Inventory Control: Part 1- Fundamentals

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Inventory ControlPart 1- Fundamentals
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Inventories

• Materials and Supplies Needed to Operate Business
• Substantial Part of Total Assets 20 to
  60 In Manufacturing Company
• It is Desirable to Reduce Inventory (Lean) but We
  Cannot Eliminate It.

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Types of Inventories

• By Location
• - Raw Materials
• - Work-in-Process (WIP)
• - Finished Goods (Including Distribution)
• - Supplies (Maintenance, Repair, Operational)
• By Demand
• - Independent Demand
• - Dependent Demand

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Types of Inventories

• By Function
• - Lot-Size (Cycle or Replenishment)
• - Instantaneous (Purchase)
• - Non-Instantaneous (Produce)
• - Safety (Fluctuation or Buffer)
• - Anticipation (Seasonal)
• - Transportation (Pipeline)
• - Hedge (Beyond Scope of Class)

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Lot Size StocksInstantaneous Receipts
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Lot-Size StocksNon-Instantaneous Receipts
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Safety Stocks

• Used for Emergencies
• Finished Goods Unexpected Demand (Level Related
  to Customer Service)
• Raw Materials Orders Not Received
• Work-in-Process (WIP) Worker Unavailable or
  Machine Breakdown - Decoupling Inventory
• Also Known as Buffer or Fluctuation Inventory

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Inventory Costs

• Item Costs
• Carrying or Holding Costs (Capital, Storage,
  Risk)
• Ordering Costs (Purchase, Production Control, Set
  Up, Lost Capacity)
• Stockout Costs
• Capacity Associated Costs (Overtime, Hiring,
  Training, Extra Shifts, Layoff)

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Inventory Ratios

• Inventory Turns Annual Cost of Goods Sold /
• Average Inventory in Dollars
• E.g. 1,000,000 / 500,000 2
• Days of Supply On Hand / Daily Usage
• E.g. 9000 / 200 45 Days

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Evaluating Inventory

• First In First Out (FIFO)
• Last In First Out (LIFO)
• Average Cost
• Standard Cost

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ABC Inventory Classification

• Amount of Control Over an Item (Stock-Keeping
  Unit or SKU) Depends on Value
• Paretos Law A Small Percentage of Items Account
  for Large Percentage of Value
• Typically
• - A Items 20 of Items Account for 80 Value
• - B Items 30 of Items Account for 15 Value
• - C Items 50 of Items Account for 5 Value

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Steps in ABC Analysis

• 1 Determine Annual Usage for Each Item
• 2 Multiple Annual Usage of Each Item by Cost
• 3 Sort Items According to Annual Dollar Usage
• 4 Cumulate Annual Dollar Usage and Cumulate
  Percentage of Items
• 5 Examine Annual Usage Distribution and
  Classify Items A, B, or C Based on Percentage of
  Annual Usage

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ABC Example
Part Number Unit Usage Unit Cost Annual Usage
1 1100 2 2200
2 600 40 24000
3 100 4 400
4 1300 1 1300
5 100 60 6000
6 10 25 250
7 100 2 200
8 1500 2 3000
9 200 2 400
10 500 1 500
Totals 5510   38250
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ABC Answer By Item Type
Part Number Unit Usage Unit Cost Annual Usage Cumulative Usage Cumulative Cumulate Items Class
2 600 40 24000 24000 62.75 10 A
5 100 60 6000 30000 78.43 20 A
8 1500 2 3000 33000 86.27 30 B
1 1100 2 2200 35200 92.03 40 B
4 1300 1 1300 36500 95.42 50 B
10 500 1 500 37000 96.73 60 C
3 100 4 400 37400 97.78 70 C
9 200 2 400 37800 98.82 80 C
6 10 25 250 38050 99.48 90 C
7 100 2 200 38250 100.00 100 C
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ABC Answer By Item Usage
Part Number Unit Usage Unit Cost Annual Usage Cumulative Usage Cumulative Cumulate Items Class
2 600 40 24000 24000 62.75 10.89 A
5 100 60 6000 30000 78.43 12.70 A
8 1500 2 3000 33000 86.27 39.93 B
1 1100 2 2200 35200 92.03 59.89 B
4 1300 1 1300 36500 95.42 83.48 B
10 500 1 500 37000 96.73 92.56 C
3 100 4 400 37400 97.78 94.37 C
9 200 2 400 37800 98.82 98.00 C
6 10 25 250 38050 99.48 98.19 C
7 100 2 200 38250 100.00 100.00 C
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Control Using ABC

• A Items Need High Degree of Control and Frequent
  Review.
• B Items Need Normal Control.
• C Items Need Simple Control MRP May Not be
  Needed Use Safety Stocks or Two-Bin System.

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