INVENTORY CONTROL

MANAGEMENT
 INTRODUCTION TO INVENTORY
• Inventory can be classified as supplies, raw materials,
work-in-process and finished goods which are essential to
a businesses’ operations.
• Inventory management depends heavily on sales because
inventory is purchased earlier than sales can be made and
poor inventory levels leads to either lost sales or
excessive carrying costs.
• Any changes in the products’ demand should be worked
into the company’s purchasing and manufacturing
schedules thus coordination among the sales, purchasing,
production and finance departments is important.
OBJECTIVE OF INVENTORY MANAGEMENT
• Ensure that the inventories needed to sustain operations are
available
• Hold the costs of purchasing and carrying inventories to the lowest
possible level Inventory costs are divided into three categories:
• Carrying costs: are associated with inventory and include cost of
capital tied up, storage and handling costs, insurance, depreciation,
taxes, losses due to deterioration, obsolescence, or theft. They rise
in direct proportion to the average amount of inventory held.
• Ordering costs: include the costs of placing and receiving orders.
Are considered to be fixed costs and decline as the number of
orders decrease.
• Low inventory costs: results in the loss of sales, customer goodwill
and disruption of production schedules
 DEFINITION OF INVENTORY
• Inventory is the stock of any item or resource
used in an organization. An inventory system is
the set of policies and controls that monitor
levels of inventory and determine what levels
should be maintained, when stock should be
replenished, and how large orders should be.
 PURPOSE OF INVENTORY
– To maintain independence of operations.
– To meet variation in product demand.
– To allow flexibility in production scheduling.
– To provide a safeguard for variation in raw
material delivery time.
– To take advantage of economic purchase order
size.
– Many other domain-specific reasons.
 TYPES OF INVENTORY
• Raw Material – needed for production of goods
or services
• Work in process ( WIP ) – consists of item such as
components or assemblies needed for final
product in manufacturing
• Maintenance/repair/operating (MRO) supply
• Finish Goods Inventory – in manufacturing
plants, warehouse and retail outlets are the item
sold to the firm’s customers.
THE INVENTORY MANAGEMENT SYSTEM

• Organize the inventory management

effectively using
a. ABC Analysis
b. Record Accuracy
 ABC ANALYSIS
• ABC analysis is a type of analysis of material dividing in three groups called A-group items, B-
Group items and C-group items. For the purpose of exercising control over materials.
Manufacturing concerns find it useful to divide materials into three categories.
• "A" group items: 10% of total number of items carries 70% of value.
• "B" group items: 20% of total number of items account for only about 20% consumption
value
• "C" group items: 70% of total number of items account for only about 10% of consumption
value
ABC analysis also helps in reducing the clerical costs and results in better planning and
improved inventory turnover. ABC analysis has to be resorted to because equal
attention to A, B and C items will not be worthwhile and would be very expensive
 RECORD ACCURACY
• Inventory accuracy is refers to how well the inventory records agree with physical
count
• Based on the inventory record, a company determines net requirements for an
item, releases orders based on material availability, and performs inventory
analysis.
• If the records are not accurate, there will be shortages of material, disrupted
schedules and late deliveries, lost sales, low productivity and excess inventory.
• Three pieces of information must be accurate namely part description / number,
quantity, and location.
• Accurate inventory records enable firms to operate an effective materials
management system, maintain satisfactory customer service, operate effectively
and efficiently, and analyze inventory
• Inaccurate inventory records will result in lost sales, shortages and disrupted
schedules, excess inventory, low productivity, poor delivery performance, and
excessive expediting.
• Poor inventory record accuracy can be caused by many things, but they all result
from poor record-keeping systems and poorly trained personnel
 INVENTORY COST
Holding costs - associated with keeping stock over time
• storage costs (Costs of running out
• rent/depreciation
• labour
• overheads (e.g. heating, lighting, security)
• money tied up (loss of interest, opportunity cost)
• obsolescence costs (if left with stock at end of product life)
• stock deterioration (lose money if product deteriorates
whilst held)
• theft/insurance
 INVENTORY COST
Ordering costs - associated with ordering and
receiving an order
• clerical/labour costs of processing orders
• inspection and return of poor quality products
• transport costs
• handling costs
Setup (or production change) costs
• Costs for arranging specific equipment setups, and so
on
 
INVENTORY COST
INVENTORY MODELS FOR INDEPENDENT
DEMAND
– Economic Order Quantity (EOQ) models
– Fixed-time period models
– Quantity Discount Models
 ECONOMIC ORDER QUANTITY
• EOQ applies only when demand for a product is
constant over the year and each new order is
delivered in full when inventory reaches zero
• There is a fixed cost for each order placed, regardless
of the number of units ordered
• There is also a cost for each unit held in storage,
sometimes expressed as a percentage of the
purchase cost of the item.
 EOQ
Assume :
• The ordering cost is constant.
• The rate of demand is known, and spread evenly
throughout the year.
• The lead time is fixed.
• The purchase price of the item is constant i.e. no
discount is available
• The replenishment is made instantaneously, the whole
batch is delivered at once.
• Only one product is involved
• Economic Order Quantity, EOQ =

The optimal number of order per year, N = D/EOQ

The expected time between orders per year, T = Working day per year / N
 
The Reorder Point, ROP = X L
 Example 1

• Example 1
• Manatee uses EOQ logic to determine the order quantity for its various
computer components and is planning its Avatar chip orders.
Forecasted annual demand is 10,000 units Avatar chips. The setup costs
associated with placing and receiving each Avatar chip order is $9.25. It
is estimated that the cost to carry an Avatar chip in inventory for a year
is $5.00. Manatee operates a 250 days working year in 50 weeks and on
average, delivery of an order takes 5 working days. Calculate:

a. Economic Order Quantity (EOQ)

b. The optimal number of order per year (N)
c. The expected time between orders per year (T)
d. The Reorder point ( ROP )
e. Annual Total inventory cost
 Answer
• Answer: _____________________________________
a) EOQ =  [ 2 (Demand) (Order Cost) ] / (Carrying Cost)
_____________________
EOQ =  [ 2 (10,000) (9.25) ] / (5)
_____________
EOQ =  [ 185,000 ] / 5
_______
EOQ =  37,000 = 192.35 units.

 
b) N = D/EOQ
= 10,000/ 192.35
= 52 order peryear.
 
• T = Working day peryear / N
= 250 / 52
= 4.8 days per ear
 
• ROP = X L
= (10,000 / 250) X 5
= 200 units
 
• TC =
• = (10,000 x 9.25) / 192.35 + ( 192.35 x 5 ) / 2
• = $ 961.77.
ECONOMIC PRODUCTION QUANTITY, EPQ
 The batch mode is widely used in production. In
certain instances, the capacity to produce a part
exceeds its usage (demand rate)
 Assumptions
1. Only one item is involved
2. Annual demand requirements are known
3. Usage rate is constant
4. Usage occurs continually, but production occurs periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts
 EPQ

2 DS p
Qp 
H p u
D = Annual Demand in Units for the Inventory
Item
S = Setup or Ordering Cost per Order
H = Holding or Carrying Cost per Unit per Year
p = production rate
d = daily demand
 Example :
A plant manager of a chemical plant must determine the
lot size for a particular chemical that has a steady demand
of 30 barrels per day. The production rate is 190 barrels
per day, annual demand is 10,500 barrels, setup cost is
$200, annual holding cost is $0.21 per barrel, and the
plant operates 350 days per year.

a. Determine the Economic Production Quantity, EPQ

 SOLUTION :
• Given ;
D = 10 500
S = $200
H = $0.21
P = 190
d = 30
 QUANTITY DISCOUNT MODELS
• A quantity discount is a price discount on an item if predetermined
numbers of units are ordered.
• The quantity discounts are price reductions designed to induce large orders.
• If quantity discounts are offered, the buyer must weigh the potential
benefits of reduced purchase price and fewer orders against the increase in
carrying costs caused by higher average inventories.
• Hence, the buyer's goal in this case is to select the order quantity that will
minimize total costs, where total cost is the sum of carrying cost, ordering
cost, and purchase cost.
• The basic EOQ model can be used to determine the optimal order size with
quantity discounts; however, the application of the model is slightly altered.
The total inventory cost function must now include the purchase price of
the item being ordered:
 QUALITY DISCOUNT MODEL CALCULATION
STEPS.
Quantity Discount Model Calculation Steps:
• Compute EOQ for each quantity discount price.
• Is computed EOQ in the discount range?
• If not, use lowest cost quantity in the discount
range.
• Compute Total Cost for EOQ or lowest cost
quantity in discount range.
• Select quantity with the lowest Total Cost,
including the cost of the items purchased.
Example :
SOLUTION :
 MASTER SCHEDULING
• The master production schedule (MPS) is effectively the plan
that the company has developed for production, staffing,
inventory, etc.
• It has as input a variety of data, e.g. forecast demand,
production costs, inventory costs, etc and as output a
production plan detailing amounts to be produced, staffing
levels, etc for each of a number of time periods.
• This production plan is operates at an aggregate level (that is
it does not usually go into great detail about parts to be used,
etc - hence the name aggregate planning); and is cost driven,
that is it attempts to meet the specified requirements at
minimum cost.
 DEFINATION MPS

• Master production schedule is translating a

business plan into a comprehensive product
manufacturing schedule that covers what is to be
assembled or made, when, with what materials
acquired when, and the cash required. MPS is a
key component of material requirements
planning (MRP).
• The MPS - the production quantity to meet
demand from all sources & is used for computing
the requirements of all time-phased end items
 FUNCTION OF MASTER PRODUCTION
SCHEDULING
• An effective MPS ultimately will:
– Give production, planning, purchasing, and
management the information to plan and control
manufacturing
– Ties overall business planning and forecasting to
detail operations
– Enable marketing to make legitimate delivery
commitments to warehouses and customers
– Increase the efficiency and accuracy of a company's
manufacturing
 BENEFIT OF MPS
• Production plan with resource, schedule and available inventory (It all starts with what do we
want to make, when do we want to make, what does it take to make it, What we have got)
– Increased master scheduler efficiency and effectiveness
– Increased customer service levels
– Reduced inventory
– Improved margins
– Increased visibility and operational control
– Process change-over reduction
– Translates a business plan with forecasted demand
– Inventory reduction, leveling
– Reduced production bottlenecks and idle equipment – Reduce manual and inconsistent
scheduling efforts at each production level
– Increase production efficiency- Increased resource utilization and lowered manufacturing
costs
– Labor load leveling
– Accurate delivery date quotes – Improved on-time delivery performance
– Real time information
 APPLICATION OF MPS
• You can enter production planning or forecast by items in the
Master Production Schedule (MPS) at
Manufacturing/Planning/Master Production Schedule
• The objective of the Master Production Schedule (MPS) is to
plan and control materials and capacity of resources to meet
production demands
• The MPS defines the number of end items that need to be
produced within a certain period based on a forecast.
• The MPS is also used to calculate expected material
requirements to meet the production schedule.
Cont :-
Inputs To Mps
• Market requirements
• Production Plan from Aggregate Planning
• Resources available
 
Constraints
• Quantities of individual items must equal aggregate quantities from the
Production Plan
• Demand which must be met
– Capacity available
 
Output
• An MPS showing end items available every month (or period) that is feasible
with respect to demand and capacity. At this point we know when we need
units available so we can plan when to produce or order using MRP.
 MATERIAL REQUIREMENT PLANNING
• Computerized ordering and scheduling system for manufacturing and
fabrication industries, it uses bill of materials data, inventory data, and
master production schedule to project what material is required, when,
and in what quantity
• . MRP phases orders for dependent-demand items (such as raw materials,
components, parts) over a period to synchronize flow of materials and in
in-process inventories with production schedules
• It also computes and tracks effect of hundreds of variables such as new
orders, changes in various capacities, overloaded production centers,
shortages, and delays by suppliers, and feeds financial data into the
accounting system.
• In contrast to just in time inventory (a demand-pull production system),
• MRP is a plan-push system, and in contrast to advanced planning system
(a forward scheduling system) it is a backward-scheduling system.
 OBJECTIVE OF MRP
• Ensure the availability of materials, components,
and products for planned production and for
customer delivery,
• Maintain the lowest possible level of inventory,
• Plan manufacturing activities, delivery schedules,
and purchasing activities.
• Reduction in Inventory Cost
• Meeting Delivery Schedule
• Improved Performance of production
MRP Structure
 REQUIREMENT OF MRP
Material Requirements Planning (MRP) need
things below:
• Master Production Schedule (MPS)
• Bill of Material
• Information about the stock right
• Correct order information
• The lead time is estimated to be accurate.
 MRP INPUT & OUTPUT
• Input
- Bill of Material
- Lead time
- Inventory Data
- Purchasing Data
• Output
- MRP by period report
- MRP by date report
- Planned order report
- Purchase Advice
- Exception report.