Inventory Planning, Control

1
Inventory Planning, Control Valuation
2
What is an Inventory ?

• Inventory
• the stock of any item or resource used in an
  organization raw materials, finished products,
  component parts, supplies and work-in-process.
• An inventory system
• policies and controls for monitoring levels of
  inventory
• Information system that records transactions and
  enables analysis of stock requirements and
  levels/quantities, costs etc

3
Why hold inventory / stock?

• Provide flexibility
• minimum delay in supplying customers
• a good range
• Protect against uncertainties
• Enable economic purchasing
• Anticipate changes in demand or supply
• Buffers to feed processes and enable efficient
  scheduling
• Strategic stock holdings

4
Inventory Types

• Raw-materials.
• Work-in-progress or in-transit
• Finished-goods
• In the warehouse, awaiting shipment, in delivery
  vehicles, in tanks, on shelves, in the stores
• Strategic inventory
• Scrap re-work

5
The Nature of Inventory Planning

• Inventory do not give revenues without
  operations.
• Organizations resources are limited there for
  investments in inventory should be optimized (
  Economic ).
• Why to manage inventory ?
• To ensure a continues operation activities
  (non-stop).

6
Costs of Inventory

• Ordering costs
• Offering prices, purchase order office,
  shipping and/or set up
• Holding / Carrying Costs
• tied up capital (item value), staff equipment,
  obsolescence, perish ability, shrinkage,
  insurance security, (rent/lease), audit, taxes.
• Cost of being out of stock, cancelling an order
• Scrap and re-working
• Shortage Costs .

7
Inventory Costs

• Item cost
• Carrying costs
• Capital costs
• Storage costs
• Risk costs
• Obsolescence
• Damage
• Pilferage
• Deterioration

8
Inventory Costs (cont)

• Ordering costs
• Production control costs
• Setup and teardown costs
• Lost capacity costs
• Purchase order costs
• Stockout costs
• Capacity-associated costs

9
Material-Flows Process
Production Processes
Work in process
To Customer
Stores warehouse
Finished goods
WIP
From Suppliers
WIP
Inventory in transit
10
Stock Input (Flow in), Storage (Holding) and
Flow out (Usage)
Inventory Level
Supply Rate
Stock Level
Rate of Demand (Usage)
11
Economic Order Quantity (EOQ)

• In trying to minimize inventory costs a company
  must find the order quantity which spreads the
  ordering or set-up costs over as many units as
  possible without incurring excess holding costs.
• The EOQ model attempts to determine the amount of
  units to purchase which will minimize the total
  costs associated with ordering and holding
  inventory

12
Economic Order Quantity (EOQ)

• How to calculate EOQ ?
• Tabular Approach /Trial and Error. (waste time)
• Graphic Approach /By using charts.
• Formula Approach /Mathematically .

13
EOQ Aim Cost Minimization
Holding Ordering costs total cost curve.
Find Qeoq inventory order point to minimize
total costs.
Cost
14
Economic Order Quantity (EOQ)

• EOQ Assumptions
• Demand is known and constant.
• Lead time is known and constant.
• Order and holding costs are averaged across all
  transactions.
• Single product line
• No quantity discounts - stable unit cost
• No stock-outs allowed
• Items ordered/produced in a lot or batch
• Batch received all at once
• Holding cost is linear based on average stock
  level
• Fixed order set up cost

15
Calculate EOQ
2DS
2(Annual/Period Demand) (Order cost)
Qeoq






H
Holding Cost
(total unit cost storage)

• Exercise EOQ and reorder point?
• Annual demand 12,000 units
• Days/year in average daily demand 365
• Cost to place an order 500
• Holding cost /unit p.a. 12 ( 20 Cost per
  unit)
• Lead time 7 days
• Cost per unit 60

16
EOQ Solution
2DS
2(12,000 )(500)
Q







1000 units
eoq
H
0.2 60
Number of orders Annual Demand / EOQ
12000 / 1000 12 orders
per year. Orders Cost 12 500 6000 Total
Holding Cost 0.2601000
2
6000. There for Total Inventory Cost 6000
6000 12000

17
EOQ Table minimum TVc
Avg.stock x item x hc
Oc Hc
18
Cost Estimation Model Sensitivity

• In practical way its difficult to estimate the
  variables in the EOQ model such as the holding
  cost.
• Example

Not that much in sensitivity



Daily demand Demand during period (240 days) EOQ Total cost of inventory
40 Min 9600 units 894.4 units 10,733
60 Max 1440 units 1095.4 units 10,800

19
Extensions of the EOQ model
1. EOQ with Order Size Restrictions . 2. EOQ
with Storage limitations . 3. EOQ with quantity
discount .
20
Extensions of the EOQ model
1. EOQ with Order Size Restrictions .
Example AICO ltd Demand Expected next year
5000 units. Supplier packages only contains 400
unit for each. EOQ 1000 unit when ordering cost
10 holding cost per unit 0.1
We have two options 800 unit or 1200 unit .
Option Ordering Cost Holding Cost Total Cost
800 unit 62.5 40 102.50
1200 unit 41.7 60 101.70
21
Extensions of the EOQ model
2. EOQ with Storage limitations .
Example AICO ltd Demand Expected next year
5000 units. Supplier packages only contains 400
unit for each. EOQ 1000 unit when ordering cost
10 holding cost per unit 0.1
22
Extensions of the EOQ model
3. EOQ with quantity discount .
23
The Reorder Point (ROP)
when to place an order in units?
Reorder point ROP D L D Avg daily demand
(constant) L Lead time (constant)
Annual Demand 10,000 units Days per year
considered in average daily demand 365 Cost to
place an order 10 Holding cost per unit per
year 10 of cost per unit Lead time 10
days Cost per unit 15
24
EOQ and ROP example
2DS
2(10,000)(10)
365.148 (366 units)

Q


H
1.50
eoq
If lead time 10 days, Reorder point 27.39
10 days
273.97 274 units Place
order for 366 units. When 274 left, place next
order for 366.
25
Order Quantities Reorder Points
Average stock q/2
No. of units on hand
q
q
safety or buffer level
R
L
L
Time
R Reorder point L Lead time
26
Order Quantities Reorder Points
27
Safety Stock and Re-order Levels

• Reserve - buffer - cushion against uncertain
  demand (usage) lead time.
• A basis for a "2-bin" system
• Application to JIT?
• EOQ assumes certain demand lead time. If
  uncertain, then
• ROL
• Average usage in lead time safety stock

(Avg. lead time x Avg. daily usage)
28
How Much Safety Stock? Cost vs. safety level

• Depends on
• Uncertainty demand lead time
• cost of
• being out of stock
• carrying inventory
• increasingly better service
• Service level policy
• confidence of not hitting a stock-out situation

29
Order Point with Safety Stock
30
End of Part One