Inventory Management

Just In Time
INVENTORY MANAGEMENT

 Management of inventory is essential.

 Todetermine the proper level of investment in the

inventories.

 20%-30% of total assets are in the form of inventory.

 Optimal level of inventory.

 If it become too large.
 If it become too small.

 Theinventory denotes the goods and services being sold

and raw material consumed
 TYPES OF INVENTORIES
1. Raw materials:

 Raw materials are used in production process.

 Raw materials are regularly issued and transferred to
production department.

2. Work in progress:
 Raw material engaged in various phases of production
schedule.
 The degree of completion may be varying for different
units.
 The value of work in progress includes raw material cost,
direct wages and expense already incurred ( overheads, if
any)
 The work in progress inventory contains partially produced
3. Finished Goods:

 These are the good either purchased by the business

firm, or are being produced or processed by the firm
 These are products which are completed and are
waiting for sale.
 They are final output of the business firm
 They are referred as merchandize inventory in case of
wholesalers and retailers
OBJECTIVES
 Proper
planning, purchasing, handling, storing and
accounting should focus a part of inventory
management.

 Tokeep the stock in such a way that neither there

is overstocking nor under stocking

 Optimum level of inventory

 Continuous supply

 To keep materials under cost control

BENEFITS AND COSTS ASSOCIATED WITH RISK
IN INVENTORIES
Significance of keeping and holding Inventories

 Helps in smooth and efficient running of

business

 Provides service to the customers immediately

 Reduces products lost because there is an

additional advantages of batching

 Maintaining inventory may earn price discounts

 Costs and risks associated with inventories
 Maintaining inventories is benefited, it must also consider the
cost involved in holding inventories , which are as under.

 Carrying cost: The cost incurred in keeping or maintaining

an inventory of one unit of raw material or working progress.

 Cost of ordering: The cost of ordering includes the cost of

acquisitions of inventories.

 Stock out stocks: A stock out situation arises when the

business firm is not having units of an item in store but there
is demand for that either from the customers or the
production department.
FACTORS DETERMINING THE OPTIMUM
LEVEL OF INVEONTORY
Rate of inventory turn over

Time period in which inventory completes the cycle of production and sales.

Investment is low in inventory when the turnover rate is high and vice versa

Type of product
Durable products

Perishable and fashion products

 Structure of market

 Under imperfect market condition, the demand is uncertain and stocks must
be held by the firm if the want to take advantage of the profitable
opportunity

 Optimum level of sales will depend upon the variability of sales and cost
revenue relationship

 Level of inventory rise with increase in difference between price and

marginal cost

 Economic production

 It is also determines the inventory level

 Sufficient stock of raw material is maintained to ensure uninterrupted

production
Levels Of Inventory

 Determination of various levels of  inventory is

one of the prime responsibility of Materials
Department.

 The purpose behind setting of different stock

levels is to ensure smooth operation of the
enterprise and allocation of appropriate
amount of monetary resources to different
items in the inventory
Factors Affecting the Determination of
Stock Levels
 Rate of consumption
 Lead time
 Storage /warehousing /carrying costs
 Insurance cost
 Seasonal considerations
 Price fluctuations
 Economic Order Quantity (EOQ)
 Quality of raw material
 Availability of space
 Availability of funds
 Government and other legal and statutory
requirements.
STOCKS LEVELS

 Maximum level
 Minimum level
 Reorder level
 Danger or safety stock level
Maximum level
 This is the maximum quantity above which stock
should never be held at any time. It is fixed after
considering the following factors:

 Investment required in stores, raw materials and other

items of inventory
 Availability of storage space
 Lead time for delivery of materials
 Obsolescence rate
 Consumption rate of materials.
 Economic Order Quantity
 Storage and Insurance costs
 Price advantage due to bulk purchases.
Maximum level
 Maximum Level can be calculated as:

Maximum Level=Re-order Level ×  Re-order

Quantity –(Minimum consumption × Minimum
Re-order period)
Minimum Level
 This is the minimum level below which an
item of stoeck should never be allowed to fall.
Minimum level depends on the following
factors:
 Consumption rate of materials.
 Lead time for delivery of materials.
 Production requirements.
 Minimum order size fixed by suppliers.
 Minimum level is computed using the
following formula:

Minimum level=Re-order level – (Normal

consumption × Normal reorder-period)
Danger or safety level
 Safety or reserve stock is fixed to avoid stock out
conditions. Carefully fixed safety stock level helps in
minimizing stock-out and carrying costs. This level is
fixed usually between minimum level and zero level. On
reaching this level, the storekeeper stops issuing
materials. However sometimes for preventive measures,
this stock is fixed above minimum level.

 Formula for calculating Danger level is:

Danger/Safety level= Ordering Level–(Average rate of
consumption×Re-order period)
Or
(Maximum rate of consumption–Average rate of
consumption)×Lead Time
Ordering Level
 Ordering Level is that level on reaching which, a fresh
order is placed with the suppliers. This level depends on:
 Annual consumption of an item.
 Lead time.
 Expected usage during lead period.
 Minimum Level.
 Ordering level is calculated using the formula:
Ordering Level= Minimum Level + consumption during
lead period
or
Maximum consumption × Lead time + Safety stock
or
Maximum consumption×Maximum re-order period
ABC Analysis
 Popularly known as Always Better Control .
 This technique divides inventory into three
categories based on their annual consumption
value, namely
I. A
II. B
III. c
Why ABC analysis?
  It ensures control over the costly items in
which a large amount of capital is invested.
  It ensures considerable reduction in the
storage expenses.
  It helps in maintaining stock turnover rate at
comparatively higher level through scientific
control of inventories.
VED analysis
  The analysis classifies items on the basis of
their criticality for the industry or company.
 VED Analysis attempts to classify the items
used into three broad categories, namely
I. Vital.
II. Essential.
III. Desirable.
Why VED analysis?
 The VED analysis helps in focusing the
attention of the management on vital items
 Ensuring their availability by frequent review
and reporting.
 The downtime losses could be minimized to a
considerable extent.
FSN analysis
 Here the items are divided into three
categories according to their usage rate.
I. Fast moving items.
II. Slow moving items.
III. Non moving items or dead stock.
How does FSN analysis help?
 It helps in controlling the obsolescence
 It helps to avoid investments in non moving or
slow items.
 It helps in knowing the demand of the item.
Difficulty in Production

 Demand is uncertain and variable.

 Same equipment and people are used to make
a
 variety of products.
 Switching products takes time.
 Things may go wrong:
 Materials are defective.
 Deliveries are late
 Equipment fails, people make mistake
Solution 1: Use Inventory

Use inventory to:

 Match supply with varying demand.

 Allow production of a variety of products on
the same equipment, tools etc.
 Overcome defective materials, late deliveries,
equipment failures, mistakes, etc.
Solution 2: Use Just-In-Time

 Use just-in-time to identify and solve problems

that create inventory.
 Reduce setup costs to switch products.
 Expose yourself to problems rather than
hiding under the cover of inventory
 Eliminate defective materials, late deliveries,
equipment failures, mistakes, etc.
“Typical” Production

 Forecast demand based on classical methods

 Produce in large lots (to reduce expensive
 setups) & economics of scale
 PUSH product to customer.(even if he/she doesn't want !)
 Large lot sizes mean:
 Large work-in-process inventories.
 Large final product inventories.
 Slow response to changes and defects.
“Just-in-Time” Production

 Produce in small lots to replenish stock

actually sold.
 Sales PULL product (and parts) through plant.

 Small lot sizes mean:

 Small work-in-process inventories.
 Small final product inventories.
 Quick response to changes and defects.
What is Waste?

 Waste is ‘anything other than the minimum

amount of equipment, materials, parts, space,
and worker’s time, which are absolutely essential
to add value to the product.’
Different Kinds of Waste

 Waste from Over-production

 Waste of Motion
 Transportation waste
 Processing waste
 Defective Products
 Excess Inventory
 Information waste
 Energy waste
 Manpower waste
Elimination of Waste

 JIT attempts to eliminate all costs (waste) that DO

NOT ADD any value to a product.

 Machining, Packaging, Assembling etc add value

to a product but moving, storing, counting, sorting
etc add cost but No Value to a product. Hence try
to eliminate them.
What is Just-in-Time?

 Just-in-time (JIT): A highly coordinated processing

system in which goods move through the system, and
services are performed, just as they are needed.

 JIT - lean production

 JIT- pull (demand) system
 JIT- operates with very little “fat”
 Goals of JIT

 A manufacturing process that is so streamlined,

cost efficient, quality oriented and responsive
to customer, that it becomes a strategic
weapon.

 The goals in most cases consists of :

 Produce product only on demand.
 Produce a perfect quality product.
 Reduce the cost of manufacturing.
 Integrate and to optimize every step of manufacturing
process.
 Develop manufacturing Flexibility.
 Keep commitments made to customers and suppliers.
Pull/Push Systems

 Pull System
System for moving work where a workstation
pulls output from the preceding station as
needed. (e.g. Kanban) .

 Push System
System for moving work where output is
pushed to the next station as it is completed.
JIT Through …

 Product design.
 Process design.
 Personnel/organizational elements.
 Manufacturing planning and control.
Enabler : Product Design

 Standard parts.
 Modular design.
 Highly capable production systems.
 Concurrent engineering.
 Use of CAD/CAM.
 Use of CFD.
Enabler .. Process Design

 Small lot sizes.

 Setup time reduction.
 Manufacturing cells.
 Limited work in process.
 Quality improvement.
 Production flexibility.
 Little inventory storage.
Production Flexibility
 Reduce downtime by reducing changeover
time.
 Multi-tools, workstations.
 Use preventive maintenance to reduce
breakdowns.
 Cross-train workers to help clear bottlenecks.
 Use many small units of capacity.
 Use off-line buffers.
 Reserve capacity for important customers.
Enabler : Personnel/Organizational
Elements

 Workers as assets.

 Cross-trained workers.

 Belief in improvement by workers.

 Continuous improvement.

 Cost accounting.

 Leadership/project management.
Enabler .. Planning & Control

 Level loading.
 Pull systems.
 Visual systems (Andon , alarms etc.).
 Close vendor relationships.
 Reduced transaction processing.
 Preventive maintenance.
Kanban as a Control System

 Kanban:
Card or other device that communicates
demand for work or materials from the
preceding station.
 Kanban is the Japanese word meaning “signal”
or “visible record”.
 Paperless production control system.
 Authority to pull, or produce comes from a
downstream process.
Kanban..
 Fixed quantity bins or containers or pallets
used to signal replenishment needs.

 When first bin empty, new full bin moved in

within usage time from the second bin).

 Integration of computer systems internally &

externally with suppliers systems so Kanban
data & instructions can flow between linked
systems.
Suppliers
 JIT objective: Frequent on-time deliveries of
small lots of high quality.

 Buyer and supplier form JIT partnerships to

eliminate:
 Unnecessary activities.
 In-plant inventory.
 In-transit inventory.
 Poor suppliers
Transitioning to a JIT System
 Get top management commitment.
 Decide which parts need most effort.
 Obtain support of workers.
 Start by trying to reduce setup times.
 Gradually convert operations.
 Convert suppliers to JIT.
 Prepare for obstacle.
Barriers to Migration

 Management may not be committed.

 Workers/management may not be
cooperative.
 Suppliers may resist.
Benefits of JIT Systems

 Reduced inventory levels.

 High quality.
 Flexibility.
 Reduced lead times.
 Increased productivity.
Benefits of JIT Systems
 Increased equipment utilization .
 Reduced scrap and rework.
 Reduced space requirements.
 Good vendor relationships .
 Reduced need for indirect labor.
Benefits of JIT Systems
 Part Cost: Low scrap, Low Inventory
 Quality: Fast detection, Corrections
 Design: Fast Response to Engineering changes
 Administration Efficiency: Fewer suppliers,
minimal expediting, less paper work
 Productivity: Reduced rework/Inspection delay,
reduced parts
 Disadvantage of JIT System

 A supplier that does not deliver goods to the company exactly on

time could impact the production process.

 A natural disaster could interfere with the flow of goods.

 An investment should be made in information technology.

 A company may not be able to immediately meet the

requirements of a massive and unexpected order.

Thank You