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Inventory management

• Inventory management refers to the process


of ordering, storing and using a
company's inventory: raw materials,
components and finished products in effective
manner.
• when to restock certain items?
• what amounts to purchase or produce?
• what price to pay?
• large inventory carries the risk of spoilage,
theft, damage, or shifts in demand
INVENTORY MANAGEMENT

EOQ ABC VED CLASSIFICATION


Analysis
• The EOQ is the optimum size of the order for a
particular item of inventory calculated at a
point where the total inventory costs are at a
minimum
• minimizes total annual holding and ordering
costs of inventory.
• Stock-out costs are difficult to incorporate in
this model, since they are based on qualitative
and subjective judgment
Ordering costs
• The ordering costs are the costs of placing a
separate order multiplied by the number of
separate orders placed in the period
Carrying costs
• The carrying costs can be calculated based on
the assumption that annual cost of carrying a
particular stock item on average , half the
stock is on hand all the time in addition to the
safety or buffer stock
Assumptions

1. That there is a known, constant stockholding


cost.
2. That there is a known, constant ordering cost.
3. Those rates of demand are known and constant.
4. That there is a known, constant price per unit,
• i.e.,there are no price discounts.
5 That replenishment is made instantaneously,
• i.e.,the whole batch delivered at once
Safety stock
• Safety stock is the emergency stock you need
to endure unexpected occurrences - like
seasonal acts
EOQ WITH DISCOUNTS
• A particularly unrealistic assumption with the
basic EOQ calculation is that the price per
item remains constant. Usually some form of
discount can be obtained by ordering
increasing quantities. Such price discounts can
be incorporated into the EOQ formula
Beneficial effects -
Savings will come from:
(a)Lower price per item, and
(b)The large order quantity means that fewer orders need to
be placed and hence, ordering costs are reduced.

Adverse effects
- Increased costs arise from the extra stockholding costs
caused by the average stock level being higher due to the
larger order quantity.
ABC Analysis

• In this technique, the items of inventory are


classified according to value of usage. The
higher value items have lower safety stocks,
because the cost of production is very high in
respect of higher value items. The lower value
items carry higher safety stocks. ABC analysis
divides the total inventory list into three
classes A, B, and C using the rupee volume, as
follows:
The control of inventory through ABC
analysis is exercised as follows:

• 'A' class items merit a tightly controlled inventory system


with constant attention by the purchase and stores management. A
larger effort per item on only a few items will cost only moderately,
but the effort can result in large savings.
• 'B' class items merit a formalized inventory system and
periodic attention by the purchase and stores management.

• For 'C class items still relaxed inventory procedures are used.
VED analysis
• VED analysis can be very useful to capital
intensive process industries. As it analyses
items based on their critically, it can be
used for those special raw materials which are
difficult to procure
• V’
• stands for vital items and their stock analysis
requires more attention, because out-of-stock
situation will result in stoppage of production.
Thus, 'V items must be stored adequately to
ensure smooth operation of the plant.
• E'
• means essential items. Such items are
considered essential for efficient running but
without these items the system would not fail.
Care must be taken to see that they are always
in stock
• D’
• stands for desirable items which do not affect
the production immediately but availability of
such items will lead to more efficiency and
less fatigue
EPQ
• Economic production quantity (EPQ) is the
quantity of a product that should be
manufactured in a single batch so as to
minimize the total cost that includes setup
costs for the machines and inventory holding
costs.
MCQ
• In the basic EOQ model, if D = 6,000 per year,
S = $100, H = $5 per unit per month, the
Economic Order Quantity is approximately
• a. 527
• b. 100
• c. 490
• d. 142
• In the basic EOQ model, if D = 6,000 per year,
S = $100, H = $5 per unit per month, the
Economic Order Quantity is approximately
• a. 527
• b. 100
• c. 490
• d. 142
• Which of the following statements about the
basic EOQ model is false?
• a. If the setup cost were to decrease, the EOQ
would fall.
• b. If annual demand were to increase, the EOQ
would increase.
• c. If the ordering cost were to increase, the EOQ
would rise.
• d. If annual demand were to double, the EOQ
would also double.
• Which of the following statements about the
basic EOQ model is false?
• a. If the setup cost were to decrease, the EOQ
would fall.
• b. If annual demand were to increase, the EOQ
would increase.
• c. If the ordering cost were to increase, the EOQ
would rise.
• d. If annual demand were to double, the EOQ
would also double.