CHAPTER V INVENTORY MANAGEMENT. Outline Inventory Definition and inventory types. Finance and other...

GLOBAL PURCHASING & MATERIALS HANDLING

CHAPTER V

INVENTORY MANAGEMENT

Outline

• Inventory Definition and inventory types.

• Finance and other sides of inventory.

• Functions of Inventory.

• Inventory Costs.

• Inventory Management and Controlling.

• ABC Analysis

• Inventory Control Models

Inventory

• A list of goods on hand.

• Inventories are materials and supplies that a business

or institution carries either for sale or to provide

inputs to the production process.

• All materials , to support production, to meet

customer’s requirements.

• Inventories are substantial parts of total assets.

Inventory

• Financial Side: Inventories represent 20% to 60% of total

assets in balance sheet. In addition, there is a cost for carrying

inventories, which increases operating costs and decreases

profits. Thus, good inventory management is essential for a

better financial position.

Inventory

• Production Side: Since inventory either a result from

production or a support factor for production, two sides of

inventory must be coordinated carefully. If we don’t have

enough inventory at right time and place we cannot supply

Customer Service, on the other hand,if we have excessive

inventory, we will have to stand for additional costs.

Inventory

• Papers in cases

• Products in warehouse.

• Products sent in trucks.

• Screws, lubricants in maintenance warehouse.

Inventory Types

• Raw Material:

• Work-in-Process:

• Finished Good:

• Distribution Inventories

• Operational Supplies:

Inventory types

• Raw Material Inventories: There are raw materials and other

supplies, parts and components, which enter into the product

during the production process and generally form part of the

product.

• WIP Inventories: These are semi-finished, work in progress and

partly finished products formed at the various stages of production.

Inventory Types• Finished Good: These are completely finished products ready for

sales. In a manufacturing unit, they are the final output of the

production process.

• Distribution Inventories: Finished goods located in the distribution

system.

• Maintenance,repair and Operational Supplies (MRO): Items used in

production but not become a part of main product.F or example;

hand tools,spare parts, lubricants and cleaning supplies.

Stock or Inventory ?

• Stock is the monetary and physical elements in

production.

• Inventory is used as a physical stock which is counted

at the end of the year

Why do we have to make stock?

• Production is a continous process.

• Manpower and machines mustn’t be idle.

• To take the advantage of Economies of Scale.

• Fluctuations in demand necessitate to make stock. In

the high levels of demand, we have to get stock.

• To prevent supply problems.

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Objectives of inventory management

• Maximizing customer service:

• Minimizing cost-plan operation: (Operating Efficiency)

• Minimizing Inventory Investment:

• The higher inventory, the higher customer level on the other hand, the

higher inventory the higher material cost!!! It is a paradox!!!

• Minimizing risk and uncertainity.

• Prevent the risk of obsolescence.

Inventory Types based on Functionality• Anticipation Inventory:

• Fluctuation Inventory:

• Lot-Size Inventory:

• Transportation Inventory:

• Hedge Inventory:

• Speculative Inventory:

• MRO:

Inventory types based on functionality

• Anticipation Inventory: They are built up in assumption of

future demand. For example; they are created ahead of a peak

selling season, a promotion program, vacation shut down e.t.c.

The other aim to build up them may to reduce the costs of

changing production rates.


• Fluctuation Inventory(Safety Stock): It is held to cover random

unpredictable fluctuations in supply and demand or lead time. If

demand or lead time is greater than forecast, a stock out will

occur. Safety Stock is carried to protect against this possibility. Its

purpose is to prevent disruptions in manufacturing or deliviries

to customers.It is also called buffer stock or reserve stock.

• Quality Problems

• Lead time fluctuations

• Equipment Problems


• Lot-Size-Inventory: Items are purchased or manufactured in

quantities greater than needed immediately create lot-size

inventories. This is to take advantage of quantity discounts; to

reduce shipping,clerical and set up costs.It is also called cycle

stock. It is the portion of inventory that depletes gradually as

customers’ orders come in and is replenished cyclically when

suppliers’ orders are received.


• Transportation-Inventory: They are also called pipeline or

movement inventories.

• Hedge Inventory: The price of some products such as minerals

and commodities fluctuates according to world supply and

demand. If buyers expect prices to rise, they can purchase

hedge inventory when prices are low.

• Speculative Inventory:

• MROs:

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Inventory costs

• Purchase Cost: Price paid for a purchased item, which consists

of the item and any other direct costs associated in getting

them in to the plant. These could include such things as

transportation, custom duties and insurance. The inclusive cost

is often called landed price.

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Inventory costs

• Carrying Cost: It includes all expenses incurred by the firm

because of the volume of inventory carried.

• As inventory increases, these costs increases, as well.

• Carrying costs include some particular costs:

• Capital Cost: The interest income loss by not investing money

• Storage Cost:Space, Workers, Equipment

• Risk Cost: Loss of product value, damage, being stolen,deterioration

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Inventory costs

• Ordering Cost: Ordering costs are associated with placing an

order either with the factory or supplier. It does not depend on

quantity proportionally. They include the following costs:

• Production Control Cost:

• Set up Cost:

• Lost Capacity Cost:

• Purchase Order Cost

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Inventory costs

• Stockout Cost: If demand during the lead time exceeds

forecast, we can expect a stockout. It causes back-order costs,

lost sales, and further lost customers

• Capacity-Associated Costs: When output levels must be

changed, there may be costs for overtime,hiring,training,extra

shifts, and layoffs.These costs can be avoided by levelling

production by producing in slack periods for sale in peak

periods.

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Abc Inventory Analysis

• How well do we know the good in pur inventory?

Strategy based on product category

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1. What is the importance of the inventory item?

2. How are they to be controlled?

3. How much should be ordered at one time?

4. When should an order be placed?

ABC analysis is helpful method to classify the items according to

their importance.

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1. What is the importance of the inventory item?

2. How are they to be controlled?

3. How much should be ordered at one time?

4. When should an order be placed?

ABC analysis is helpful method to classify the items according to

their importance.

29Product Number of

TransportationCumulative Category

1 XXXX 150 150 A

2 YYYY 140 290 A

3 ZZZZ 80 370 A

4 DDDD 30 400 A

5 GGGG 20 420 B

6 HHHH 10 430 B

7 TTTT 10 440 B

8 JJJJJ 10 450 B

9 LLLL 10 460 B

10 EEEE 5 465 B

11 SSSS 5 470 B

12 UUUU 4 474 B

13 KKKK 4 478 C

14 ABCD 4 482 C

15 EFGH 4 486 C

16 JKLM 4 490 C

17 NOPR 2 492 C

18 STUY 2 494 C

19 XYZT 2 496 C

20 AEDF 2 498 C

21 ASDH 1 499 C

22 SDER 1 500 C

23 TOPLAM 500 C

A Group

500 x 80%

B Group

500 x 15%

C Group

500 x 5%

A Group

4 Types

4/23

%18

B Group

8 Types8/23

%35

C Group

11 Types

11/23

%47

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Abc inventory analysis

• Group A : About 20% of the items account for about 80% of

monetary usage.

• Group B: About 30% of the items account for about 15% of the

monetary usage.

• Group C: About 50% of the items account for about 5% of the

monetary usage

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Abc Inventory Analysis• A Items;

•Do they important share on our turnover?

•Do you have to make inventory for them?

•Safety Stock?

•Where do you stock them?

•Are they the most demanded good?

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Abc inventory analysis• B Items;



•Safety Stock?



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Abc inventory analysis

• C Items;



•Safety Stock?



34


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1. Which material is more important for us?

2. How can we reduce inventory costs?

3. Which parts?Where will they be stocked?

4. Which type of material , how much stock?

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Abc Inventory AnalysisType Control

LevelStock Input Inventory Frequency of

Check

A Tight Definetely Accurate

Not so Big Quantities

Continuously

B Not so tight

Accurate Enough Frequently

C Slack Basic Big Quantities

Scarcely

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Abc Inventory Analysis(Advantages)

• Advantages:

• It is useful in sourcing value chain.

• Rescue us dealing with trivial material.

• Disadvantages:

• It may be hard to evaulate material accurately.

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Abc Inventory Analysis (An Example)

Material Part Annual Consumption

Unit Price(1000 pb)

Annual Cost(1000 pb) Sequence

3-323 40,000 0.7 28,000 5

3-334 195,000 1.1 214,500 1

3-335 4,000 1 4,000 9

6-603 100,000 0.5 50,000 3

06-604 2,000 1.4 2,800 10

06-605 240,000 0.7 168,000 2

06-606 16,000 0.8 12,800 6

12-152 80,000 0.6 48,000 4

12-153 10,000 0.7 7,000 7

12-154 5,000 0.9 4,500 8

Total 539,600

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Abc inventory analysis(an example)

Material Part

Annual Consumption

Annual Cost(1000 pb)

% Cost % Cumulative Cost

Class

3-334 195,000 214,500 39.8 39.8 A

06-605 240,000 168,000 31.1 70.9 A

6-603 100,000 50,000 9.3 80.2 B

12-152 80,000 48,000 8.8 89 B

3-323 40,000 28,000 5.2 94.2 B

06-606 16,000 12,800 2.4 96.6 C

12-153 10,000 7,000 1.3 97.9 C

12-154 5,000 4,500 0.83 98.73 C

3-335 4,000 4,000 0.74 99.47 C

06-604 2000 2,800 0.52 100 C

20%

30%

50%

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Methods of Evaluating Inventory

• FIFO:

• LIFO:

• Average Cost:

• Standart Cost:

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Inventory Control

• Continuously Checking:

• Inventory is monitored every time.

• If inventory quantity goes down, order process starts.

• Control is realized by means of eye, two-boxes method,

computer based data.

• Necessary for the material in group of A

• Risk of out of stock is minimized.

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Inventory Control

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Inventory Control

• Periodically Checking:

• Inventory is monitored in a definite frequencies.

• Suitable for B and C class of material.

• Material is ordered in a definite frequencies and in big

quantities. It provides saving on transportation

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Inventory Control

CHAPTER V INVENTORY MANAGEMENT. Outline Inventory Definition and inventory types. Finance and other...

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