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Definitions Inventory-A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.
Inventory System- A set of policies andcontrols that monitors levels of inventory anddetermines what levels should be maintained,when stock should be replenished, and howlarge orders should be
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Inventory
Def.
Works-in-Process
Finished Goods
Maintenance, Repair and Operating (MRO)
Raw Materials
in order to meet an unexpected demand ordistribution in the future..
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Inventory Positions in the
Supply Chain
Raw
Materials
Works
in
Process
Finished
Goods
Finished
Goods
in Field
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Inventory Costs Ordering costs
Carrying costs
Out-of-stock costs
Capacity Costs
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Ordering Costs
Costs of placing an order with a vendorof materials
Preparing a purchase orderProcessing payments
Receiving and inspecting the material
Ordering from the plant
Machine set-up
Start up scrap getting a production run
started.
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Carrying Costs Costs connected directly with materials
Obsolescence
Deterioration
Financial Costs
TaxesInsurance
Storage
Interest
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Out-of-Stock Costs Lost sales cost
Back-order cost
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Capacity Costs Overtime payments when capacity is
too small.
Lay-offs and idle time when capacity istoo large.
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Objectives of Inventory
Control Ensure a continuous supply raw
materials and supplies to facilitate
uninterrupted production
Maintain sufficient-finished goods for
smooth sales operation and efficient
customer service.
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Inventories permit the procurement of
raw materials in economic lot size aswell as processing of these raw materialinto finished goods is the most
economical quantity known aseconomic lot size.
Reduce dependencies of one anotherand enable, the organisation to scheduleits operations independently of another
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Inventory management helps to reduce
material handling costs.
It helps to utilize people and equipment
reasonably.
It facilitates product display and service
to customers.
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Process of Inventory
management and Control
Step 1- Determination of optimuminventory levels and procedures of theirreview and adjustment.
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Step 2- Determination of the degreeof control that is required for the best
results.
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Step 3- Planning and design of theinventory control systems.
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Step 4- Planning of the inventory controlorganisation.
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Inventory control
techniques
Inventory control techniques represent
the operational aspect of inventory
management.
Several techniques of inventory control
are in use & it depends on the
convenience of the firm to adopt any ofthe techniques.
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The techniques most commonly
used are the following:-ABC analysis
EOQ
VED classification HML classification
SDE
FSN
SOS
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Always better control ABC)
ABC approach is a means of categorizinginventory items into three classes (A,B,C)according to the potential amount to be
controlled.
ABC analysis often called the Selectiveinventory technique.
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Procedure of ABC analysis1. List each item carried in inventory by
number.
2. Determine the annual value of usage& rupee value of each item.
3. Multiply each items annual value of
usage by its rupee value.4. Compute each item s percentage of
the total inventory.
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5. Select the top 10% of all the itemswhich have the highest rupee %s &
classify them as A items.6. Select the next 20% of all items with
the next highest rupee %s &
designate them B items.7. The next 70 % of all items with the
lowest rupee %s are C items.
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Economic Order Quantity EOQ)
Economic order quantity is the level of
inventory order of which inventory costis minimum.
Optimum quantity is the order size atwhich the total cost, comprisingordering cost & plus carrying cost isleast.
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Assumptions:- Demand for the product is constant &
uniform throughout the period.
Lead time is constant. Price per unit of the product is
constant.
Ordering costs are constant.All demands of the product will be
satisfy.
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Terms used in EOQ Minimum level
Lead time
Reorder level
Maximum level
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Example:-A unit of material X costs Rs 100 &
yearly consumption is 25000 units.
Cost of placing an order is Rs. 10 &storage cost is 10 % per annum. FindEOQ?
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Weaknesses of EOQ technique Erratic usages
Faulty basic information
Costly calculations
EOQ ordering must be tempered withjudgment.
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VED ClassificationVED stands for vital, essential &
desirable.
VED analysis is used primarily to havecontrol of spare parts.
The spare parts can be divided intothree categories-vital, essential,
desirable.
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In the first category such valuable partsare included, the non availability of
which even for a short time can causestoppage of production for long time.
In the second category, those spareparts are included,the absence of whichcant be tolerated for more than some
hours.
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Those spare parts the absence of whichis bearable for a week & will not lead to
stoppage of production are known asdesirable parts.
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SDE classification SDE divide units based on availability i.e
Scares, Difficulty , Easy.
Scarce means items which are inshort supply.
Difficulty means items which aredifficult to procure or which are comefrom distant places.
Easy refers to those items which are
easily to acquire.
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FSN classification FSN stands forFast moving, Slow
moving, Not moving.
Here classification is based on patternof issues from stores & is useful in
controlling obselence.
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SOS classification SOS stands for Seasonal & Off Seasonal
classification.
It may be advantageous to buyseasonal items at low prices & keep
inventory or buy at high price during offseason.
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