Post on 14-Jun-2015
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BY:K.MOHAN VENKAT VINAYCH.NARSI TEJA REDDY
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Inventory Definition A stock of items held to meet
future demand Inventory is a list for goods and
materials, or those goods and materials themselves, held available in stock by a business.
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Introduction Constitute significant part of current assets
On an average approximately 60% of current assets in Public Limited Companies in India
A considerable amount of fund is required
Effective and efficient management is imperative to avoid unnecessary investment
Improper inventory management affects long term profitability and may fail ultimately
10 to 20% of inventory can be reduced without any adverse effect on production and sales by using simple inventory planning and control techniques
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Work inprocess
Work inprocess
Work inprocess
Finishedgoods
RawMaterials
Vendors Customer
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Nature of Inventories Raw Materials – Basic inputs that are converted into finished product
through the manufacturing process Work-in-progress – Semi-manufactured products need some more
works before they become finished goods for sale Finished Goods – Completely manufactured products ready for sale Supplies – Office and plant cleaning materials not directly enter
production but are necessary for production process and do not involve significant investment.
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Objective of Inventory Management
To maintain a optimum size of inventory for efficient and smooth production and sales operations
To maintain a minimum investment in inventories to maximize the profitability
Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality
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An effective inventory management should
Ensure a continuous supply of raw materials to facilitate uninterrupted production
Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes
Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service
Minimize the carrying cost and time Control investment in inventories and keep it at an optimum level
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An optimum inventory level involves three types of costsOrdering costs:- Quotation or tendering Requisitioning Order placing Transportation Receiving, inspecting and
storing Quality control Clerical and staff
Stock-out cost Loss of sale Failure to meet delivery
commitments
Carrying costs:- Warehousing or storage Handling Clerical and staff Insurance Interest Deterioration,shrinkage,
evaporation and obsolescence
Taxes Cost of capital
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Dangers of Over investment
Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity cost
Excessive carrying cost
Risk of liquidity- difficult to convert into cash
Physical deterioration of inventories while in storage due to mishandling and improper storage facilities
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Dangers of under-investment
Production hold-ups – loss of labor hours
Failure to meet delivery commitmentsCustomers may shift to competitors
which will amount to a permanent loss to the firm
May affect the goodwill and image of the firm
Classification of inventory
• ABC Classification
• HML Classification
• XYZ Classification
• VED Classification
• FSN Classification
• SDF Classification
• GOLF Classification
• SOS Classification
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ABC Classification
• In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity.
• A typical manufacturing operation shows that the top 15% of the line items, in terms of annual rupees usage, represent 80% of total annual rupees usage.
• Next 15% of items reflect 15% of annual rupees• Next 70% accounts only for 5% usage
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A
B
C
XYZ Classification
On the basis of value of inventory stored
Whereas ABC was on the basis of value of consumption to value.
X – High Value Y – Medium value Z – Least value
Aimed to identify items which are extensively stocked.
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HML Classification On the basis of unit value of item
There is 1000 unit of Q @ Rs. 10 and 10,000 units of W @ Rs. 5.
Aimed to control the purchase of raw materials.
H – High, M- Medium, L - Low
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VED Classification
• Mainly for spare parts because their consumption pattern is different from raw materials.
• Raw materials on market demand• Spare parts on performance of plant and
machinery.• V – Vital, E – Essential, D – Desirable
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Therefore V items has to be stocked more
and D Items has to be less stocked
FSN Classification
According to the consumption pattern
To combat obsolete items
F – Fast moving
S – Slow moving
N – Non Moving
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SDF & GOLF Classification
Based on source of procurement
S – Scarce, D- Difficult, E- Easy.
GOLF
G – Government, O – Ordinary, L – Local, F – Foreign.
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SOS Classification
Raw materials especially for agriculture units
S – Seasonal
OS – Off seasonal
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EOQ – Three Approaches
Trial and Error methodOrder-formula approachGraphical approach
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EOQ & Re-order point
EOQ – gives answer to question “How much to Order”
Re-order point – gives answer to question “when to order”
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Trial & Error MethodAssumptions:-
Annual requirement (C)=1200 units
Carrying cost (I) = Rs.1
Ordering cost (O) =Rs.37.5Order size Q 1200 600 400 300 240 200 150 120 100
Average inventory Q/2 600 300 200 150 120 100 75 60 50
No. of orders C/Q 1 2 3 4 5 6 8 10 12
Annual carrying cost I* Q/2
600 300 200 150 120 100 75 60 50
Annual ordering cost O*C/Q
37.5 75 112.5 150 187.5 225 300 375 450
Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500
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Order- Formula approach 1/2
EOQ =(2CO/I)
C = Annual demand
O = Ordering cost per order
I = Carrying cost per unit
1/2
EOQ =(2*1200*37.5/1) = 300 units
Graphical method to find EOQ
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Cost
in
RS.
Order quantity
Ordering cost = DS/Q
Carrying cost = CQ/2Total cost
EOQ0
A Review
So we have dealt with
1. EOQ model
2. Its extension
3. And now we will be dealing with special inventory models
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Special inventory model
Non – Instantaneous replenishment
Quantity Discount
One – period decision
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Non – Instantaneous replenishment
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Special inventory model
A B C DA B C
Thus the inventory is replenished gradually than in lots
Particularly in situation were manufacturers use continues production processe.g. FACT makes Ammonium on a continual basis
Capacity 10 units
Discount Quantities If discount increases with the order quantity, then the price of
inventory is no more constant
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Special inventory model
Hence a new approach is needed to find the best lot size
Total cost
Annual holding cost
Annual ordering cost
Annual cost of materials= + +
One period decisions
If a newspaper seller does not buy enough papers to resell on the street corner, sales opportunity is lost. If the seller buys too many, the overage cannot be sold because nobody wants yesterdays newspaper.
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Special inventory model
Applicable to fashion goods, seasonal goods and
due to change in technology
The newsboy problem
Inventory management under uncertainty
1. Option price model
2. Risk adjusted discount cash flow (DFC) Model
3. Dynamic inventory model
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Option price model
Option is a contract that gives the holder a right to acquire or sell certain things at a predetermined price without any obligation.
Calculated by integrating the market information and inventory control.
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Risk adjusted discount cash flow (DFC) Model
• Inventory control problem is converted to capital budget problem
• Suppose a television dealer decides to hold an additional inventory of 1000 television per month. The cost of holding inventory is spread overtime.
• Inflows = no: of units × probability × present value
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Beneficial for projects like oil drilling were the benefit is acquired only after a long time but once oil is struck the additional expanse is covered.
Dynamic inventory model
1. Uncertain variables are identified
2. Probability associated with them is taken
3. Simulation techniques are applied
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Emerging trends in inventory management• Entering into log term contract at a fixed price to
reduce uncertainties• Just-in-time• Kanbans – Japanese technique (Only produce
when demand comes)• Internet based ordering system• Vendor development• Investment in plant and machinery• Continuous-flow manufacturing• Visual control• Supply chain management
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Theories under Supply chain Managment
Resource-based view (RBV)
Transaction Cost Analysis (TCA)
Knowledge-Based View (KBV)
Strategic Choice Theory (SCT)
Agency Theory (AT)
Institutional theory (InT)
Systems Theory (ST)
Network Perspective (NP)
Materials Logistics Management (MLM)
Just-in-Time (JIT)
Material Requirements Planning (MRP)
Theory of Constraints (TOC)
Performance Information Procurement Systems (PIPS)
Performance Information Risk Management System (PIRMS)
Total Quality Management (TQM)
Agile Manufacturing
Time Based Competition (TBC)
Quick Response Manufacturing (QRM)
Customer Relationship Management (CRM)
Requirements Chain Management (RCM)
Available-to-promise (ATP)
and many more
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