Inventory Management & Techniques

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 and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Zero Inventory? Reducing amounts of raw materials and

purchased parts and subassemblies by having suppliers deliver them directly.

Reducing the amount of works-in process by using just-in-time production.

Reducing the amount of finished goods by shipping to markets as soon as possible.

Reasons for Inventories Improve customer service Economies of purchasing Economies of production Transportation savings Hedge against future Unplanned shocks (labour strikes, natural

disasters, surges in demand, etc.) To maintain independence of supply chain

How to Measure Inventory The Dilemma: closely monitor and

control inventories to keep them as low as possible while providing acceptable customer service.

Average Aggregate Inventory Value:how much of the company’s total

assets are invested in inventory? Ford:6.825 billion Sears: 4.039 billion

Inventory Measures Weeks of Supply

Ford: 3.51 weeks Sears: 9.2 weeks

Inventory Turnover (Turns) Ford: 14.8 turns Sears: 5.7 turns GM: 8 turns Toyota: 35 turns

Objectives of Inventory Control 1) Maximize the level of customer

service by avoiding understocking. 2) Promote efficiency in production

and purchasing by minimizing the cost of providing an adequate level of customer service.

Types of classification

1.ABC ANALYSIS 2.HML ANALYSIS

3.VED ANALYSIS 4.SDE ANALYSIS

5.GOLF ANALYSIS6.SOS ANALYSIS

7.MNG ANALYSIS 8.FSN ANALYSIS

9.XYZ ANALYSIS

ABC ANALYSIS (Pareto Principle) A Items: very tight control, complete

and accurate records, frequent review B Items: less tightly controlled, good

records, regular review C Items: simplest controls possible,

minimal records, large inventories, periodic review and reorder

HML ANALYSIS

HML analysis is similar to ABC analysis except for the difference that instead of “usage value", "price” criterion is used. The items under this analysis are classified into three groups which are called “High”, “Medium” and “Low”. To classify, the items are listed in the descending order of their unit price.

HML analysis helps to-

•Assess storage & security requirement.•To keep control over consumption at the departmental head level.•Determine the frequency of stock verification.•To evolve buying policies to control purchase .•To delegate authorities to different buyers to make petty cash purchase.

VED ANALYSIS

VED analysis represents classification of items based on their critically.The analysis classifies the items into three groups vital, essential & desirable.VED (vital-essential-desirable)analysis is carried out to identify critical items.

Number of reasons:-

•If the non-availability of the items can cause serious production losses.•Lead time for procurement is very large.•It is non-standard items & is procured to buyer’s design.•The sources of supply is only one & is located far off from the buyer’s plant.

Steps involved in making VED analysis are:

i. Identify the factors to be considered for VED analysis.

ii. Assign points/weightages to be factors.

iii.Divide each factor into three degrees & allocate.

iv.Prepare categorization plan.v. Evaluate items.vi.Place the items.

S-E-D analysis(“Scarce”, “Difficult” & “Easy“)

It is based on the problems of procurement namely:

Non-availabilityScarcityLonger lead time Geographical location of suppliersReliability of suppliers

S-D-E analysis is employed by the purchase department

I. To decide on the method of buying.

I. To fix responsibility of buyers.

G-NG-LF ANALYSIS/GOLF ANALYSIS

G-NG-LF analysis (or GOLF analysis) like S-D-E analysis based on the nature of the suppliers which determine quality, lead time, terms of payments, continuity or otherwise of supply & administrative work involved.

“G” group covers items procured from “government” suppliers such as the STC, the MMTC and the public sector undertakings.

“NG”(O in GOLF analysis)group comprises of items procured from “Non-Government”(or Ordinary) suppliers.

“L” group contains items bought from “Local suppliers”.

“F” group contains those items which purchased from “foreign” suppliers. The transactions with such suppliers.oInvolved a lot of administrative & procedural work.oNecessitate search of foreign suppliers.oRequire opening of letter of credit.oRequire making of arrangement for shipping & port clearance

S-OS ANALYSIS

S-OS analysis is based on seasonality of the items & it classifies the items into two group S(seasonal) & OS(off seasonal).oSeasonal & are available only for a limited period.oSeasonal but are available throughout the year.oNon-seasonal items whose quantity is decided on different considerations.

M-N-G ANALYSIS

M-N-G analysis based on stock turn over rate & it classifies the items into M(moving items), N(Non-moving items) & G(Ghost items)

M-N-G analysis helps to:-identify non-existing items for which The store keeps bin-cards or waste computer memory orWaste computer stationery while preparing stores ledger.

All pending / open purchase orders (if any) of such items Should be cancelled.

F-S-N ANALYSIS

F-S-N analysis is based on the consumption figures of the items. the items under this analysis are classified into three group :F(fast moving), S(slow moving), N(non-moving).To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into account & the period, usually in terms of number of months, that has elapsed since an analysis the last movement is recorded.

F-S-N analysis helps to identify:

I. Active items which require to be reviewed regularly.

II. Surplus items whose stocks are not higher than their rate of consumption.

III. Non-moving items which are not being consumed.

Inventory Costs Procurement costs Carrying costs Out-of-stock costs

Procurement Costs Order processing Shipping Handling Purchasing cost: c(x)= $100 +

$5x Mfg. cost: c(x)=$1,000 +

$10x

Carrying Costs Capital (opportunity) costs Inventory risk costs Space costs Inventory service costs

Out-of-Stock Costs Lost sales cost Back-order cost

Reasons Against Inventory Non-value added costs Opportunity cost Inventory deteriorates, becomes

obsolete, lost, stolen, etc.

Independent Demand Independent demand items are

finished products or parts that are shipped as end items to customers.

Forecasting plays a critical role Due to uncertainty- extra units

must be carried in inventory

Dependent Demand Dependent demand items are

raw materials, component parts, or subassemblies that are used to produce a finished product.

MRP systems.

Reorder Point Quantity to which inventory is allowed to

drop before replenishment order is made

Need to order EOQ at the Reorder Point:

ROP = D X LTD = Demand rate per periodLT = lead time in periods

level of inventory average

inventory

units Q

t time

Sawtooth Model

changing lead times changing demand Uncertainty creeps in:

Plug in safety stock

Safety stock - allows manager to determine the probability of stock levels - based on desired customer service levels

Planning for Uncertainty