SCM Materias JPM -3

8/7/2019 SCM Materias JPM -3

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I N V E N T O R YI N V E N T O R Y

MANAGEMENTMANAGEMENT


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Supply Chain InventorySupp

ly Chain Inventory

Retail Store Inventory

F Products Warehouse Inventory

In-Plant R M Stores Inventory

Raw Materials PlantWarehouse Inventory

Single-Period InventorySing

le-Period Inventoryand / or,

Multi-Period InventoryMulti-Period Inventory

(Fixed Order-QuantityFixed Order-Quantity

and / or,

Fixed Time-PeriodFixed Time-Period

)

In-Plant F Products Stores Inventory

MANUFACTURING PLANTMANUFACTURING PLANT

Retail StoreRetail Store

Raw Material Supplier WarehouseRaw Material Supplier Warehouse

Material RequirementPlanning (MRP-1)


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TYPE OF INVENTORYA)A)MATERIAL BASED (MATERIAL BASED (

based onbased onnature of Materialnature of Material) :) :

1) Production InventoryProduction Inventory

: Raw materials andComponents / Parts required processing andassembly work, for the purpose of production.

2) MRO InventoryMRO Inventory

(Maintenance, Repair & Operatingsupplies) : Maintenance Spare parts andConsumables (Lubricating oil, grease, cotton waste,Electrodes, Cleaning & Protecting chemicals, etc).

3) WIP InventoryWIP Inventory

( Work-in-process or Work-in-progress) : Sub-assemblies and components already

produced (waiting for final assembly) or all semi-finished work in the production-process line.

4) Finished Goods InventoryFinished Goods Inventory

(final Products) :Completed or finished or assembled final products,

(after final quality-inspection and labeling) ready fordelivery (shipment).


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B)B) PURPOSE BASEDPURPOSE BASED ::1)1) Cycle InventoryCy

cle Inventory : Material procurement in cycle, repeatedmanner and in batches / lots with Min. Inventory Level at Zero(nil) and Max. Inventory Level at Order Quantity (Q). Here, thereis every chance of Stock-out condition.

2) Safety Stock InventorySafety

Stock Inventory : Material procurement in cycle and inbatches with Min. Inventory Level at Safety Stock but not atZero (nil) to avoid chances of Stock-out condition.

3) Anticipation InventoryAnticip

ation Inventory : Bulk quantity (more than the normal

quantity) of stock is maintained purposefully fora) Anticipated price rise of materials of the stockb) Anticipated Scarcity of Raw Materials, Components, etcc) Anticipated Seasonal rise of demand of final productd) Anticipated sudden rise of demand of final product

4)4) Pipe- line InventoryPipe

- line Inventory : For WIP or sub-assemblies, betweenoperations/processes, and for raw material or componentsbetween supplier and plant inventory (supplier Warehouse),and for final products, products under movement betweenunder movement betweenplants

plantsfinished-product- Ware-houseWare-house and distributors orand distributors orcustomers warehouses.customers warehouses.


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C)C) Based on theBased on the Inventory-Replenishment TypeInventory

-Replenishment Type

1)1) Single-Period InventorySing

le-Period Inventory: Purchasing through only oneordering opportunity . (A very special occasion or situation when theprocurement will not repeat any more). It is applicable to productshaving a very short Life Cycle.

Example :(1) Inventory of a Retailer to sell to the public (customer) the t-t-

shirtsshirts likelike thethe jersey of Indian teamj

ersey of Indian team in the World Cup CricketWorld Cup Cricket to beheld in Indiaheld in India

, mainly just before and

just before and during the tournamentduring

the tournament.(2) The inventory required for a marriage ceremonymarriag

e ceremony in a familyand arranged by the family itselfarrang

ed by the family itself.

(3) Calendars, Diaries or Greeting-cardsCalendars,

Diaries or Greeting-cards forspecific occasion

specific occasion (orwith specific purpose

specific purpose), having year and date printed on them

year and date printed on them.(4) Order forElectronic Voting MachinesElectronic Voting

Machines, in India to BharatElectronics Ltd. and Electronic Corporation of India Ltd.

## Single-Period Inventory Seeksefficient estimation of accurate quantity of stockestimation of accurate q

uantity of stock in inventory to avoid(i) Over-stockOver-stock to reduce loss due toto reduce loss due to waste in disposing surpluswaste in disp

osing surplus,, andalso

(ii) Under-stockUnder-stock ((stock-outstock-out) to reduce chances of foregoing profit) to reduce chances of foregoing profitthroughthrough loss in salesloss in sales and also (leading to)and also (leading to) customer-dissatisfactioncustomer-dissatisfaction..

2)2) Multi-Period InventoryMulti-Period Inventory

: Material procurement is repeated inbatches / lots, having Inventory-Control system maintaining differentInventoryInventory

Levels.

Example : All manufacturing & Service units, Retail outlets,Warehouses, Distributors, etc.


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The basic Costs of InventoryThe basic Costs of Inventory

Basic Costs of Inventory for a certain period (say,

annually) include :

1)1) Total Cost of OrderingTotal Cost of Ordering

and Procurementand Procurement ::

No. of Ordering for procurement of Material during theNo. of Ordering for procurement of Material during the

period x Ordering Cost /Orderperiod x Ordering Cost /Order= (N x Co)

(N x Co) = (D/Q) x Co

(D/Q) x Co

2)2) Total Inventory Carrying CostTotal Inventory

Carrying Cost (( Inventory maintenanceInventory maintenanceCostCost ororInventory Holding CostInventory Holding Cost)) ::

Average Value of the Stock during the period x RateAverage Value of the Stock during the period x Rateof Inventory Carrying-Cost (%)of Inventory Carrying-Cost (%)

= x x ValueValue of Ordering Quantity x Ccof Ordering Quantity x Cc= x (Q x P) x Cc x (

Q x P) x Cc


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Cost Components ofCost Components of ORDERING COSTORDERING COST

1.1. Cost ofCost ofpreparation of the Tender Documentpreparation of the Tender Documentwith detail Specifications of the itemswith detail Specifications of the items

2.2. Cost ofCost offloatation of Tender Enquiryfloatation of Tender Enquiry

3.3. Bid EvaluationBid Evaluation4.4. Vendor NegotiationVendor Negotiation

5.5. Placement of OrderPlacement of Order (Purchase Contract)(Purchase Contract)


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Cost ComponentsCost Components ofof Inventory Carrying Cost orInventory Carrying Cost orHolding CostHolding Cost

1.1. INTERESTINTEREST on theon the INVESTMENTINVESTMENTonStock of Material in

Inventory2.2. Cost ofCost of INSURANCEINSURANCE of the Stock of Material3.3. Cost ofCost of INVENTORY SPACEINVENTORY SPACE and WarehouseWarehouse/ shed/ room4.4. Cost ofCost of MAINTENANCEMAINTENANCE of Inventoryof Inventory including :

(i) Stock keeping Arrangement (Rack or Trays or Bins

or Tanks or Silo, etc(ii) In-plant Material Handling,(iii) Protecting Stock from damage, spoilage, pilferage(iv) Infrastructuresin Stores (light, water, fan, AC, etc)(v) Accounting and Records Keeping for Stock.

5.5. Cost ofCost of MANPOWERMANPOWER( for receiving, keeping, issuing,maintaining of materials and Cleaning & Maintenance of storesroom, ),

6.6. Cost ofCost of (Loss due to)(Loss due to) SPILLAGESPILLAGE ,, SPOILAGESPOILAGE (Damage)(Damage) andPILFERAGEPILFERAGEof material

7.7. Cost ofCost of OBSOLESCENCEOBSOLESCENCE, if any.


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Inventory Replenishment SystemsInventory Replenishment SystemsMulti-Period Inventory ModelsMulti-Period Inventory ModelsREORDERING PROCEDUREREORDERING PROCEDURE

1)1) (Q-SYSTEM)(Q-SYSTEM)Fixed-Order Quantity ModelFixed-Order Quantity Model / Continuous/ Continuous(Perpetual) Review Policy(Perpetual) Review PolicyModel Assumptions : Demand for the product is constant and uniform throughout the periodLead time (time from ordering to receipt) is constantPrice per unit of product is constantInventory holding cost is based on average inventoryOrdering or setup costs are constantAll demands for the product will be satisfied (No back orders are allowed)

Continuous (Perpetual) Review of Stock Level is to be done.

The Ordering Quantity by WILSONS FORMULAWILSONS FORMULA is

EOQ, Q* = [ (2 x D x CQ* = [ (2 x D x Coo) / (P x C) / (P x Ccc)])] where Cc in %

= [ (2 x D x C= [ (2 x D x Coo) / C) / CHH ]] here CH inRs per unitquantity D : Annual demand, Co : Ordering cost/order, P : Price

CH : Inventory Holding Cost in Rs/unit, Cc :Inventory carrying cost in %


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STOCK TIME DIAGRAMSTOCK TIME DIAGRAM LT-2 = LT-1 + 2Cycle Time [ LT-2 > LT-1, LT-2>Cycle Time]STOCKSTOCK

TIMETIME

LT-1 LT-2 LT-2

LT-2LT-1

Maximum LevelMaximum Level

Reordering LevelReordering Level

Minimum LevelMinimum Level

Danger LevelDanger Level

00

Safety StockSafety Stock

Reserve StockReserve Stock

Buffer StockBuffer Stock

C cle Time


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Av. Stock LevelAv. Stock Level = Min. Level + (Reorder Quantity)= Min. Level + (Reorder Quantity)

or Max. Level - (Reorder Quantity)or Max. Level - (Reorder Quantity)

or [ max. Level + Min. Level]or [ max. Level + Min. Level]

Danger LevelDanger Level ::The stock level in the inventory, which insistson# UnorthodoxUnorthodox HastyHasty ProcurementProcurement procedure for the

material,

# eveneven at higher priceshigher prices,

to avoidto avoid STOCK-OUTSTOCK-OUT conditionin the Inventory (which causes interruption

of production).

# DangerDangerlevellevel is always belowbelow or atat the Minimum LevelMinimum Level.]

The stock corresponding to Danger Level is called Safety StockSafety Stock.[ Where, Safety Stock = Max. consumption rate x Max. Lead Time]


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RE - ORDERING POINT (LEVEL)RE - ORDERING POINT (LEVEL)Reorder Point / LevelReorder Point / Level = Buffer Stock + Safety StockBuffer Stock + Safety Stock

[considering Min level at Danger Level]

(i) If bothboth demand and lead time are constantdemand and lead time are constant (as in EOQ)

ROP = d x LT + Z .ROP = d x LT + Z . d LT

(ii) If demand is variable but lead time is constantdemand is variable but lead time is constant

dLTzLTdROP ..+=

__

Where, d = Mean DemandWhere, d = Mean Demandd =Standard Deviation ofStandard Deviation of

DemandDemand

Where,Where, dLT = StandardStandardDeviation of Demand duringDeviation of Demand duringLT ZLT Z= Service Level Constant= Service Level Constant

(iii) If Lead Time is variable but Demand is constantLead Time is variable but Demand is constant

____ ROPROP= d x LT + Z . d= d x LT + Z . d..LT(iii) If both DemandDemand && Lead Time are variableLead Time are variable

_ __ __ _ _ __ __ _ROP = d x LT +ROP = d x LT + Z .Z . LT.LT.dd22 ++

dd22..LT 2


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Economic Production-Run QuantityEconomic Production-Run Quantity(EPQ(EPQ) ConditionsConditions

Relevant when production is doneproduction is done in batchesin batches or lots

Minimum Economic Capacity (rate)Minimum Economic Capacity (rate) to produce apart is much more than the parts consumption ordemand rate.(Economic)Economic)Production Rate > Consumption RateProduction Rate > Consumption Rate

Assumptions of EPQ are similar to EOQ except ordersordersare received incrementally & continuouslyare received incrementally & continuously,, onlyonly

during productionduring production Consumption is continuousConsumption is continuous

Both Production & Consumption Rate is constantBoth Production & Consumption Rate is constant


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Economic Production-RunEconomic Production-RunQuantityQuantity (EPQ) Assumptions(EPQ) Assumptions

Only one item is involved Annual demandAnnual demand of the item is known andof the item is known and fixedfixed

Usage rate is constantUsage rate is constant Usage occursUsage occurs continuallycontinually

Production rate is constantProduction rate is constant Production occursProduction occurs periodicallyperiodically in lotsin lots as per orderedas per ordered

quantityquantity Orders are supplied incrementally & continuouslyOrders are supplied incrementally & continuously,,

only during productiononly during production Lead time does not varyLead time does not vary No quantity discounts


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Economic ProductionEconomic ProductionQuantityQuantity (EPQEPQ)

InventoryLevel

UsageUsage

Production

,Suppl y

&

Usa

ge

Production

,Suppl y

&

Us

age

TimeTime

Stock (Inventory)Stock (Inventory)


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Stock/Quantity

Time

Max Inv. Level (Qmax )

Production / Order Quantity. (QQ)

p

d

Demand/Consumption

Production

Inv. Accumulation

Production (Supply) rate = ppDemand (Consumption) rate = dd

Production (Supply) time, tt11 = Q/p

Qmax = (p d) x t1 = (p d) x Q/p

Total Holding CostTotal Holding Cost = (Qmax / 2) x CH= ((p dp d) x) x QQ x Cx CHH

p 2p 2tt11 t2

Total Inventory Cost, Tc = Holding Cost + Ordering Cost

Tc = (p d)/p x (Q/ 2) x CH + (D/Q) x CoFor minimizing the Total Inventory Cost, Tc d (Tc) = 0

dQ

(p d) CH / 2p (D/Q2) x Co = 0 _____________________

Q2 = 2p . => QQ == (2D.C(2D.Coo)) xx p .p .

D. Co (p d) . CH CC (( - dp - d ))


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Example: EPQExample: EPQ

Highland Electric Co. buys coal from Cedar Creek Coal Co.

to generate electricity. CCCC can supply coal at the rate of3,500 tons per day3,500 tons per day at $10.50 per ton$10.50 per ton. HEC consumes thecoal at a rate of800 tons per day800 tons per day and operates 365 days peryear.HECs annual Inventory Carrying Cost for coal is 20%20% of thevalue of average stock maintained in the inventory, and theOrdering Cost is $5,000$5,000 per order.

a) What is the Economical Order sizeEconomical Order size?b) What will be HECs Annual Stocking CostAnnual Stocking Cost of coal?

c) What is HECs Maximum Inventory LevelMaximum Inventory Level for coal?d) What will be HECsHECs Maximum UseMaximum Use of coal as % of theof coal as % of theProduction Lot,Production Lot, by the time it receives the full lotby the time it receives the full lot..


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Solution: EPQ problemSolution: EPQ problem Page 1of 3

(a) Economical Production-Lot SizeEconomical Production-Lot Size

dd = 800800 tons/day; DD = 365 x 800 = 292,000292,000 tons/yearpp = 3,5003,500 tons/day, Price PP = $ 10.50/ton, Carrying Cost CC

cc= 20% per year

CC

oo

=$ 5,000$ 5,000

/order/order

CC

HH

=CC

cc x Px P = 0.20 x 10.50 =

$ 2.10$ 2.10 / ton/year

EPQEPQ = 42,455.5 tons per order42,455.5 tons per order

EPQEPQ = 2(292,000)(5,000)/2.10[3,500/(3,500-800)]

EPQ= (2D.Co /CH) . [p / (p - d)]


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Solution: EPQ problemSolution: EPQ problem Page 2 of 3

(b) Total Annual Stocking Cost (TSC)Total Annual Stocking Cost (TSC)

TSC = (p - d) / p x (Q/2) x CTSC = (p - d) / p x (Q/2) x CHH

+ (D/Q). C+ (D/Q). Coo

= [(3,500-800) /3,500] x (42,455.5/2) x (2.10)

+ (292,000/42,455.5) x (5,000)

= 34,388.95 + 34,388.95

= $ 68,777.90$ 68,777.90 Note: Total Carrying CostNote: Total Carrying Costequals Total Ordering Costequals Total Ordering Cost


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Solution: EPQ problemSolution: EPQ problem Page 3 of 3

(c) Maximum Inventory LevelMaximum Inventory LevelQ

max= [(p-d) / p ]. Q

= [(3,500 800)/3,500] x 42,455.5= 0.771429 x 42,455.5

= 32,751.4 tons32,751.4 tons

(d)(d) Maximum UseMaximum Use of coalof coal by the time it receives the full lotby the time it receives the full lot(in % of Production Lot-size)

= Q Qmax

= 42,455.5 32455.542,455.5 32455.5Q 42,455.5

= 10,000 = 0.2355 = 23.55%23.55% of production lot-sizeof production lot-size 42,455.5

HEC will use approx 23%HEC will use approx 23%

of the production lot by theof the production lot by the

time it receives the full lot.time it receives the full lot.


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EOQ With QUANTITY DISCOUNTEOQ With QUANTITY DISCOUNTMODELMODEL

This model is applicable when the Unit Price of material to be purchasedis not fixed, but varies due to variable discount available based on the

bulk-size (Quantity) of Purchase Order.

Example :

Let the discounted prices are as follow,

Quantity Unit Price Where, P1 > P2> > Pn-1 > Pn

0 < Q1 < B1 P1B1 Q2 < B2 P2

Bn-2 Qn-1 < Bn-1 Pn-1

Bn-1 Qn Pn

STEPS


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STEPS :1) Have the Discount range on listed Unit Price available, as above,2) Select the max. discounted price to get thethe least priceleast price, PnPn3) Based on the least priceon the least price PnPn, calculate the EOQ, say Q*nQ*n and check,

# If, the Q*n is in the range of lot size Qn (ie BBn-1n-1 Q* Q*nn),Then, P

nis correct and find the total Inventory Cost (TC Q*

n) with Q*

n,

# Otherwise go to step-44) With the next higher discounted pricenext higher discounted price PP

n-1n-1, calculate the EOQ, say Q*

n-1

and check,

# If, Q*n-1 is in the range of lot size Qn-1 (ie Bn-2 Q*n-1 < Bn-1),Then, P

n-1is correct and find the total Inventory Cost (TC Q*

n-1) with

Q*n-1

& Pn-1

and also ( TC Bn-1) with B

n-1& P

n.

Select the less TC,# Otherwise go to step-5

5) With the next higher discounted price Pn-2 calculate the EOQ, sayQ*n-2

and check and continue like step-4, till the correct discountedprice is arrived at.

6) Calculate Total Inventory Cost with the correct EOQ at correct pricerange and compare it with the Total Inventory Costs withwith minimumminimumquantitiesquantities at all itsat all its lower price-rangeslower price-ranges. Minimum Total Inventory costshould be selected among these.

Prob 1) Annual demand for a particular item in a retail shop is 4800 units


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Prob-1) Annual demand for a particular item in a retail shop is 4800 units.The Ordering cost is Rs 1000 per order, inventory Carrying cost isannually 24% on the value of the average stock and the discountedunit price on bulk purchase is

Quantity Unit Price

0 < Q < 500 Rs 10.00500 Q < 1000 Rs 9.90

1000 Q < 1500 Rs 9.801500 Q < 3000 Rs 9.603000 Q < 4000 Rs 9.404000 Q Rs 9.20

Find the optimal order size (EOQ), actual unit price and the least annualcost of inventory.

Ans : - Let the unit price, PP66= Rs 9.20= Rs 9.20 (the Max discounted Least price),

EOQ, QQ66** = [ (2 x 4,800 x 1000) / (9.20 x0.24)] = 20852085 which is < 4000and is in the range 1500 Q < 3000 at PP44= Rs 9.60= Rs 9.60

EOQ is revised as, QQ44** = [ (2 x 4,800 x 1000) / (9.60 x 0.24)]= 20412041which is within the corresponding quantity range 1500 Q < 30001500 Q < 3000 at

PP44

= Rs 9.60 and thus the assumption is correctassumption is correct.


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Annual Inventory Cost, TC Q*TC Q*44 = (D x P) + (D/Q) x Co + (Q x P) x Cc= 4800 x 9.60 + 4800 x 1000 / 2041 + (2041 x 9.60 x 0.24)= Rs 50,782Rs 50,782

Now, with min order quantity (B5 = 4000) with least price range, P6 = 9.20,

Total Annual Inventory Cost, TC BTC B55 with price PP66

= 4800 x 9.20 + 4800 x 1000 / 4000 + (4000 x 9.20 x 0.24) =Rs 49,776Rs 49,776

Similarly,Similarly, TC BTC B44 (B4 = 3000) with Price PP55 is also calculated as, TC BTC B44= Rs. 50,104Rs. 50,104

Now, compare Total Inventory Costs in all the above cases,Now, compare Total Inventory Costs in all the above cases,

Here,Here, TC BTC B55 is the least Total Inventory Cost.is the least Total Inventory Cost.

Ans : The Optimal (most economic order quantity) isAns : The Optimal (most economic order quantity) is BB55 = 4000= 4000with pricewith price PP66 = Rs 9.20= Rs 9.20 andandTotal Annual Inventory Cost,Total Annual Inventory Cost, TC BTC B55 = Rs. 49,776= Rs. 49,776

Price Quantity D x P D x Co / Q Q x P x Cc Total Inv. Cost

(P(P44)) 9.60 (Q*(Q*44)) 2041 46,080 2,351 2,351 (TC Q*(TC Q*44)) 50,782

(P(P55)) 9.40 (B(B44)) 3000 45,120 1,600 3,384 (TC B(TC B44)) 50,104

(P(P66)) 9.20 (B(B55)) 4000 44,160 1,200 4,416 (TC B(TC B55)) 49,776

2)2)(P S t )(P System) Fi d Ti P i d M d l ith S f t St kFi d Ti P i d M d l ith S f t

St k


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2)2)(P-System)(P-System) Fixed-Time Period Model with Safety StockFixed-Time Period Model with Safety Stock1)1) REVIEW PERIODREVIEW PERIOD,, RR== Annual period / Annual No. of OrderAnnual period / Annual No. of Order

== Annual period / (Annual demand / EOQ)Annual period / (Annual demand / EOQ),

2)2) TARGET Inventory LevelTARGET Inventory Level,,

where R+LR+L == dd (R+L)(R+L)

3)3) ORDER QUANTITYORDER QUANTITY,, Q =Q = QQTT -- II , Where,

R+LR+L =Standard DeviationStandard Deviation of demandof demand during (Review Period + Lead Time)during (Review Period + Lead Time)

dd= Standard Deviation of weekly demand.

QQ= Quantity to be ordered (Ordering Quantity)dd = Estimated Normal Rate of demand (i.e. Av. Consumption RateAv. Consumption Rate)ZZ = Service Level ConstantService Level Constant = Factor corresponding to specified SERVICESERVICE

LEVELLEVELRR = Review Period = Time gap between consecutive reviews / OrderingLL = Lead timeII=Current inventory level (includes items on order) i.e. Stock-in-hand

QQTT = d x (R + L)= d x (R + L) ++ Z xZ x R+LR+L

QQTT

= Buffer Stock + Safety stockBuffer Stock + Safety stock

Example-2Examp

le-2 ::


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Example-2Example-2 ::The normally distributed weekly demands of an item has the meanThe normally distributed weekly demands of an item has the meanvalue 18 units per week with a standard deviation of weekly demandvalue 18 units per week with a standard deviation of weekly demandof 5 units. The Lead Time being 5 weeks, EOQ with Q-system 75 unitsof 5 units. The Lead Time being 5 weeks, EOQ with Q-system 75 unitsand Service Level is 90%.and Service Level is 90%.

Design P-system for Inventory Management.Design P-system for Inventory Management.

-- Annual demand,Annual demand, DD = Mean Weekly Demand (= Mean Weekly Demand (dd) x Weeks/year) x Weeks/year(where, mean demand,(where, mean demand, d = 18d = 18 ) =) = 1818 x 52 =x 52 = 936 units936 units

No. of orders per year = Annual Demand / EOQ = 936No. of orders per year = Annual Demand / EOQ = 936 75 (as75 (as EOQ=75EOQ=75))

Review PeriodReview Period,, RR = Total Period / no. of order = 52 weeks= Total Period / no. of order = 52 weeks (936 / 75)(936 / 75)= (52 x 75)= (52 x 75) 936 weeks =936 weeks = 4.2 weeks4.2 weeks 4 weeks4 weeks

Standard Deviation of demandStandard Deviation of demand during (Lead Time + Review Periodduring (Lead Time + Review Period),),

R+LR+L

==

dd (R+L)(R+L)

==

5 (4+5)5 (4+5)

==

5 95 9

==

15 units15 units

wherewhere ddis Standard Deviation of weekly demand, (is Standard Deviation of weekly demand, (dd = 5).= 5).

Now,Now,forfor90% of service level90% of service level,,Service-Level ConstantService-Level Constant,, Z = 1.28Z = 1.28 (from the table)(from the table)


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Safety StockSafety Stock = Z xZ x R+LR+L = 1.28 x 15 = 19.2 units =19 units19 units(say)

Buffer StockBuffer Stock = dd.(R+L).(R+L) [where, mean demand, dd

=18 /week ]

= 18 x ( 4+5) = 162 units162 units

Target Inventory LevelTarget Inventory Level = Buffer stock + Safety Stock

= 162 + 19 = 181 units181 units

AnswerAnswer::1. At the interval of 4 weeks4 weeks (Review Period),(Review Period), the Virtual Stock reviewreviewis doneis done and the Virtual Stock position is compared with theVirtual Stock position is compared with theTarget Inventory LevelTarget Inventory Level.

2. If the Virtual Stock isVirtual Stock is at or aboveat or above the Target Inventory Levelthe Target Inventory Level,

skip Reorderingskip Reordering till next Review Periodtill next Review Period.3. If the Virtual Stock isVirtual Stock is belowbelow the Target Inventory Levelthe Target Inventory Level, PlacePlace

OrderOrder and order a quantityorder a quantity is equal tois equal to differencedifferencebetween Target Inventory and virtual Stock.between Target Inventory and virtual Stock.

SELECTIVE INVENTORY CONTROL


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SELECTIVE INVENTORY CONTROLSELECTIVE INVENTORY CONTROL

INVENTORY CONTROL TECHNIQUESINVENTORY CONTROL TECHNIQUES

Cost basisCost basis RequirementRequirement

Criticality basisCriticality basisConsumptionConsumption

Rate basisRate basis Procurement basisProcurement basis

ABCABC HMLHML VEDVED FSNFSN SDESDE GOLFGOLF

[[ CumulativeCumulativeCostCost ]]

[[ Unit CostUnit Costoror

PricePrice ]]

or SAPSAP

[[ AvailabilityAvailability]]

[[SourceSource]]

ABCABC : Always Better ControlAlways Better Control oror PARETOPARETO AnalysisAnalysis

INVENTORY CONTROL TECHNIQUES


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INVENTORY CONTROL TECHNIQUESINVENTORY CONTROL TECHNIQUES

ABCABC :: Cumulative CostCumulative Cost basis :basis : AA Highest cost,Highest cost, BB Medium cost,Medium cost,

CC Lowest costLowest cost

HMLHML :: Unit CostUnit Cost basis :basis : HH High price, High price, MM Medium price, Medium price, LL Low price Low price

======================================================================================================================

VEDVED :: Requirement CriticalityRequirement Criticality basis :basis : VV Vital, Vital, EE Essential, Essential, DD Desirable Desirable

FSNFSN :: Consumption rateConsumption rate basis :basis : FF Fast moving, Fast moving, SS Slow moving, Slow moving,

NN Non-moving Non-moving

========================================================================================================================

SDESDE: (Procurement): (Procurement) AvailabilityAvailability basis :basis : SS Scarcely available,Scarcely available, DD DifficultlyDifficultlyavailable,available, EE Easily available Easily available

oror SAPSAP :: S S ScaresScares, A , A AvailableAvailable, P -, P - PlentyPlenty

GOLFGOLF :: Procurement SourceProcurement Source basis :basis : GG Govt. quota (priority), Govt. quota (priority), OO Ordinary, Ordinary,

LL Local, Local, FF - Foreign- Foreign


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Applicability of Inventory Control TechniquesApplicability of Inventory Control TechniquesABCABC : to control cost tied-up withto control cost tied-up with Production-inventory and WIP-Production-inventory and WIP-

inventoryinventory. Care is taken so that mainly A & B categories of materials are. Care is taken so that mainly A & B categories of materials arenever surplus.never surplus.

HMLHML : to control cost tied-up withto control cost tied-up with Production-inventory and WIP-inventoryProduction-inventory and WIP-inventoryinventory, by (i) keeping check on the price of high cost items duringinventory, by (i) keeping check on the price of high cost items duringpurchase and (ii) through proper Vendor Development.purchase and (ii) through proper Vendor Development.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------VEDVED : to control Cost tied-up and Levels ofto control Cost tied-up and Levels ofMRO-inventoryMRO-inventory (mainly spares(mainly spares

partsparts).).

FSNFSN : to control Cost tied-up withto control Cost tied-up with MRO-inventory (mainly spares partsMRO-inventory (mainly spares parts) and) andreduce the chances of Obsolescence -cost spares in MRO-inventory.reduce the chances of Obsolescence -cost spares in MRO-inventory.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SDESDE : to control inventory levels, with the main objective of avoiding stock-to control inventory levels, with the main objective of avoiding stock-out condition, throughout condition, through critically Lead- Time-Analysiscritically Lead- Time-Analysis based onbased onavailability.availability.

GOLFGOLF : to controlto control Procurement StrategiesProcurement Strategies

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