NIT Hamirpur

Department of Mechanical Engineering

Inventory Management
ME-474(b) Production Planning and Control Dr. Divya Pandey

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Plan
Introduction to Inventory Management Types of Inventories Objectives of Inventory Control ABC Classification Inventory related Costs Inventory Models Economic Order Quantity

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Inventory Management : Introduction What is an Inventory System

Inventory is defined as the stock of any item or resource used in an organization. The term Inventory denotes any ideal resource that could be put to some future use. An Inventory System is made up of a set of policies and controls designed to monitor the levels of inventory and designed to answer the following questions:
What levels should be maintained? When stock should be replenished? and How large orders should be? i.e. what is the optimal size of the order?
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Inventory Management : Introduction

Marketing : Level of service Operations : stocks in sufficient quantities

Inventory Management Information Systems : Inventory control systems

Finance : Cash flow and Cost of money

Judicial Aspects : Ownership and responsibility

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Types of Inventories
Raw materials Components (purchased parts) Partially completed goods: work in progress (WIP) Finished Goods M.R.O. (Maintenance, Repairs and Operating supplies) Goods-in-transit to warehouses or customers

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Functions of Inventory
To maintain sufficient stock of raw material in the period of short supply and anticipate price changes. To ensure a continuous supply of material to production department facilitating uninterrupted production. To minimize the carrying cost and time. To maintain sufficient stock of finished goods for smooth sales operations. To ensure that materials are available for use in production and production services as and when required. To ensure that finished goods are available for delivery to customers to fulfil orders, smooth sales operation and efficient customer service.
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Functions of Inventory
To minimize investment in inventories and minimize the carrying cost and time. To protect the inventory against obsolescence and unauthorized use. deterioration,

To maintain sufficient stock of raw material in period of short supply and anticipate price changes. To control investment in inventories and keep it at an optimum level.

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Independent versus Dependent Demand

Independent demand
A Chair

Independent demand is uncertain. Dependent demand is certain.

D (2) Front legs E (4) Leg supports

B (1) C (1) Back Seat subassembly subassembly

Dependent demand

F (2) Back legs

G (4) Back slats

H (1) Seat frame

I (1) Seat cushion

J (4) Seat-frame boards

Independent demand finished goods, items that are ready to be sold E.g. a computer Dependent demand components of finished products
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E.g. parts that make up the computer

Objective of Inventory Control

To achieve satisfactory levels of customer service while keeping inventory costs within reasonable boundsThe primary objectives of inventory management are: To minimize the possibility of disruption in the production schedule of a firm for want of raw material, stock and spares. To keep down capital investment in inventories.

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ABC Analysis
Percentage of dollar usage value
100 90 Class A 80 70 60 50 40 30 20 10 0 10
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Class B

Class C

20

30

40

50

60

70

80

90 100
10

Percentage of items

ABC Classification : Guidelines

A Percentage of total number of items Percentage of total annual value ($) Inventory control Purchasing process B C

10 to 15 % 25 to 30 % 30 to 50 % 70 to 80 % 15 to 20 %
Rigourous Precise with constant revisions Normal Normal

5 to 10 %
Simple Periodical

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ABC Classification : Example

Part 1 2 3 4 5 6 7 8 9 10

Unit Cost Annual Usage 2700 15750 1350 3600 1350 900 450 14400 22950 900 90 40 130 60 100 180 170 50 60 120

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ABC Classification : Example

Part 9 8 2 1 4 3 6 5 10 7 Unit Cost Annual Usage 22950 14400 15750 2700 3600 1350 900 1350 900 450 Total 60 50 40 90 60 130 180 100 120 170 1000 Value 1377000 720000 630000 243000 216000 175500 162000 135000 108000 76500 3843000 % of Tot Value % of Tot Qty 35.8 18.7 16.4 6.3 5.6 4.6 4.2 3.5 2.8 2.0 6 5 4 9 6 13 18 10 12 17 Class A

A class items Use of Continuous review B class items Periodic review C class items simple rules of thumb

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ABC Classification : Advantages

It ensures a closer and a more strict control over such items, which are having a sizable investment in there. It releases working capital, which would otherwise have been locked up for a more profitable channel of investment. It reduces inventory-carrying cost. It enables the relaxation of control for the C items and thus makes it possible for a sufficient buffer stock to be created. It enables the maintenance of high inventory turn over rate.

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Economic Order Quantity

Definition of EOQ How to use the EOQ model in a business organization How the EOQ model works Example

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Economic Order Quantity

EOQ, or Economic Order Quantity, is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.

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How to use EOQ in your organization How much inventory should we order each month?

The EOQ tool can be used to model the amount of inventory that we should order each month.
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Inventory Related Costs

Acquisition Cost Holding (carrying) Cost Ordering (set-up) Cost Shortage Cost

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Acquisition Cost

Price paid to acquire the product. Can be subject quantity discounts

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Holding (Carrying) Cost

Total holding cost is composed of a multitude of costs which vary depending on the type of product stocked.

Category Value

% of Inventory
6% 3% 3% 11% 3% 26%
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Housing (building) cost Material handling costs Labor cost Inventory investment costs Pilferage, scrap, & obsolescence Total holding cost
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The Principles Behind EOQ: The Holding Costs

Interest

Obsolescence

Storage

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Ordering Cost
Order processing Supplies / Forms Clerical support Receiving / Inspection Follow up / Expediting For manufacturing
Clean-up cost Re-tooling cost Adjustment cost

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Shortage Cost
Reputation of the company; Loss of orders / profits Increase in the costs: Overtime/ sub-contracting Additional delivery Purchasing price premium Idle machinery and human resources Etc

IMPACT ON THE CUSTOMER... DIFFICULT TO DETERMINE

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Inventory Models

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Inventory Models

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Inventory Models

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Inventory Models

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ANALYIS
Broad Approach Identify the cost component in each cycle (of length t) Carrying cost, shortage cost, setup or order cost Express cost in terms of decision variables (order quantity and backorder level) Develop annul cost multiplying (1) by number of cycles/year Optimize to find out optimal value of q and b.
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Inventory Models

Inventory versus time in the EOQ model

Inventory Level
Order Quantity (large Q)

Time

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Basic Economic Order Quantity (EOQ): Principles

Assumptions of the basic EOQ model Demand fixed at constant rate of d units/unit time Replenishments made when inventory reaches zero level so that no shortage occur Fixed lot size q. Infinite replenishment rate Lead time is known The unit carrying cost is constant Rs/unit/unit time The replenishment cost is constant Rs/Order

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Total (Annual) Ordering Cost

Annual Ordering Cost Number of Orders = Number of Orders Cost per X Order

Annual Demand Lot Size

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Annual Holding (Carrying) Cost

Holding cost = Average Inventory x Annual Holding Cost per Unit Average CYCLE inventory = Lot Size 2 Holding cost per unit = % Holding Cost X Unit Cost

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Basic Economic Order Quantity : Model

Total Annual Cost

Q D TC = H + S + D C 2 Q
Annual Holding Cost Order of set-up cost Total acquisition cost

TC : Total annual cost D : Total annual demand Q : Quantity ordered H : Unit holding cost S : Order or set-up cost C: Unit cost (price)
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Basic Economic Order Quantity : Principles TOTAL COST

Costs $ TOTAL ANNUAL HOLDING COSTS TOTAL ANNUAL ORDER COSTS

Q H 2

D S Q

EOQ
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QUANTITY (UNITS)
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E.O.Q. = Minimum Total Cost

The total cost curve reaches its minimum where the carrying and ordering costs are equal.

Q D TC = H + S + D C 2 Q
Taking the derivative of both sides of the equation and setting equal to zero to find the minimum value of the function, one obtains:
dTC (Q ) d Q D H + S + DC = 0 = dQ dQ 2 Q

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E.O.Q. - Example
A toy manufacturer uses approximately 32 000 silicone pieces per year. The pieces are used at a constant rate over 240 working days each year. Annual holding cost is 0,6$/u and ordering cost is 24$. Determine the economic order quantity as well as the total annual cost of this item.

= 1600 pieces
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E.O.Q. Example
Omega is a company which manufactures megaphones. The company buys its speakers at a cost of $ 20 each. With each order, Omega must spend $ 50 (preparation of the purchase order, delivery, receiving, etc...). The annual demand for speakers is 10 000 units and the annual carrying cost is 20 % of the unit cost. Which quantity would minimize the annual total cost?

2 x 10 000 x $50 = 500 20% x $20

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Material Requirements Planning (MRP) What MRP does?

Master Schedule for END ITEMS

MRP
Detailed scheduled for RAWMATERIALS & COMPONENTS used in the end products

Dependent demand Lumpy

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MRP

Independent Vs Dependent demand

Independent Demand: Demand unrelated to demand of other products (end products, spare parts) Usually forecast Conventional inventory control (EOQ, Wagner/Whitin ) applicable.

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MRP

Dependent Demand
Demand directly related to demand of some other product (components, raw materials, subassemblies) Requirements derived from delivery schedule of end items. MRP is appropriate tool for planning & control of manufacturing inventories
Raw material WIP Component parts subassemblies
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MRP
Lead Time
Ordering Lead time (for Purchase pars)

Initiation of purchase requisition

Receipt of item from Vendor (offshelf/fabricate)

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MRP
Manufacturing Lead time In MRP, lead times are used to determine starting dates for assembling final products and subassemblies, for producing component parts, and for ordering raw materials.

Place Order

Process part through sequence of Item Delivered machines as given on route sheet.

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Inputs to MRP
The master production schedule and other order data. The bill of materials files. (the product structure) The inventory record file.

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MRP
COMMON USE ITTEMS MRP collects the common use items from different products to effect economics in ordering the raw materials and manufacturing the components/subassemblies.

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Structure of the MRP System

Customer orders Engg. changes Sales forecasting Service parts requirement

BOM
Lead Times (Item Master File) Inventory Data

Master Production Schedule

MRP by Period Report MRP by date report Planned order report Purchase advice Exception report

Inventory Transaction

MRP planning programs (computer and software)

Exception report

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Master Production Schedule

Typical information in MPS (A) What end product are to be produced? (B) How many products are to be produced? (C) When the product are to be ready for shipment? Demand Firm customer orders Forecasted demand Demand from individual component parts (for repair and service) Often excluded from MPS since it does not include end product demand.

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Bill of Materials (BOM) File

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Inventory Record Files Accurate current data on inventory status Generally computerized (item master files) Lead times must be established in inventory record files Inventory transactions (issues, arrivals, order placement, realization) must be kept current.

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Inputs for MRP EXAMPLE

Master production schedule

Week p1 p2
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7 70

8 50 80

9 25

10 100

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INPUT for MRP Example

Initial inventory status for M4
Week M2 1 2 3 4 5

Gross Requirements Scheduled Receipts On Hand 50 Net Requirements Planned Receipts Planned order releases

40 90

Lead Times (in weeks)

Assembly P1=1 P2=1 S2=1 S3=1
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Manufacturing C4=2

ordering M4=3

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Basic MRP Logic Input MPS, BOM, Inventory status, lead times Do parts Explosion Offset requirements by lead times Netting of requirements from gross by considering availabilities Lot sizing of net requirements procurement or production.
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for

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MRP Example

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MRP. Example

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MRP Example

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MRP OUTPUT Reports Primary Outputs:

Order releases notice, to place orders that have been planned by the MRP system Reports showing planned ordered released in future periods Rescheduling notices, including changes in due dates for open orders. Cancellation notices, including cancellation of open orders because of change in the master schedule Reports on inventory status.
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MRP OUTPUT REPORTS Secondary Reports

Performance reports of various types:- costs, item usage, actual vs planned lead times, and other measures of performance Exceptions reports showing- deviation from schedule, overdue orders, scrap and so on. Inventory forecasts indicating projected inventory levels (both aggregate inventory as well as item inventory) in future periods.

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Benefits of MRP Reduction in inventory (30-50% in WIP) Improved customer service (late orders reduced by 90%) Quicker response to changes in demand and master schedule. Greater productivity Reduced setup and product changeover cost Better machine utilization Increased sales and reduction in sales price.
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