class” & Low-value items as “C class” C-class items require simple control mechanisms such as level based reordering. B-class require moderate level of control. Annual $ value of items A B C High Low Low High Percentage of Items

5. Economic Order Quantity (EOQ) The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs. The EOQ is used as part of a continuous review inventory system in which the level of inventory is monitored at all times and a fixed quantity is ordered each time the inventory level reaches a specific reorder point . It can be a valuable tool for small business owners who need to make decisions about how much inventory to keep on hand, how many items to order each time, and how often to reorder to incur the lowest possible costs.

6. Profile of Inventory Level Over Time Quantity on hand Q Receive order Place order Receive order Place order Receive order Lead time Reorder point Usage rate Time EOQ GRAPH

7. Assumptions of EOQ Model Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts

8. TC Formulae Q- How much quantity D- Annual Demand H- Holding/Carrying Cost S- Order/ Setup Cost

9. EOQ Formula In the equations for TC and TVC , the values of D, H, S and C are known. The only unknown variable is Q . Our objective is to minimize TC . TC is minimized at that value of Q , where, Annual Ordering Cost = Annual Holding Cost. See the equation below. Solving the above equation for Q , gives the value of EOQ ( Q O ) as shown below. 9

10. Problems in EOQ Model The demand is known with certainty & is continuous over time There is an instantaneous replenishment of items The items are sourced from an external supplier There are no restrictions on the quantity that we can order There are no preferred order quantities for he items No price discount is offered when the order size is large

11. Price Break Model Price Break models are used where the price of inventory varies with the order size. In these models the economic order quantity is calculated for each possible price and compared to the amount of inventory that will be available at that price. Where the amount of inventory desired is available at that price this option can be considered by the organization.

12. SELECTION CONTROL ON THE BASIS OF UNIT COST OF THE ITEMS (XYZ CLASSIFICATION): High Unit Cost (X-class item) Medium Unit Cost (Y-class item) Low Unit Cost (Z-class item) ON THE BASIS OF MOVEMENT OF INVENTORY (FSN CLASSIFICATION) Fast Moving Slow Moving Non Moving ON THE BASIS OF CRITICALITY OF ITEMS (VED CLASSIFICATION) Vital Essential Desirable ON THE BASIS OF SOURCES OF SUPPLY Imported Indigenous ( National Suppliers) Indigenous ( Local Suppliers) {relevant in case of maintenance items}

13. V.E.D ANALYSIS It attempts to classify the items used into three broad categories, namely Vital, Essential, and Desirable. The analysis classifies items on the basis of their criticality for the industry or company. Vital : Vital category items are those items without which the production activities or any other activity of the company, would come to a halt, or at least be drastically affected. Essential : Essential items are those items whose stock – out cost is very high for the company. Desirable : Desirable items are those items whose stock-out or shortage causes only a minor disruption for a short duration in the production schedule. The cost incurred is very nominal. VED Analysis is very useful to categorize items of spare parts and components. In fact, in the inventory control of spare parts and components it is advisable, for the organization to use a combination of ABC and VED Analysis. Such control system would be found to be more effective and meaningful.

14. STEPS INVOLVED IN INVENTORY CONTROL

15. 1.    Research existing periods where inventory was out of synch with demand. This could be a point where you experience a shortage or excess. Looking at these inventory management failures can be a good place to start.  If you figure out where it all went wrong, you will be able to more easily fix it. 2.    Study demand and consumer spending trends in the marketplace. Look back on the last couple years at existing retail statistics to track the various periods where demand peaked or experienced a significant drop. This can serve as the basis for forecasting the upcoming seasons. However, you will also need to track current trends among consumers, including their buying behaviors , needs and wants, and consumer confidence to spend related to the economy. 3.    Assess inventory and supply costs. These costs include numerous expenses scattered throughout the supply chain, including freight, volume discounts, and warehousing. See how these have been impacted by your current inventory system and identify those places where waste removal can lower these costs. 4.    Decide what processes can be automated. With today’s technology, there’s no excuse for any manual processes left in your inventory management system. There are numerous online tools for everyone. Keeping people out of the inventory processes reduces the likelihood for human error to adversely impact your performance. 5.    Evaluate supplier performance. You can make numerous in-house enhancements only to be sabotaged by your suppliers. Suppliers who have not added the same best practices to maintain a steady supply to meet fluctuating demand. 6 .    Categorize your inventory. Create different layers among your products to address different periods of demand for specific types of merchandise. You can also categorize your inventory by type of customer, profit margin it delivers, and overall cost of having it on hand. Creating this system provides a way to deliver on various types of demand while minimizing the costs. This type of best practice can be achieved through today’s inventory management software solutions .

16. 7.    Set category goals. To accompany your inventory stratification mentioned in the last step, establish goals for each category to measure and track efficiency. You can also track different issues and determine if they are category-specific or are signs of a larger issue. These could be issues that you didn’t identify in the past performance test from the first step. 8.    Prioritize changes. You might find that many areas need improvement. However, you need to continue meeting your current demand. This is the point where you will have to decide which things can be immediately fixed, what will take a much larger overhaul, and what might need to be handled in the near future during a quiet demand period. 9.    Get an outside opinion. It may be that you are too far in to see how your inventory management system could run more effectively. There are consultants that specialize in evaluating these types of systems and providing suggestions. They can also be a good source of information about the latest technology that would fit your specific needs, address the visible issues, align with your growth strategy, and work with your budget. 10. Establish an inventory management policy. Whatever changes you make should then become the basis for a formal inventory management policy. The policy will define responsibilities and illustrate how you are balancing cost-effective measures with optimized customer service that addresses fluctuating demand. Covering all aspects of inventory management in a policy emphasizes the new best practices approach you are taking and reflects your overall culture that is focused on continual improvement.