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1. Inventory and Inventory management2. Lead time

3. Reserve stock and safety stock4. Reorder level5. Economic order quantity

6. Trade off between total costs of inventoryand order quantity7. Customer Service levels

8. Average inventory9. Selective Inventory Control10. Paretos rule

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1. Quadrant technique2. Non-Performing Asset

3. ABC analysis4. Vendor managed Inventory5. Inventory Turn Over Ratio6. Review Period

1. Quadrant technique2. Non-Performing Asset

3. ABC analysis4. Vendor managed Inventory5. Inventory Turn Over Ratio6. Review Period

1. Quadrant technique2. Non-Performing Asset

3. ABC analysis4. Vendor managed Inventory5. Inventory Turn Over Ratio6. Review Period

1. Quadrant technique2. Non-Performing Asset

3. ABC analysis4. Vendor managed Inventory5. Inventory Turn Over Ratio6. Review Period

1. Quadrant technique2. Non-Performing Asset

3. ABC analysis4. Vendor managed Inventory5. Inventory Turn Over Ratio6. Review Period

1. Quadrant technique

2. Non-Performing Asset13. ABC analysis14. Vendor managed Inventory15. Inventory Turn Over Ratio16. Review Period

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* What is Inventory?

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A list of items being held in stock

An asset not participating in conversion or notgetting sold

Any NPA, considered to be an asset & part of

working capital

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Why do we have inventory?

Due to mindset - reluctance to dispose off Consequence of redundancy of products

Built-up as a means of customer satisfaction, asa cushion against uncertainties

To overcome disadvantages of poor

infrastructure 9 to 12 months of sales in India, a few days in

Japan and a month in US/Europe

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Importance of InventoryDecades of 1980 & 1990 brought inventory in

focusWhy? Emergence of Japan as a economic super

power in 1980s

Visual evidence of success of Japanese systemsFord Motors carried 15 times more WIPinventory than what Toyota did! A benefit Toyota

enjoyed over Ford in cost managementImpact on product cost, 5 to 35% of product

cost are logistical costs & 35% of logistical costsare inventory costs

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Effect on product qualityFacilitates production

Protects the conversion process fromuncertainties of market

Has a major impact on product cost - a source of

cost and bad qualityMeasure of managerial performanceSigns of poor inventory management

An increase in back ordersRising inventory investmentsHigh customer turn over

Increase in order cancellation

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Insufficient storage spaceIncrease in rupee & number of obsolete products

Objectives of Inventory ManagementTo increase corporate profitability

To anticipate impact of corporate policies oninventory levels and act proactively

To minimize logistical costs while meetingcustomer service requirement

Functions of Inventory [Rationale for

Inventory]Overcomes geographical separationDecoupling internal process reducing

dependence

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Balancing supply and demandBuffers uncertainties of lead time, demand and

poor infrastructure

Acts like a cushion against unusual events likestrike or warTechnical requirement of batch production

Facilitates price discounts

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Inventory related costsProcurement Costs - management and stafftime, order preparation and dispatch, follow up,

transport from vendor, receiving, handlingstorage

Carrying Costs - capital, opportunity, space,tax, security, insurance, spoilage and

preservation, obsolescenceOut of stock costs - emergency transport, lost

sale, lost customer

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Types of InventoryLocation inventory-Inventory at a fixedlocation

In transit inventory[pipeline inventory]-Beingtransported and or waiting to be transportedManufacturing inventory

R/M, components, WIP, F/G, MRO[Maintenance, repairs and operating supplies]Risk due to commitment of resource to

manufacturing is deep and long.

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Wholesale inventoryStock of large quantities and sold in small

quantities to retailersStock of seasonal products, products to satisfy

assorted, small and urgent needs of retailers

Generally risk is narrow & deep, when theproduct line expands risk is wider and deeper.Retailers inventory

Variety of products to satisfy demandRetailers push the inventory backwards to

wholesalers and reduce the depth of risk althoughthe risk is wide

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Average inventoryAverage level of inventory in the organization

R/M, parts, WIP, finished goodsFollowing inventory concepts are used in

calculating average inventory

1. Cycle inventory: result of replenishment process,also known as base stock or lot size stock, Q/2

2. Safety stock Inventory: Stock held to safe guard

against variations in lead-time & or consumption3. Transit Inventory: Either moving or awaitingmovement

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Economic order quantityAssumptions of Wilsons Lot size formula or

Classical EOQ model3. Demand is at a known constant rate and

continuous

4. Lead time is known and constant5. Demand is fully satisfied, no shortages areallowed

6. All costs are time invariant7. Quantity discounts are not considered

8. Replenishment is instantaneous, there is notransit inventory

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* Process is continuous* No constraints are imposed on quantities

ordered, storage capacity, budget etc. EOQ derivation All assumptions in tact

EOQ=2AD/h

Relax instantaneous replenishmentEOQ=2AD/h(1-D/P)

Limitations of classical EOQ model- major

limitations are the assumptions made If the concept of EOQ is applied without taking

into account the limitations, results can be

disastrous

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Adjustments to EOQEOQ model does not consider economics oftransportation

# Transportation costs are sensitive to weight ofconsignmentQuantity discount-Quantity discounts can upset

the benefit of EOQ if we dont evaluate thesituation from total cost perspective

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Other EOQ adjustmentsProduction lot size:Mismatchbetweenbuyers EOQ and suppliers EBQ. Some

adjustment is needed.Multiple items purchase

# Combination of products are sourced from asupplier

# Impact of quantity discounts and

transportation costs on total cost when acombination of products is purchased# So adjustment is required to EOQ

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Limited capital# Significant role of budgetary allocation

# Budget has to satisfy the requirement of entireproduct line# EOQ of various items requires adjustment

Private trucking# Getting a full truck (FTL) becomes significantfrom cost perspective as against EOQ

Standard package

# Standard package and EOQ

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Inventory Classification* Ranking of Inventory to facilitate selective

management control

* Dates back to 1951- GE* Paretos rule: 80-20 rule, separate vital few fromtrivial many

* ABC Analysis

20%

80%

80%

Trivialmany

Vitalfew

20%

InventoryItems

InventoryValue

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*An example of ABC analysisLogistics Perspective of selective management

controlABC analysis has one chosen parameter like

cost or value in focus

A category is priority from the perspective ofthis particular parameter

Prioritization in inventory management has to

consider other factors as wellVED AnalysisFSN Analysis

HML

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SDE [Scarce, Difficult to procure, Easy toprocure]SOS [Seasonal Off Seasonal]

GOLF [Government, Open market, Local &Foreign Source]

XYZ analysis

Quadrant technique

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Distinctives

High risk, low value

items: customized items

not expensive but not

available easily, single

supplier and long lead-

time

Criticals

High value customized

items not available easily

Generics

Low value easily

available items, standard

items

Commodities

High value standard

items, basic production

items, standard

packaging items

Value or Profit potential

StockoutRisk

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Fundamental approaches to managing

inventoryTraditional approach has been deciding when to

order?But challenge of today - to find answers to the

questions where? to stock the material, how

much? and when?Inventory decisions influences customersatisfaction level

High level of inventory & higher customersatisfaction level

Cost of high inventory is obviously highModern challenge is high customer satisfaction at

minimum inventory

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Fixed Order Quantity Approach (condition

of certainty)The order quantity is fixed at EOQ

Another stock level fixed is Re Order Level(ROL or ROP) which triggers orderingROL is fixed by calculating lead time

consumptionInventory cycles can be conceptualized by

looking at the figure drawn in the classEOQ Model discussed already

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ROLIS LEAD TIME CONSUMPTION

Q

LeadTime

LeadTime

LeadTime

INVENTORY

CYCLE TIME

INVENTORY

CYCLE TIME

INVENTORY

CYCLE TIME

INV

D

SAFETY STOCK

Q - MODEL

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SOME IMPORTANT CONCEPTSROL = SAFETY STOCK [FOR EXTENSION OF LEAD TIME] +

RESERVE STOCK [FOR INCREASE IN DEMAND] +BUFFER STOCK[LEAD TIME CONSUMPTION]

3. SAFETY STOCK: Dave X [Lmax-Lave]4. RESERVE STOCK: Lave X [Dmax Dave]

ROL = Dave Lave + Kd2 L +l2 D2 K=115.87% K=22.28% K=30.13%

K=050%

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Salient Features of the above approach1. widely used technique

2. requires constant monitoring of stock levels3. limited by the assumptions made cost of in

transit inventory, volume transportation rates, use

of private carriage4. Combines the concepts of push & pull

Min-Max Approach a modification to EOQ

model Order for EOQ is released when ROL is reached

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Assumption is stock depletion is at a specific rateD during replenishment cycle.

In reality when stock depletions can be high Min-Max Approach suggests that the actualorder quantity should be the sum of EOQ and the

difference between ROL and actual stock onhand at the time ROL occurs.

Fixed Order Quantity Approach (condition ofuncertainty)

When demand and lead time vary

Fixed Order Interval ApproachDecisions about review period & S

Optional replenishment Approach

Decisions about review period, S and s

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Q

TIME

LeadTime

Lead

Time

LeadTime

INV

D

SAFETY STOCK

T T

S

I1

I2

P- MODEL

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Some Inventory related definitions

1. Inventory policy:

5W-1H questions about buying and controlling

inventory. What to stock? How much? When? Where?What method? Approach? Centralized or decentralized control

2. Service levels:performance objectives of inventory

function Order cycle time: release of a purchase order & receiptof the shipment at customers place

Case fill rate:percentage of cases deliverable against

the number of cases customer ordered Line fill rate:product lines fully delivered to the productlines ordered is the line fill rate.

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Order fill rate:percentage of orderscompletely fulfilled to orders received

Average inventorya. Cycle inventory

b. Safety stock Inventory

c. Transit Inventory also known as Pipe LineInventory

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Inventory Strategy a long term plan to

control inventoryWhat is controlled? Selective managementcontrol, quadrant approach

When do we move inventory? Kanban system inJIT, DRP, MRP

Where and at how many places? Centralized ordecentralized? Warehouse location, square root

lawWhy? Customer satisfaction at minimum cost

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How do we manage? Inventory approaches,push methods? pull methods?

How do we measure performance? Inventoryturns, fill rates, perfect orders