unit 3 - Inventory Control Management.ppt

Inventory management marketing management

1. CHAPTER III INVENTORY CONTROL MANAGEMENT
Definition:Inventoryisstockofgoodsheldforfutureuse.
TYPES OF INVENTORY
RAW
MATERIALS
OR
PURCHASED
GOODS
PARTIALLY
COMPLETED GOODS
[WIP] OR GOODS IN
TRANSIT
FINISHED
GOODS
SPARE PARTS, TOOLINGS , JIGS
FIXTURES & ACCESSORIES

2. DEMAND
[USUAGE]
FOR ALL
INVENTORY
ITEMS
INDEPENDENT DEMAND
ITEMS
DEPENDENT DEMAND
ITEMS

3. –Finished Goods for sale
•subassy or parts used in assembly of ONE PARENT
Product
–Directly proportional to Demand
•Directly proportional to number of Independent items.
–Forecasting techniques are used
•Materials Requirement Planning is used
–E.g. Car
•Five wheels

4. REASONS FOR HOLDING INVENTORY
1. To meet expected Customer demand
2. To Smoothen Production Requirements
3. To Decouple Internal Operations
4. As a Hedge Against Stock Out
5. To Take Advantage of Economic Lot Size
6. As a Hedge against Price Increase

5. 1. TO MEET CUSTOMER DEMAND :
I want Lens of Camera If the retailer does not have in
stock Competitor retailer loss of sale loss of
Customer hence the basis is Forecasting techniques.
2. TO SMOOTHEN PRODUCTION REQUIREMENTS :
Firms build up inventories in anticipation of seasonal increase in
demand to stock during Off season periods . eg.
Umbrellas, camera-lens, CFL tubes for spot lights
3. TO DECOUPLE INTERNAL OPERATIONS :
Unless successive operations have a buffer of In-Process
Inventory between them ; they will be so dependent on
each other that breakdown in any one operation or
connecting supply link may shut down the entire system.
Eg. Wheels in a car assy plant. , bulbs for spot lights
Hence temporary storage must be provided unless parts are
consumed as fast as they are produced.

6. 4.AS A HEDGE AGAINST STOCK OUT
STOCK OUT
Delayed Deliveries Unexpected increase in demand
Delays Due to Weather conditions
Supplier Stock out
Deliveries of wrong material
U.I.D Risk of shortage is reduced
by holding Excess Stocks/ Buffer Stock
/Safety/Cushion Stocks

7. 5.TO TAKE ADVANTAGE OF ECONOMIC LOT
SIZE:
•minimizing purchasing and inventory cost
•Economic to produce large quantities than small
quantity.
6.AS A HEDGE AGAINST PRICE INCREASE:
•Stocking done in anticipation of price increase
•Be careful of perishable vs. non /less perishable items.

8. OBJECTIVES OF INVENTORY CONTROL :
Is to strike an optimum balance between :
•Maximize the level of Customer Service –having
right goods in sufficient quantities in right place at
right time.
•Minimise the Cost of providing the desired C.S.L.
•Overstocking Vs. Understocking
•Take fundamental decision on
•[i] when to order ----R.O.P.
•[ii] how Much to order----E.O.Q

9. INVENTORY ACCOUNTING SYSTEM
P E R I O D I C C O N T I N U O U S /P E R P E T U A L
Physical stock count of items on daily,
weekly , monthly , quarterly, yearly
basis eg. 31 March
Keeps track of Removal of inventory on a
continuous basis –so no Xcess, no shortage
Lack of control on stocks between
review periods
Keeps current inventory info & when qty.
reaches a PREDETERMINE minimum a
fixed qty Q = EOQ is ordered
Need to protect against stock out is xx
Need to take a decision on Order
Quantity after REACH review eg.
Medicines , kitchen
Eg. Bank transaction, Bar code reader ,
Fuel Indicator in vehicle
Added cost of Record Keeping
Periodic check is still necessary to account
for pilferage, theft, recording errors, expiry
etc.

10. Most elementary system is the 2-bin system :
It is a Continuous System where there is no need to
record every withdrawal.

11. U.P.C.
Universal Product Code: Laser scanning device /bar code reader
0 = group of item -toiletry
-grocery
-white goods
14800 = Manufacturer
2308 = indicates nature & style of item-d/door refrig.
•Increases speed and accuracy of Inv. management System
•Reduces need for periodic check and order size determination of
replacement order.
•Improves C.S.L. because price & qty. is clearly mentioned.

12. INVENTORY COSTS
INVENTORY H O L D I N G/CARRYING COSTS :
•interest, insurance, rent, taxes, depreciation, obsolescence,
deterioration, spoilage, pilferage, breakage, warehousing, heat,
light, refrigera
n
rent, security, material handling expenses, wages
of store keeper, RF /walkie-talkies etc.
•inventory financing charges,
•depends on type of items
•Concealable products, pocket camera, calculators etc. are prone
to theft
•Dairy products, salads, medicines, batteries,
confectionary/bakery items,
•Photographic films, video tapes, pendrives, storage elex. Devices.
Inventory Holding cost = % of unit price
Typically Holding cost = 20 -40 % of value of the item.

13. INVENTORY ORDERING COSTS :
•Cost of ordering and receiving
•Cost of making purchase order
•Inspection of goods on arrival for quality and
quantity.
•Cost of moving to temporary storage
•Paying for emergency orders
•Expressed as FIXED rupee amount PER ORDER –
irrespective of order size
•If the firm produces its own inventory , instead of
ordering from supplier –m/c set up cost, installing
new fixtures~ expressed as fixed charge per run .
INVENTORY COSTS

14. INVENTORY SHORTAGE COSTS :
* results when Demand xx supplies of inventory on
hand .
•includes opportunity cost of not making a ale/episode
of serial or newscast.
•Loss of customer goodwill /TRP
•Lateness charges , LD clause
•Is difficult ot measure /subjective
•Paying for special/urgent deliveries
•If shortage occurs of an item of internal use [on the
assy line], then cost of LOST PRODUCTION, due to
DOWN TIME is also added to shortage cost. This
can be huge amount.
INVENTORY COSTS

15. PRIORITY SYSTEM IN
INVENTORY–ABC ANALYSIS
•All items kept in Inventory are not of equal
importance. They r based on :
–Money invested
–Profit potential
–Sales/usage volume
–Stock out penalties

16. •A class Items: 5~10% of total no.of items but
constitutes 60 ~ 70% of value
•B class items: 30 ~ 40% of the total no. of items but
constitutes 15 ~ 30 % of value
•C class items: 55 ~ 60 % of total no. of items but
constitutes 10 ~ 15% of value
•Hence : A = very important item: eg. Camera, Recording
equipment, main console/keyboard, no reflection screens
for visual effects.
•B = Medium importance item: spotlights, camera-lens,
step down & step up transformers of lights in Studios,
•C = Least importance items: hardware, cfls, onsumables,
video tapes, , bulbs etc.

17. Cost
Quantity

18. HOW MUCH TO ORDER : E.O. Q.
I) ECONOMIC ORDER QUANTITY :
•Identifies the optimum order quantity in terms of minimizing the
sume of Annual Costs which vary with Order Size.
Order Size Models : E .O.Q. {economic Order Qty.}
E.R. S . { economic prodn Size }
Q. D. { quantity discounts }
•Assumptions of E.O.Q. Model :
1.There is only one product involved at a time
2.Annual usage [demand] is known.
3.Usuage is spread evenly throughout the year, so that usage rate
is reasonable constant.
4.Lead Time does not vary.
5.Each order is received in a single delivery
6.There are no quantity discounts
7.Stock outs are not permitted.

19. GRAPH : q Vs. time. Showing LT, U, Q ROP etc.
Optimum Order Quantity is a trade off between Inventory Carrying cost and
Inventory Ordering costs.
•If order size is xx , Average Inventory is xx , Inventory cost is xx, Ordering
cost is xx becos no. of orders placed per year are xx.
•See Graph II and Graph III to illustrate this point.
Note that :
Annual Holding cost = Avt. Amt. of inv. On hand x cost to carry ONE unit for a
year
Therefore, Avg. Inventory = [Q + 0] /2
So, Annual Carrying/holding cost = [Q/2] x H ,..{i}
Where H is the Holding cost per unit per year.
Graphically :

20. •Now, if the annual demand for books in the
library is 12000 numbers and Order size is 1000
books per order. How many orders do we place
???
•Hence No. of orders to be placed = D / Q
•Where D = total Demand , & Q = quantity
ordered at a time.
•Ordering costs are relatively insensitive to
Ordered quantity . Assuming S represents the
ordering Cost per order,
•Annual Ordering Cost = [D/Q] x S..{ii}
Graphically :

21. •Hence TOTAL COST = annual ordering
cost + annual Holding cost
•T C = [Q/2] x H + [D/Q] x S ..{iii}
•dTC/dQ = H/2 –DS/Q
2
= 0
•E . O . Q = [(2xDxS)/H]
1/2
= Q
o..{iv}
•TC
min= [Q
o/2] x H + [D/Q
o] x S .. {v}

22. •Numerical: A supplier of spotlight lamps
expects to sell 9600 bulbs in a year to a
Production Studio. Annual carrying costs are
Rs. 16/-per bulb and ordering costs are Rs. 75/-
. The supplier operates for 288 days in a year.
a)Determine the EOQ and total cost at EOQ.
b)How many times per year does the supplier Re
order.
c)Determine the length of the order cycle.

23. Solution :

24. RE ORDER POINT
R.O.P. PREFACE :
CustomerServiceLevel:CSLisdefinedasProbabilitythat
DemandwillnotexceedSupplyduringLeadTime{i.e.the
stock–in-handwillbesufficienttomeetthedemand}
Hence,CSLof75%meansthatprobabilityisthat75times
outof100thedemandwillbemetandwillnotexceedthe
supplyduringLeadTime,ordemandwillbesatisfied75%of
times/instances.
It does not mean that 75% of demand will be satisfied. Eg. If
demand is of 10 units per day then 75% of the days demand
of 10 units per day will be met.
Hence : Service Level = 100% -Stock out Risk

25. CSL of a given item can be estimated in 2 ways :
One : the annual % of LT without a stock out
Two : the annual % of customer orders that are filled by
the Existing inventory.
Therefore, Amount of Safety Stock for a given situation will
depend on
Average Usage Rate & Average Lead Time
Usage and Lead Time Variability ( Std. Deviation)
Desired C.S.L in % from Probability Distribution
Curve/Tables .. The area under the P.D. C is the CSL
Ie. Peak is at u LT on z scale .
Graph of Normal Distribution .

26. RE ORDER POINT : When to Order ??
ROP is in terms of Quantity .
ROP comes when the Quantity on Hand drops to
a PREDETERMINED Level .
Hence, ROP = Expected usage during lead time
{EUDLT} + Stock {SS}
Safety stock = buffer stock = floating stock =
cushion stock =additional stock = Excess Stock .
Definition of SS : Additional stock carried to
reduce the risk of stock out during Lead Time . It
is held in excess of expected demand.

27. FOUR DETERMINANTS OF REORDER POINT :
Rate of Demand or Usage Rate
Length of Lead Time
Extent of Demand and Lead Time variability
Degree of stock out risk acceptable to management.
Stock out can occur due to two major reasons :
1.Variable Lead Time –it is not certain how much
quantity is needed to satisfy demand during Lead
Time.
2.Variable Usage Rate –will drain the inventory more
quickly than expected.
Graph :

28. FOUR MODELS OF R.O.P.
Constant Usage Rate Constant Lead Time
Variable Usage rate Constant Lead Time
Constant Usage rate Variable Lead Time
Variable Usage rate Variable Lead Time

29. 1. Constant Usuage Constant Lead Time:
There is no stock out risk created by increased demand or increased
Lead Time. Hence no safety stock is required.
Rishi consumes two video tapes per day in post editing activity. The
tapes are delivered to his studio by a salesman 7 days after an order
is placed. How many tapes should Rishi have in hand before he
reorders to ensure uninterrupted editing. ??
R O P= usage rate x Lead Time
= u x LT
Here u = 2 tapes/day ; LT = 7 days
Hence , Rishi should reorder when he has 14 tapesin hand.
Numerical : A departmental store uses an average of 200 boxes per
day and Lead time averages 4 days. Because both usage rate and
Lead time is variable , the store carries a safety stock of 100 bags to
chances of stock out . Determine the Stock out .

30. Solution:

31. 2. Variable Usage Constant Lead Time:
_ ___
R.O.P. = u LT + z /LT ( o
u
)
Numerical: A Video editing studio uses 1000 Recording tapes per month,
at an average rate of 40 tapes per day. Usage may be approximated by
Normal Distribution, with standard deviation of 03 tapes per day. Lead
time is constant at 4 days . Monthly carrying costs are 0.02 paise per tape
and ordering costs are Rs. 2/-per order.
1] Determine the E.O.Q.
2] For a C.S. Level of 99% how many tapes should the Media production
Manager have on hand when he /she reorders. ?
Solution:

32. 3. Constant Usuage rate, Variable Lead Time:
R.O.P = u LT + z u 0
LT
Problem: A film processing studio uses 2.1
litres of developer chemical per day. Lead
Time is normally distributed with a mean of
6 das and a standard deviation of 2 days.
Determine the R.O.P. to have a service level
of 98%.? How much of that Quantity is Safety
Stock ?
Solution:

33. 4. Variable Usuage Rate , Variable Lead Time :
In this case, Safety stock should be larger to account for steep
variations in Demand /usuage and Lead Time .
_______________
R.O.P = uLT+ z / LT0
u
2
+ u
2
0
LT
2
Note that LTunder the Square root sign is NOT a square.
Numerical: Consumption of Halogen [spot light] bulbs at a local
Production Studio is known to be normally distributed with a
mean of 150 bulbs per day and a standard deviation of 10 bulbs
per day. Delivery time is also normally distributed with a mean
of 6 days and a standard deviation of 1 day.
How many bulbs should be on hand at Reorder Time in order to
be 90% sure of not running out of stock before the delivery
arrives ?

34. Solution: