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INVENTORY MANAGEMENT
1
By
Vimal Raj K

DEFINITION
INVENTORY is the stock of any item
or resource used in an organization.
It may consists of Raw materials,
Spare parts/consumable, and Finished
Goods.
2

INVENTORY TYPES
? Movement Inventories
? Buffer Inventories
? Anticipation Inventories
? Decoupling Inventories
? Cycle Inventories
3

MOVEMENT INVENTORY
? Inventory is moved from one location to
another.
? Transportation time is involved in
transferring substantial amount of
resources.
? Example : Coal is transported from the
coal fields to an industrial town by trains.
? It is also called as transit or pipeline
inventories
4

BUFFER INVENTORY
? Protect against the uncertainties of
demand and supply.
? Actual demand may not exactly
match the average and could well
exceed it.
? Also known as Safety stock.
? Idea of keeping buffer stock is to
render high level of customer service
and consequently reduce number of
stockouts and back-orders.
6

ANTICIPATION INVENTORY
? Anticipation inventories are held for
reason that a future demand for the
product is anticipated.
? Underlying idea is to smoothen the
production process for a longer
duration on a continuous scale
rather than operating with excessive
over time in one period.
7

DECOUPLING INVENTORY
? Idea of the decoupling inventories is to decouple,
different parts of the production system.
? Inventory shared by two operations to prevent
breakdown or unevenness for machines.
? Provides a cushioning effect in the face of varying
work-rates, and machine breakdowns and failures.
8

CYCLE INVENTORY
? Purchase are usually made in lots rather than for
the exact amounts which may me needed at a point
of time.
? If all purchase are made exactly, then there is no
use of cycle inventory.
9

INVENTORY COST
? Purchase cost
? Ordering cost / Setup cost
? Carrying cost
? Stockout cost
10

PURCHASE COST
? Purchase price �C items that are
bought from outside sources.
? Production cost �C items that are
produced with in the organisation.
? This cost may be constant per unit, or
it may vary as the quantity
purchased/produced increases or
decreases.
? Also known as nominal cost of
inventory.
11

ORDERING COST / SETUP-COST
? Ordering cost is incurred whenever the
inventory is replenished.
? It includes cost associated with the
processing (setup cost) and chasing of
the purchase order, transportation,
inspection for quality, expediting overdue
orders, and so on.
? Also known as procurement cost.
12

CARRYING COST
? Cost associated with storing an item in
inventory.
? Carrying cost includes �C cost of capital
invested in the stock, costs directly
associated with storing goods,
deterioration costs, general insurance,
etc.
? Also known as holding cost or storage
cost.
13

STOCKOUT COST
? Stockout imply shortages.
? If stock out is internal, it
would imply that some
production is lost.
? If stock out is external, it
would result in a loss of
potential sales and loss of
customer goodwill.
14

ECONOMIC ORDERING QUANTITY
The Economic Order Quantity
(EOQ) is the number of units that a
company should add to inventory
with each order to minimize the
total costs of inventory��such as
holding costs, order costs, and
shortage costs.
15

TYPES OF MODEL IN EOQ
? Purchase model without shortage
? Manufacture model without shortage
? Purchase model with shortage
? Manufacture model with shortage
18

PURCHASE MODEL WITHOUT SHORTAGE
19

ASSUMPTIONS
? Demand is known and uniform
? Purchasing at equal interval
? Zero lead time
? No shortages
? Instantaneous replenishment.
20

MANUFACTURING MODEL WITHOUT SHORTAGE
21

ASSUMPTIONS
? Demand is at a constant rate (D).
? All cost coefficients (C1, C2, C3) are constants.
? There is no shortage cost.
? The replacement rate is finite and greater than the
demand rate. This is also called replenishment rate
or manufacturing rate, denoted by R.
22

PURCHASE MODEL WITH SHORTAGE
23

MANUFACTURING MODEL WITH SHORTAGE
24

SELECTIVE APPROACHES
? ABC analysis
? VED analysis
? HML analysis
? SDE analysis
? S-OS analysis
? FSN analysis
? XYZ analysis
25

ABCANALYSIS
? The inventory items in an organization are
classified on the basis of their usage in monetary
terms.
? A �C high consumption value items.
? B �C moderate consumption value items.
? C �C low consumption value items.
? By plotting the usage value of the items to obtain
the ABC distribution curve.
26

VEDANALYSIS
? The items are classified on the basis of their
criticality to the production process.
? V �C vital items with out which production process
would come to a standstill.
? E �C essential item whose stock out would
adversely affect the efficiency of the production
system.
? D �C desirable item which are required but do not
immediately cause a loss of production.
28

HML ANALYSIS
? The items are classified on the basis of the unit
cost.
? H �C high rate.
? M �C medium rate.
? L �C low rate.
29

SDE ANALYSIS
? The items are classified based on the availability.
? S �C scarce items which are in short supply.
? D �C difficult items means that might be available in
the indigenous market but cannot be procured
easily.
? E �C easily available items which are from local
markets.
30

S-OS ANALYSIS
? Analysis is based on the nature of supplies.
? S �C seasonal items.
? OS �C off seasonal items.
31

FSN ANALYSIS
? Based on the consumption pattern the items are
classified in this analysis.
? F �C fast moving items.
? S �C slow moving items.
? N �C non moving items.
? This classification helps in the arrangement of
stocks in the stores.
32

XYZ ANALYSIS
? In this analysis the classification is based on the
closing inventory value of different items.
? X �C item with high investment.
? Z �C item with low investment.
? Y �C item with moderate investment.
33

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Inventory management

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