*

• Logistics Management
• Inventory Control Systems

• By
• Prof S. S. Sharma
• Faculty Operations Management Domain
 Supply Chain Management
Inventory Control Systems

What is an inventory?
 What is an inventory?

• The term inventory means any stock of direct or indirect

material (raw materials or finished items or both) stocked in
order to meet the expected and unexpected demand in the
future.
 A basic purpose of inventory management is to control
inventory by managing the flows of materials.
 Types of Inventory

• The most commonly types of inventory:

1. Raw materials Inventory: Parts and raw materials
obtained from suppliers that are used in the production
process.
2. Work-in-Process Inventory: This constitutes partly
finished parts, components, sub-assemblies or modules
that have been started into the production process but not
yet finished.
 Types of Inventory

3. Finished goods inventory: Finished product or end items:

These are the products that are ready for delivery to the
customer.
4. Replacement Parts Inventory: This constitutes
maintenance parts meant to replace other parts in machinery
or equipment, either the company’s own or its customers.
 Types of Inventory

5. Supplies Inventory: Parts or materials used to support the

production process, but not usually a component of the
product: these could be stationery used by the company and
lubricants and coolants used to run the machines etc.

6. Transportation Inventory: Items that are in the distribution

system but are in the process of being shipped from
suppliers or to customers.
 Organizational Inventories
Type of Inventory

Type of Organization Supplies Raw In-process Finished

Materials Inventory Goods
A. Retail systems

1. Sale of services *

2. Sale of goods * *

B. Wholesale/ Distribution * *

C. Manufacturing systems

1. Projects * * *

2. Intermittent process * * *

3. Continuous process * * * *
 Fixed and Variable Holding Costs
Fixed costs Variable costs
Capital costs of warehouse or store Cost of capital in inventory
Cost of operating the warehouse or Insurance on Inventory value
store Losses due to obsolescence, theft,
Personnel costs spoilage
Cost of renting warehouse or storage
space
 Fixed and variable Ordering costs
Fixed costs Variable costs
Staffing costs (payroll, benefits Shipping costs
etc) Cost of placing and order
Fixed costs on IT systems (phone, postage, order forms)
Office rental and equipment Running costs of IT systems
costs Receiving and inspection costs
Fixed costs of Vendor Variable costs of Vendor
Development Development.
 Sustainable Supply Chain Management
Inventory Control Management

Concerned with achieving balance between the competing

objectives:
1. Minimize cost of maintaining or carrying inventory
2. Maximize the service to customers
 Sustainable Supply Chain Management
Inventory Control Management
Inventory carrying Costs:
a. Investment cost:
A dominant factor of inventory carrying cost.
-Company investing borrowed money to buy material at a certain interest rate
in material that have not yet been delivered to the customer for payments.
b. Storage Cost
c. Cost of possible obsolescence or spoilage
 Sustainable Supply Chain Management
Inventory Control Management
How do we minimize the cost of carrying inventory?
 Maintain Zero inventories
 Customer service may suffer
 Resulting in loss of business.
Cost referred is called Stock Out Cost:
 Minimize stock out cost
 Provide a high level of customer service.
 Inventory Control Systems

• Inventory control system to be used depends on type of

demand for the item:
1. Independent Demand
2. Dependent Demand
 Inventory Control Systems
Demand Types

1. Independent Demand Items

 Demand or consumption for the item is un-related to
demand for other items.
Example: End products and spare parts
 Inventory Control Systems
Demand Types

2. Dependent Demand
 Demand for the item is directly related to demand for
something else, usually because the item is a component
of an end product, subject to independent demand.
Example: An automobile is an end product having independent
demand, while tyres and other components required to build the
automobile falls in the dependent demand category as their demand
depends on demands of automobiles to be manufactured.
 Inventory Control
Demand Types
• An automobile is an end product having independent
demand, while tyre demand depends on demands of
automobiles.
Replacement Components, like tyre represent :
 Dependent demand in new car business
 Independent demand in the replacement tyre market
 Inventory Control

Systems of Inventory Control:

 Different inventory control systems required, depending upon
which type of demand we are attempting to manage
1. Order Point System:
2. Material Requirement planning
 Inventory Control
Systems of Inventory Control

Order Point System :

 Used for control of inventories of independent demand items
 Addresses two important issues
a. How much to order?
b. When to order?
 Inventory Control
Systems of Inventory Control

Order Point System :

How much to order?
 Decided by means of using economic order quantity formulas.
When to order?
 Accomplished using reorder points.
 Systems of Inventory Control
Order Point System
Inventory Level Model Maximum Inventory
level

Replenishment Demand Rate

Inventory Level

Q
Average Inventory
Level

O
Time
 Inventory Control
Systems of Inventory Control

Order Point System :

How much to order?
Total Annual Inventory Cost equation:
TIC = Ch Q / 2 + Csu Da / Q
Where TIC = Total Annual Inventory Cost (Carrying + ordering cost) Rs./Yr
Q – Order quantity, pieces/order
Ch – Holding Cost (cost of carrying the inventory), Rs. / piece /Yr
Da – Annual Demand for the item, pieces/yr
Csu – Cost of setting up an order, Rs. / setup or Rs./ order
Da/Q = the number of orders (batches of parts produced) per year, this gives number of
set up per year.
 Inventory Control
Systems of Inventory Control

Order Point System :

How much to order?
Economic Order Quantity:
EOQ = Sq Root of 2Da Csu / Ch
Da – Annual Demand for the item
Csu – Cost of setting up an order
Ch - Holding Cost i.e cost of carrying the inventory
 Inventory Control
Systems of Inventory Control
Order Point System :
When to Reorder
 Follow the reorder point system
To be high enough level so as to minimize the probability of a
stock out.
- Implemented using computerized inventory control systems
 Systems of Inventory Control

Operation of a reorder point inventory system

Demand Rate
Inventory Level

O
Time
Reorder Point Buffer Stock
Reorder lead time
 Material & Capacity Requirement Planning
Material Requirement Planning (MRP)
 Computational procedure to convert the master
production schedule for end products in to a detailed
schedule for raw materials and components used in the
end products.
 Material & Capacity Requirement Planning
Material Requirement Planning (MRP)
Detail schedule for Material indicates :
 Quantities of each item
 When it must be ordered?
 When it must be delivered to achieve the master schedule?
 Technique used for determining quantities of dependent demand
items constituting the inventories of raw material, purchased parts,
work in process etc.
 Sales orders
Sales Service Parts
Forecasts Requirement
Product Design
Master
production
schedule
Bill of materials
file
Material Capacity
Inventory requirements planning
record file planning

Orders released & material

procured.her outputs

Structure and Data flows in a Material Requirements

Planning (MRP) system
 Material & Capacity Requirement Planning
Material Requirement Planning (MRP)
Inputs to the MRP system:
1. Master production schedule
2. Bill of material file
3. Inventory Record file
4. Capacity requirement planning
 Material Requirement Planning (MRP)
Inputs to the MRP system:
2. Bill of material (BOM) file:
• Lists component parts and sub-assemblies that make up each
product and used in computing the requirement of raw material
and components used in the end products listed in the master
schedule.
• Case: Simplified structure of an assembled product.
 Product consists of two sub-assemblies
 Each sub assembly consisting of three parts
 Number of each item in the next level is indicated in parentheses
 Material Requirement Planning (MRP)
Inputs to the MRP system:
3. Inventory Record file:
• Identifies each item by part number and gives time-
phased record of its inventory status.
• Data includes gross requirement for the item i.e. How
many units will be needed to build products in the master
schedule
 Material Requirement Planning (MRP)

How MRP System Works?

Based on inputs from the master schedule, bill of material
file and the inventory record file, MRP processor
computes how many of each component and raw material
will be needed in future time period by “exploding the
end product schedule in to successively lower levels in the
product structure.
 Material Requirement Planning (MRP)

How MRP System Works?

 For every unit of final product listed in MPS, the required
number of components of each type must be ordered or
fabricated. Its ordering or manufacturing lead time to be
taken in to account.
 For each component, the raw material must be ordered,
accounting for its ordering lead time.
 Assembly lead time to be considered in the scheduling of
sub-assemblies and final products.
 Material & Capacity Requirement Planning
Capacity requirement planning
Objective:
 To determine the labor and equipment requirement needed to
meet the master Production Schedule.
 To identify company’s long term future capacity needs
 To identify production resource limitations in order to plan a
realistic Master Production Schedule.
 Capacity Requirement Planning
Plant Capacity Adjustment Short – Term, includes:
1. Employment Level – Direct labor hours increased or decreased.
2. Shift Hours – Labor hour per shift increased or decreased thru
overtime or reduced hour working
3. Number of work shifts - per production period increased or
decreased , authorizing evening and night shifts and or using week
end shifts
 Capacity Requirement Planning
Plant Capacity Adjustment Short – Term, Contd.:
4. Inventory stockpiling – Used to maintain steady employment period
during slow demand period
5. Order Backlogs – deliveries delayed/prioritized during busy period
when resources insufficient to keep up with demand.
6. Subcontracting- Contacting work (Out sourcing) during peak period or
taking in extra work during slack period.
 Capacity Requirement Planning

Plant Capacity Adjustment Long – Term:

• Plant equipment and machinery capacity increase:
Enhancing the plant capacity requires long lead time &
investment
• Setting up New Plants
• Plant Closing
 Capacity Requirement Planning
Plant Capacity Adjustment Long – Term:
New plant equipment and machinery:
Enhancing the plant capacity requires long lead time &
investment in:
 Additional Machinery
 More productive machinery
 New Type of machines to match future changes in product
design.
 Capacity Requirement Planning
Plant Capacity Adjustment Long – Term:
2. New Plants
 Construction of new plants
 Purchase of existing plants from other companies
3. Plant Closing:
 Lack of demand or
 Product/Technological obsolescence.
 Inventory Control Management
Just -In -Time Production

JIT – Just In Time:

 Approach developed in Japan to Minimize inventory
cost.
 Work in process and other inventories are viewed as
waste, to be eliminated as it ties up space and investment
funds.
 Principles and procedures aimed at reducing inventories
directly or indirectly.
 Inventory Control Management
Just -In -Time Production

JIT procedures proved most effective in high volume

repetitive manufacturing such as automobile industry.
 A just in time production produces exactly the right
number of each components required to satisfy the next
operation in the manufacturing sequence
 Just when that component is needed – Just in Time.
 Inventory Control Management
Just -In -Time Production

• The Ideal Batch size – One Part.

 Practically more than one parts are produced at a time but
the batch size is kept small.
• In JIT philosophy producing too many units is to be
avoided as much producing too few units.
 Inventory Control Management
Just -In -Time Production

Requisites to successful implementation of JIT:

1. Stable Schedule
2. Small Batch sizes and setup reduction
3. On time delivery, Zero defects and reliable equipments
4. Pull system of production control
5. Committed work force and supplier Base
 Just -In -Time Production
Requisites to successful implementation of JIT:
• Stable Schedule:
Work must flow smoothly with minimum disturbances. A
Master Production Schedule that remains relatively
constant over time is one way of achieving smooth work
flow and minimizing disturbances and changes in
production.
 Just -In -Time Production
Requisites to successful implementation of JIT:
• Small Batch sizes and setup reduction: Use of EOQ
formula to compute batch size. Efforts to be focused on finding ways
to reduce set up time:
 Use of quick acting clamping devices instead of nuts and bolts
 Perform as much of the setup work as possible while previous jobs
still running.
 Eliminate or minimize adjustments in setups
 Use of group technology , cellular manufacturing: Similar part styles
produced on the same equipments, i.e. Machining Centers etc..
 Just -In -Time Production
Requisites to successful implementation of JIT:
• On time delivery, Zero defects & reliable equipments:
 Small lot size requires parts to be delivered before stock out occur at
downstream stations (final Assembly).
 Workers inspect their own output to make sure it is right before it
moves o the next operation.
 Low work in process requires reliable production machinery &
equipment.
 Emphasis on reliable equipment design and preventive maintenance
 Inventory Control Management in SSCM
Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:
• Pull system of production control:
Kanban (Kahn-bahn): Toyota Pull System
 Order to produce parts at a given work station comes from the
downstream station (Assembly or Final Assembly) that uses those
parts.
 As the supply of parts becomes exhausted at a given station it places
an order at the upstream station (parts manufacturing /feeding) to
replenish the supply.
 Just -In -Time Production
Requisites to successful implementation of JIT:
• Pull system of production control:
 Procedure repeated at each workstation in the plant has the effect of
pulling parts through the production system
 Push system of production operates by supplying parts to each station
in the plant.
 Driving the work from upstream station to downstream station.
 Just -In -Time Production
Requisites to successful implementation of JIT:
Pull system of production control:
Kanban (Kahn-bahn): Toyota Pull System
The Kanban System of production control is based on use of cards to
authorise production and work flow in the plant.
Types of Kanbans:
1. Production Kanban
2. Transport Kanban
 Just -In -Time Production
Requisites to successful implementation of JIT:
• Work force and Supplier Base;
a. Work Force:
 Workers to be cooperative, committed and capable of performing
multiple tasks
 The work force to inspect the quality of their work and to deal with
minor technical problems with the machinery so that major
breakdown do not occur.
 Inventory Control Management
Just -In -Time
Requisites to successful implementation of JIT:
Work force and Supplier Base;
b. Supplier & Vendor Base:
Suppliers to hold to the standards of:
 on time delivery,
 zero defects and other
 JIT requisites as per the company norms..
 Inventory Control Management
Just -In-Time
Requisites to successful implementation of JIT:
Work force and Supplier Base;
c. Vendor Policies for JIT.
 Reducing the total number of suppliers
 Selecting and developing vendors/suppliers with proven track records
for meeting quality and delivery standards.
 Establishing long term partnership with suppliers
 Selecting the suppliers that are located near the company’s
manufacturing facility/plant