Production

Management
Inventory Management
Presented by: Michelle Go
WHAT IS INVENTORY?

Stock of materials
Stored capacity
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J.
07458
REASONS FOR KEEPING INVENTORIES

1. To stabilise production:
2. To take advantage of price discounts
However, if the discount is sufficient to offset the extra
holding cost incurred as a result of the excess inventory,
the decision to buy the large quantity is justified
3. To meet the demand during the replenishment
period:
4. To prevent loss of orders (sales)
5. To keep pace with changing market conditions
(Kumar and Suresh,n.d.)
TRADITIONAL MODELS OF INVENTORY
MANAGEMENT ( MAS BY AGAMATA, 2012)
Lead time Safety Stock
 Reorder point = quantity
quantity +

Lead time quantity = normal lead time x normal demand/usage

Safety stock quantity = safety stock in usage + safety stock in time

Safety stock in usage= (maximum usage –normal usage ) x normal lead time
(demand)

Safety stock in time= (maximum lead time –normal lead time ) x normal usage
(delay)
 SOME DISADVANTAGES OF HOLDING INVENTORY
● Inventory ties up money, in the form of working capital, which is therefore unavailable
for
other uses, such as reducing borrowings or making investment in productive fixed
assets
(we shall expand on the idea of working capital later).
● Inventory incurs storage costs (leasing space, maintaining appropriate conditions,
etc.).
● Inventory may become obsolete as alternatives become available.
● Inventory can be damaged, or deteriorate.
● Inventory could be lost, or be expensive to retrieve, as it gets hidden amongst other
inventory.
● Inventory might be hazardous to store (for example flammable solvents, explosives,
chemicals and drugs), requiring special facilities and systems for safe handling.
● Inventory uses space that could be used to add value.
● Inventory involves administrative and insurance costs.

(Chambers, Johnston and Slack, 2010)

 12-8

DIFFERENT VIEWS OF INVENTORY

Demand Type Types of Inventory

Independent Cycle
Dependent Pipeline
Safety Stock
Anticipation
Annual $ Volume
Process stage A
Raw Material B
Work in Process C
Finished Goods
Other
Maintenance / Repair
Operating Supplies
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
TYPES OF INVENTORY AS TO PROCESS STAGE
 Raw material

 Work-in-progress
 Finished goods
 Maintenance / repair / operating supplies
NATURE OF INVENTORY AS TO DEMAND TYPE
 Independent Demand Inventory Systems

 Dependent Demand Inventory Systems

Nature of Inventory as to demand type

INDEPENDENT DEMAND INVENTORY SYSTEMS

 Demand for an item carried in inventory is
independent of the demand for any other item
in inventory
Nature of Inventory as to demand type

DEPENDENT DEMAND INVENTORY SYSTEMS

 Items whose demand depends on the demands
for other items
TRADITIONAL MODELS OF INVENTORY
MANAGEMENT ( MAS BY AGAMATA, 2012)
Different Views of Inventory
ABC ANALYSIS
 Once ABC classification has been achieved, the
policy control can be formulated as follows:
 (a) A-Item:

 (b) B-Item:

 (c) C-Item:
STEPS ABC ANALYSIS
 Classify the items of inventories, determining the
expected use in units and the price per unit for each
item.
 Determine the total value of each item by multiplying the
expected units by its units price.
 Rank the items in accordance with the total value, giving
first rank to the item with highest total value and so on.
 Compute the ratios (percentage) of nos. of units of each
item to total units of all items and the ratio of total value
of each item to total value of all items.
 Combine items on the basis of their relative value to
form 3 categories- A, B and C.
 An example:
 A small firm inventories only ten items, but
decides to setup an ABC inventory system With
20 % A items, 30 % B items, and 50 % C items.
The company records provide the information
shown below.
Part 1 2 3 4 5 6 7 8 9 10 total
No

Unit 1100 600 100 1300 100 10 100 1500 200 500 5510
Usage

Unit 20 400 40 10 600 250 20 20 20 10

Cost

AUV 22000 240000 4000 13000 60000 2500 2000 30000 4000 5000 382500
ABC ANALYSIS
Part No. AUV in Cumulative Cumulative Cumulative Class
Descending AUV %AUV % of items
order (total value of each (no. of units/ total
item/ total value of no. of units)
all item)

2 240000 240000 62.75 10 A

5 60000 300000 78.43 20 A

8 30000 330000 86.27 30 B

1 22000 352000 92.03 40 B

4 13000 365000 95.42 50 B

1 5000 370000 96.73 60 C

3 4000 374000 97.77 70 C

9 4000 378000 98.82 80 C

6 2500 380500 99.48 90 C

7 2000 382500 100 100 C

 12-18 © 2004 by Prentice Hall, Inc.,
Upper Saddle River, N.J. 07458

HOW IS INVENTORY CREATED?

 Cycle Inventory –

 Pipeline Inventory – in transit

 Safety Stock

 Anticipation Inventory Types of Inventory

Cycle
Pipeline
Safety Stock
 De-coupling Inventory Anticipation
THE MATERIAL FLOW CYCLE

© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

ASHLER INDUSTRIAL CORP.
MEANING OF INVENTORY CONTROL
DETERMINE
what to order
when to order
how much to order
how much to stock

deals with two problems:

(i) When should an order be placed? (Order
level),and
(ii) How much should be ordered? (Order quantity).

(Kumar and Suresh, n.d.)

TRADITIONAL INVENTORY MODERN INVENTORY MANAGEMENT
MANAGEMENT MODEL MODEL

ECONOMIC ORDER QUANTITY COMPUTER-INTEGRATED

MANUFACTRURING (CIM)

TWO-BIN SYSTEM MATERIALS REQUIREMENT

PLANNING

MIN-MAX MODEL MATERIALS RESOURCE PLANNING

ABC CLASSIFICATION ENTERPRISE RESOURCE PLANNING

REORDER POINT JUST-IN-TIME (JIT)

REFERENCES
Kumar Anil S. and Suresh,N. (n.d.) .Operations Management.
Retrieved from
https://www.scribd.com/document/355523390/29982776-
Operations-Management-pdf
Chambers N., Johnston S. and Slack
R.(2010).Operations Management. Retrieved
from
 https://www.gurufocus.com/term/DaysInventory/JBFCF
/Days%252BInventory/Jollibee+Foods+Corporation
 https://www.gurufocus.com/term/InventoryTurnover/JB
FCF/Inventory%252BTurnover/Jollibee+Foods+Corporati
on
 https://prezi.com/-tkkq3_d6gcv/an-analysis-of-the-
inventory-management-system-of-jollibee/
 https://www.slideshare.net/jhoy1221/jollibee-system-
proposal
 https://ycharts.com/companies/JBFCF/finished_goods
_annual_cs_ast