INVENTORY MANAGEMENT

By Dr.T.V.Subramanian

IMPORTANCE OF MATERIALS MANAGEMENT

Profit Total Assets (TA) Sales TA ( FA+CA) = T.O of Total assets

ROI

Profit x Sales = 1- total costs Sales

Materials account for nearly 50% of total costs Inventory accounts for nearly 75% of CA
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Problems in Inventory
Excess of unwanted materials Shortage of needed materials The first one increases the cost and the second affects the customer service

Steps to overcone problems

Systematic Inventory planning Regular monitoring and control Control includes both Preventive and corrective measures. The most important preventive measure is dependable source development

CLASSIFICATION OF MATERIALS for Planning

Materials

FG

Indirect materials

Direct materials -MRP/MRP-2 -JIT

Project Materials
-Network based approach

General Spares stores -Replenishment systems -ROL system -Periodic review system -Selective control methods

INVENTORY PLANNING
Inventory planning and control
Deciding desirable levels Monitoring the actuals and taking appropriate preventive and corrective action

Inventory level decisions

Based on relevant cost considerations
Inventory carrying costs Ordering costs Stockout costs
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TWO FUNDAMENTAL DECISIONS IN VENTORY PLANNING

1.How much to order each time? 2 When to order? Behaviour of relevant costs 2400 1200

1200

600

0 0 *As lot size increases, Inventory carrying costs increase and ordering costs decrease * As Inventory level decreases, stockout costs increase.
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ROL SYSTEM(Perpetual Review system)Parameters to be decided

Decide fixed order quantity (=Q units)
Based on ABC Analysis Using EOQ formula

Decide re-order level (ROL)

= Average lead time consumption + Safety stock

How the system works?
Update stock level after each issue If stock level < or equal to ROL, place order =Q units, otherwise, do not order
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Cost Minimization Goal

Total Cost
C O S T

Holding Costs Annual Cost of Items (DC) Ordering Costs

QOPT Order Quantity (Q)

Basic Fixed-Order Quantity (EOQ) Model Formula

Annual Annual Total Annual Cost = Purchase + Ordering + Cost Cost
TC D C Q S

Annual Holding Cost

D Q TC = DC + S + H Q 2

= Total annual cost = Demand = Cost per unit = Order quantity = Cost of placing an order or setup cost R = Reorder point L = Lead time H = Annual holding and storage cost per unit of inventory

EOQ Formula
EOQ is arrived at by balancing ordering costs Vs. Inventory holding costs.
2DS = H 2(Annual Demand)(Order or Setup Cost) Annual Holding Cost
_

Q OPT =

We also need a reorder point to tell us when to place an order.

R eo rd er p o in t, R = d L
_

d = average daily demand (constant) L = Lead time (constant)

Basic Fixed-Order Quantity Model and Reorder Point Behavior

Number of units on hand

Q R

L
Time R = Reorder point Q = Economic order quantity L = Lead time

ABC -ANALYSIS
Items are classified in to three categories based on their annul consumption value
A category : small % of items(roughly 10%) accounting for very high consumption value( nearly 75%) B category : Items with moderate consumption value C category : Large % of items (say 75%) accounting for small % (say 10%) of value.

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ABC Analysis
100 Class B Class C

Percentage of dollar value

90 Class A 80
70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 80 90 100

Figure 13.2

Percentage of items
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ORDERING POLICY BASED ON ABC ANALYSIS

Ordering policy for different categories:
A category : small lot size( say 15 days- 1 month)more frequent ordering B category: Moderate lot size(2-3 months) C category : Large lot size (6- 12 months)

Stock level in ROL system:

Average stock level = Q/2 +safety stock Maximum sock = Q + safety stock Minimum stock = safety stock
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SAFETY STOCK DECISIONS

TYPE OF ANALYSIS TO BE DONE: 1. Lead time consumption analysis -Average and S.D 2. ABC analysis Steps in safety stock policy decision 1 Decide the service level policy for each category 2. Decide the safety stock in terms of number of SDs for a given service level (SS = k*SD) Category Servicelevel A 90% B 95% C 99% k value increases with service level

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PERIODIC REVIEW SYSTEM -Parameters to be decided

Review period : Monthly, quarterly etc., Maximum stock level(MSL)
MSL = Avg.. Consn.(RP+LT)+ safety stock

Order quantity at each review period (OQ)

OQ = MSL- Stock balance(on hand+on order)

Features:
Order quantity varies Ordering frequency fixed
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PERIODIC REVIEW SYSTEM -Graphical representation

300 200

OQ =100 OQ =150 S.O.H

SOH=150

OQ =50 SOH=250

MSL =300

100

APR

JUL

OCT

JAN
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ROL VS. Periodic Review System

Periodic Review system
Work load for purchasing staff is predictable. Multiple materials can be clubbed together in a single order. Safety stock is higher.

ROL system
Lower safety stock. Work load is unpredictable.

ROL is recommended for A-class items and Periodic Review for B and C class items.

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SELECTIVE CONTROL ANALYSIS

Classification ABC analysis Criteria Annual consn. Value Criticality Uses -.Order quantity decision - Safety stock decision -Delegation & control -.Safety stock for spares - Control - Disposal decision - Physical storage -Disposal -Stock verification
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VED analysis

FSN analysis XYZ analysis

Movement Stock value

Inventory Control Measures

Rational stocking policies Proper source development Standardization and variety reduction Reduction of wastage of material Better information system Better coordination among departments Realization that Inventory is MONEY.
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DISTINCTIVE FEATURES OF DIRECT MATERIALS

Dependent demand and intermittent demand Future requirements derived from MPS Actions of all departments affect the effectiveness of planning Coordination problems are more Hence integrated approach is a must

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MRP SYSTEM-FRAMEWORK
Firm orders BOM MPS Forecasts

Gross req.

Serv.spares.

Inv. data LT data

Net req.

Orders WO PO

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BOM FOR PRODUCT P1 P1 S1

(1)

Level 0 (Product)
(2)

Level 1 S2 Assembly

C1
(1)

C2

C3

C3

C4
(2)

C5
(1)
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(4) (1) (2) Level 2 (components)

MPS FOR PRODUCTS P1 AND P2

------------------------------------------Week no6 7 8 9 10 ------------------------------------------Product P1 50 100 Product P2. 70 80 25 --------------------------------------------

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MRP SYSTEM-INPUT/OUTPUT Inputs Outputs

MPS BOM/Amendments Inventory status data Material transactions Manufacturing lead time Purchase lead times Production schedules /work orders for internally produced items Purchase schedules /purchase orders for bought out items

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PROBLEM AREAS IN MRP USAGE

Frequent changes in MPS BOM not uo to-date Incorrect stock status Unrealistic lead times Material codification errors Quality problems No rational lot size and SS policies Coordination problems Software/Computer problems
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MRP-2 FRAMEWORK
BOM MPS Inventory lead time

MRP Revise MPS

Release of PO, WO no
CRP Is MPS feasible? Routing files and resources

Final orders
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MRP-2 SYSTEM INPUTS/OUTPUTS

MRP-2 Additional Input
Route sheets for all components (Set up time, operation time, sequence of operations, preferred work center ) Work center-wise capacity available

MRP-2 Additional output

Work center-wise load projections Direct labour hour requirements
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JUST-IN-TIME SYSTEM (JIT)

JIT system goal and philosophy Seven sources of waste JIT production concepts JIT purchasing principles JIT Components Pull Vs Push system Kanban system
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JUST IN TIME SYSTEMS (JIT)

Goal:To produce only the needed item in the needed quantity at required time.
To organize the supply system in such a way to meet the demands as and when they occur.

Philosophy: JIT philosophy is based on continuous improvement in and elimination of wastes in all areas of the company
Identification of sources of waste, tracing their root causes and taking long term actions for eliminating them is the basic approach in JIT system.
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TOYOTAS SEVEN SOURCES OF WASTE

Inventory Defective output Re-processing Waiting time Down time of equipments Transportation (Movement) Unnecessary human motions
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Inventory hides problems

Inventory Level
Rework Scrap

Set-up costs

Unbalanced line Absenteeism

Late deliveries

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COMPONENTS OF JIT-Improve Flow through JIT production system

Reduce set up times (SMDE) Small batch production Eliminate equipment problems (TPM) Adopt flexible layout (GT) Adopt PULL system of scheduling Use Visual signals for control.(KANBAN) Improve productivity
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COMPONENTS OF JIT -JIT purchasing principles

Assure long term orders to suppliers Prefer a single source Consider supplier as ones own department sitting outside.. Provide technical/ training support Develop healthy buyer-seller relationships Proximity is an advantage
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JIT COMPONENTS- Improve Quality through TQM

TQM Principles(Quality Mindset) Quality through Robust design principles Quality through process control(SPC) Quality circles

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PUSH VS PULL SYSTEM

Push system
Emphasizes non-stop adherence to a predetermined production schedule derived from anticipated demand for end products. Each stage in the upstream process prepares a schedule through backward scheduling and strictly produces according to them. After production according to the schedule is completed, they are pushed through the system , even if the next process does not immediately needs them.

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PULL VS PUSH SYSTEM

Pull system
Emphasizes simplicity, flexibility and close co ordination among workers. Though, final assembly schedules are prepared still it is recognized that they may vary. The upstream activities are geared to match the final assembly needs for a limited range of products. The production in the upstream departments is governed by what the down stream sections need. The sub-assemblies and parts are thus pulled through the system by the actual end item demand.
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Market Pull Based System

Order Order Order

Vendor
Parts Supply

Plant
Veh Prodn

Stockyard
Billing

Dealer
Retail

Supply

Supply

Supply

Actual Retail Sale or Firm Customer Order creates Pull

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Customer

KANBAN SYSTEM
Kanban in Japanese means a reminder card Kanban card acts as a visual signal to trigger off production in upstream departments in a Pull system. In this system, each section is expected to have a small inventory of input, divided into small lots of 4 or 5 pieces. With each lot a card will be attached.

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KANBAN SYSTEM (Continued)

When the down stream section draws a lot of input from its stock for production to feed next section, the attached card is removed and placed in an empty container. The upstream section regularly monitors the kanban container and if cards are found then it initiates production equal to the quantity indicated by the number of cards If no cards are found in the container the upstream section will not produce anything .
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