INVENTORY MANAGEMENT

INVENTORY
Getting right goods, at the right place, at the
right time to maintain a desired service level
at minimum cost.
– Right materials, in
– Right quantities, at
– Right time, at
– Right price, from
– Right source, at
– Least cost.
 Inventory Management- Process

• Demand forecasting and planning

• Purchasing
• Receipt, inspection and stores
• Inventory control
• Issue and distribution
• Disposal and condemnation
• Minimizing losses and pilferage
 Demand forecasting and Planning
• Development of long-term material plan includes
translating the workload statistics into materials
requirements and projecting other data necessary to
determine capital funds.
• Standardization ensures
– Non-duplication of inventory
– Variety reduction
– Economical purchase costs and
– Efficient use of materials
 Forecasting techniques
• In Manufacturing • In Hospitals
– Trend line – Last period method
– Regression analysis – The arithmetic average
– Exponentially weighted – Moving average
moving average
– Economic models
– simulation
COSTS OF HOLDING INVENTORIES
• Ordering costs

• Inventory Carrying costs

• Opportunity costs of funds blocked

• Shortage
 RISK OF HOLDING INVENTORY
• Price decline

• Product Deterioration

• Product Obsolescence
TOOLS & TECHNIQUES OF INVENTORY
MANAGEMENT/ CONTROL
• ABC Analysis
• VED Classification
• Economic Ordering Quantity (EOQ)
• Order Point Problem
• Two Bin Technique
• HML Classification
• SDE Classification
• FSN Classification
• Order Cycling System
• Just In Time (JIT)
 ABC Analysis
CATEGORY NO. OF ITEMS(%) ITEM VALUE(%) MANAGEMENT
CONTROL

A 15 70 (HIGHEST) MAXIMUM

B 30 20(MODERATE) MODERATE

C 55 10(LEAST) MINIMUM

TOTAL 100 100

 VED Classification
• Specifically used for Classification of SPARE PARTS

 V- part is VITAL( high stock level)

 E- part is ESSENTIAL (moderate stock level )

 D- part is DESIRABLE (minimum stock level )

 ABC-VED Analysis

Priority I
Priority II
Priority III

Priority I – High importance, require control at the highest

managerial level
Priority II - Intermediate importance; controlled by Office-in-
charge
Priority III – Not of significant importance; can be controlled
by lower level staff.
 Economic Ordering Quantity (EOQ)
• Level of Inventory at which
– Total Cost* of Inventory is MINIMUM
*(Ordering and Carrying Cost)
Ordering cost:
Cost incurred to get the materials
into the inventory of the hospital. This
includes
1. Salaries and wages of involved personnel
2. Postal, telephone, telex and other similar bills
3. Ads
4. Stationary
5. Entertaining the vendors/ suppliers and
6. Travel of stores personnel
Inventory Carrying Cost /Holding Cost
The cost associated with keeping/
maintaining the materials in the stores.
– Cost of storage
– Salary and wages of stores personnel
– Insurance
– Stationary, forms, paperwork, invisible charges like
loss of interest on money deadlocked in inventory,
deterioration and obsolescence, loss due to
pilferages.
It is expressed as percentage of the average
investment in inventory
 Basic Economic Order Quantity :
Model
Total Annual Cost

Q D
TC   H   S  DC
2 Q
Annual Holding Annual Ordering Annual Purchase
Cost + Cost + Cost
TC : Total annual cost
D : Total annual demand
Q : Quantity ordered
H : Unit holding cost
S : Order or set-up cost
C: Unit cost (price)
 E.O.Q. = Minimum Total Cost
 The total cost curve reaches its minimum where
the carrying and ordering costs are equal.

2DS 2(Annual Demand)(Or der or Setup Cost)

EOQ = =
H Annual Holding Cost
 Tc (Total Cost)
Cost (Rs.)

Carrying Cost (Q/2)H

DS/Q (Ordering Cost)

EOQ
Order Quantity Size (Q)
Example
• A hospital purchases 1600 pairs of surgical
gloves (units) each year at a unit cost of Rs 15.
The order cost is Rs 100 per order and the
holding cost per unit per year is computed at
Rs 8. Lead time is 2 weeks.
2DS 2(Annual Demand)(Or der or Setup Cost)
EOQ = =
H Annual Holding Cost

Economic Order Quantity (Q)= √2 X 100 X1600/ √8

Q D
TC   H   S  D  C
2 Q
=200 units
Total Annual cost= (1600 X 15) + (8 X 200)
= Rs 25600
No of orders placed in a year = 1600/200 units = 8
 Factors affecting Ordering
Quantities
• Lead time
– The period which elapses between placing an
order and receiving it in the stores.
• Internal lead time – Preparation of issue of tender,
Obtaining quotations, making comparative statements,
initial purchase order time for it to reach supplier.
• External lead time – Time taken to prepare the material
ready, dispatch, transportation and actual delivery at
the hospital.
 Order Point Problem
• The re-order point is that level of inventory when a fresh
order should be placed with suppliers. It is that inventory
level which is equal to the consumption during the lead
time or procurement time.
• Re-order level = (Daily usage × Lead time) + Safety stock.
• Minimum level = Re-order level – (Normal usage × Average
delivery time).
• Maximum level = Reorder level – (Minimum usage ×
Maximum delivery time) + Re-order quantity.
• Average stock level = Minimum level + (Re-order
quantity)/2.
• Danger level = (Average consumption per day × Lead time
in days for emergency purchases).
 Two Bin Technique
• Control of Category ‘C’ inventories
• Two Bins/Groups
First Bin- just enough to last from the date a
new order is placed until it is received
for inventory.
Second Bin- enough to meet current demand
over the period of replenishment.
 HML Classification
• Material classified on the basis of UNIT VALUE

 H- HIGH VALUE
 M- MEDIUM VALUE
 L – LOW VALUE
 FSN Classification
• Inventory is classified based on the
MOVEMENT OF INVENTORIES from stores
• Inventory technique used to AVOID
OBSOLESCENCE
 F- Fast moving
 S- Slow moving
 N- Non moving
 X-Y-Z CLASSIFICATION
 Value of inventory available on date
 X – stock value high
 Y – stock value medium
 Z – stock value low
 Method – same as A-B-C
 Helps to control stock / obsolescence
 Shows how stock values are distributed
amongst the material in store
 ORDERING CYCLING SYSTEM
• Periodic reviews at fixed interval of each item
of inventory& orders are placed to restore the
stock at a prescribed stock level
• Orders are placed based on stock on hand and
rate of consumption.
• Eg. Daily average consumption of an item is
300 and lead time is 20 days, the stock should
not be less than 20 X 300 = 6000 units. If
review time is 30 days, then stock in hand
should be 6000 + (30 X 300) = 15000. if Buffer
 JUST-IN-TIME (JIT) INVENTORY CONTROL

• The JIT control system implies that the firm should

maintain a minimal level of inventory and rely on
suppliers to provide parts and components ‘just-in-time’
to meet its assembly requirements.

• JIT also known as Zero Inventory Production Systems(ZIPS),

Zero Inventories(ZIN), Materials as Needed(MAN), or Neck of
Time(N0T)
 JIT Vs. JIC
• This may be contrasted with the traditional
inventory management system which calls for
maintaining a healthy level of safety stock to
provide a reasonable protection against
uncertainties of consumption and supply – the
traditional system may be referred to as a
“just-in-case” system.
• The most commonly used tools of inventory
management in India are: ABC analysis, FSN
analysis and inventory turnover analysis.
 INVENTORY ANALYSIS
 A-B-C Analysis – Value of consumption
 H-M-L Analysis – Unit price
 X-Y-Z Analysis – Value of items in store
 V-E-D Analysis – Criticality of item
 F-S-N Analysis – Consumption pattern
 S-D-E Analysis – Procurement problems
 S-O-S Analysis – Seasonality
 G-O-L-F Analysis – Source of supply