Inventory Is stores of Goods and stocks, incldubg raw materials, work in process, finisjed process or supplies. Inventory Control Is an activity that maintains stock keeping items at desired levels. It focuses on materials control Why inventories are controlled It is impossible and economically impractical for each stock item to arrive exactly where it is needed, and exactly when it is needed. Hence the control. Reasons for IC Marginal efficiency of capital( MEC ) A concept from finance espousing that a firm should invest in opportunities whose return is greater than the cost of capital.
Return on investment and turnover Mark up – The ratio of profits to sales. Turn over – The ration of sales to assets. Return on Assets = Mark up * Turn over Profits Sales ------= ------- * ------Assets Sales Assets Buffer Stock Inventories to protect against the effects of unusual product demand uncertain lead time
Lead Time The time passing between ordering and receiving goods. Decoupling Using inventories to break apart operations so that the supply of one operation is independent of the supply of the other. Production smoothing Products built up during slack demand periods and used in peak demand periods Material handling MH – Cost reduced by accumulating parts between operations. Bulk purchases Quantity discounts - Quantity discounts
Inventory systems Concepts • Multi Stage inventories • Parts start at more than one point of the sequential production concepts • Multi Echelon inventories. • Products stocked at various levels Factory, warehouse, retailer, customer in a distribution system. IC Operating document Policies concerning when and how much stock to reorder. Re-order point As a part of the operation doctrine, the inventory level, at which stock should be re-ordered.
Inventory systems Q/R Inventory systems An operating doctrine for which an optimal re -order point R - the trigger level – and optimal order quantity Q – the economic order quantity ( EOQ ) – are fixed. Periodic inventory system An operating doctrine for which re-order points and order quantities vary. Stocks are replenished upto a fixed base stock level after a fixed time period has passed.
Inventory costs Procurement costs Costs of pacing an order or setup costs if orders items are manufactured by the firm. Carrying ( Holding ) Costs of marinating the inventory ware house and protecting the inventoried items. Stock out costs Costs associated with demands when stocks have been depleted. Generally last sales or back order costs.
Inventory modeling A quantitative method for deriving a minimum cost operating doctrine. Deterministic model. A model in which variable Values are known with certainty. Stochastic model A model in which variable values are probabilistic. Gradual replacement model A deterministic inventory model characterized by demand being withdrawn, while production is underway. No stock outs, constant and known demand, lead time and unit cost
IC Applications Quantity discount A policy of allowing item cost to vary with the volume ordered. Usually the item cost decreases as volume increases due to economies of scale in production and distribution Service levels A treatment policy for customers when there are stock outs. Commonly established either as a ratio of customer served to customers demanding or as a ratio of units supplied to units demanded.
Saving money in inventory systems Blanket Rule A general policy for inventory control that can be modified as needed in light of total inventory costs A B C Classification of inventory into 3 groups A Group Comprising items with small volume and large value
B Group - Comprising items with moderate volume and value. C Group - Comprising items with large volume and small value. VED Classification Items classified as vital, essential and desirable from schedule point of view.
Inventory Control Procedures Cordex File system A manually operated IC system in which an inventory card represents each stock item with transactions kept on the card. IBM’s Mapics Manufacturing accounting and production information control system ( MAPICS )
Periodic inventory systems Versus Quantity / Reorder 1. The periodic system requires less calculating time than QR system 2. The periodic system may require more buffer stock to protect against uncertain demand lead time. 3. The periodic system may result in more stock outs when unusually high demand occurs
Behavioral Pitfalls in IC • Rational Decision making • Feed Back. • Inventory policy • Individual Risk Taking propensity
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