Basic inventory principles
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Transcript of Basic inventory principles
BASIC INVENTORY PRINCIPLES
FUNCTIONS OF INVENTORIESBASICALLY INVENTORIES ARE IDLE
RESOURCES MAINTAINED IN VARIOUS FORMS.RAW MATERIALSPURCHASED AND MANUFACTURED PARTS SUB ASSEMBLIESFINISHED PRODUCTS
Since inventories represent a sizable investment in a logistic system, we must be aware of the functions they perform.
FIVE CATEGORIES OF STOCKPIPE LINE STOCK (in process stock, in transit stock): it
can be reduced only by improved design of the system.CYCLE STOCKS (batch production owing to
- economies of scale- technological requirements )
• SEASONAL STOCK(time varying requirements of an item)• SAFETY STOCK (supply and demand un certainties, lead
time un certainties)• STOCKS HELD FOR OTHER REASONS (-decoupling
stages of production, price, quantity discounts and speculation)
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INVENTORY RELATED COSTSPROCUREMENT COSTS:(cost per order is
generally fixed and not dependant on order quantity)
COSTS ASSOCIATED WITH EXISTENCE OF INVENTORIES:( supply exceeds demand):
cost/unit/unit timeiC
inventory carrying cost rate• COSTS ASSOCIATED WITH STOCK OUTS:
(demand exceeds supply)(cost/unit) or (cost/unit/unit time)
PROCUREMENT COSTSProcurement costs cost of goods
cost per order is generally fixed (not dependent on order quantity)ordering cost
- Administrative component- Handling- Transportation- Inspection of arrivals
INVENTORY HOLDING COSTSCOSTS ASSOCIATED WITH EXISTENCE OF
INVENTORIES:( supply exceeds demand): cost/unit/unit time
iCinventory carrying cost rate
-storage and handling-interest on tied up capital-property taxes -insurance-spoilage-obsolescence-pilferage
STORAGE COSTS• COSTS ASSOCIATED WITH STOCK OUTS:
(demand exceeds supply)(cost/unit) or (cost/unit/unit time)Additional costs of special orderBack order if possibleLoss of customer goodwillLost sales
SELECTIVE INVENTORY CONTROLIn a large number there are
Significant fewInsignificant many PARETO’S LAW
Typical organizations deal with a large variety of stocked items (10000-100000 is not uncommon)
Depending on rankings of Value (∑(annual demand * unit price))=ABC analysis
(Always Better Control)Criticality (Vital , Essential, Desirable)= VED analysisUsage frequency= FSN analysis
SUITABLE POLICIES CAN BE CHOSEN BASED ON PRODUCT CHARACTERISTICS
Objective of ABC analysisrationalization of ordering policies:Equal treatment to all:
Annual consumption value(rs)
No: of orders
Value per order
Average inventory
1 60000 4 15000 7500
2 4000 4 1000 500
3 1000 4 250 125Total inventory=8125
Preferential treatment on the basis of ABC analysis
Annual consumption value(rs)
No: of orders
Value per order
Average inventory
1 60000 8 7500 3750
2 4000 3 1333 667
3 1000 1 1000 500Total inventory=4917
Determination of reorder point
Policy implications of selective inventory control