Factors having influence on inventories

•Lead time
•Relevant costs(ordering cost, icc,under stocking cost,overstocking
Cost)
•Service level
•Obsolete inventory
•Scrap

•Lead time: is the time that elapses between recognition and fulfillment
Forecast requirment-requisition exact qty-select source of supply-
negotiate rates-order-follow up with supplier-receive material-inspect as
per specs-store move to atpp line-preserve.
Lead time therefore can be further classified into-internal lead
time,external lead time,transportation lead time,inspection lead time
 Relevant costs
Ordering cost:
Stationery,sap feeding,despatch of order
Salaries and wages of purchase,inspection and stores
dept
Follow up cost:travel,telephone,fax
Receiving and inspection cost
Depreciation on space utilised by stores
Cost of source development
Cost of entertaining suppliers
Inventory carrying cost:
• material and components ordered are to be stored and this requires
Space and infrastructure which cost money-v r storing company’s money
This attracts huge interest rate @18% or more.
•Depreciation charges on space,shelf and other equipment used for storage
•Cost due to deterioration of materials eg stickers,pck mat,condensors.
•Cost due to spoilage evaporation shrinkage and shelf life completion.
•Salaries and statutory payments to store personnel.
 •Obsolescence cost
Could be due to
Discontinuation of product line
Change in design
Change in machinery
Existence of components when original equipment/product is scrapped
• insurance cost
Under stocking cost(ku): are due to demand for a fan and not being
able to provide components for production-resulting in loss of production
Loss of sale and loss of goodwill of the customers. For the sake of one
Component the production decleration is held up,wip is generated,and
At times due to above all components do not get packed. There are also
Intangible losses such as loss of morale and laziness of operator(human
Tendency).computation of ku is problematic hence we in CG calculate it
As loss of production.-further loss of contribution that could be generated.
 Overstocking cost (ko)
If we carry any inventory in stores ,shop floor,vendors
Or bsr we are blocking funds . Funds carry interest.
Had it not been for the blocking of funds the division
Would have used funds for any other profitable venture or not borrowed
At all. Hence overstocking cost arises due to the opportunity lost due to
Investment in inventory for a longer period than necessary.
For calculations plz use the following:in cases where components are
Ultimately used this can be equated to icc.in cases where item/component
Cannot be used ,the cost= icc-cost of ordering.
Service level: is the relation between ku and ko. In other words it the
Relation between under stocking cost and over stocking cost of keeping
An inventory and being used or keeping no inventory and the demand
Arising due to dynamic market situation and leading to stock out.
ku
service level= ---------------------
ku+ko
Obsolete inventory
 technology change
Changes in atpp-product line
Change is machine
Change in design and layout
Overbuying
Cannibalisation
Wrong storage/preservation method
Wrong handling and storage.
•COMPONENT OR ITEM TO BE MEASURED MUST BE
MEASURABLE IN AN ACCEPTED YARDSTICK.
•MEASURED VALUE MUST BE COMPARED TO A FIXED OR
DESIRED RESULT.
•COMPARISION OF PLAN AND RESULT WILL BE THE “ERROR”
WHICH HAS TO BE CORRECTED.
•THE CORRECTION IS APPLIED TO IMPROVE PERFORMANCE
•NEW MEASURE IS MADE AND CYCLE STARTED AGAIN.

ALL ITEMS MUST BE IDENTIFIED .UNITS OF ITEMS MUST BE

DECIDED.STOCK ITEMS MUST BE IDENTIFIED.CONSEQUENCES
STOCK OUT MUST BE ASSESSED.