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inventory management

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Inventory Management:

Inventory Management Presented by: Alok kr vishwakarma Amit verma Mahendra singh M-Pharm ( Pharmaceutics) Departmet Of Pharmaceutics PRANVIR SINGH INSTITUTE OF TECHNOLOGY KANPUR

Inventory Management:

Inventory Management Inventory is one of the most expensive assets of many companies. It represents as much as 40% of total invested capital. 5/23/2011 2 Department Of Pharmaceutics (PSIT)

Inventory Management:

Inventory Management Inventory is any stored resource that is used to satisfy a current or future need. Raw materials, work-in-process, and finished goods are examples of inventory. Two basic questions in inventory management are (1) how much to order (or produce), and (2) when to order (or produce). 5/23/2011 3 Department Of Pharmaceutics (PSIT)

Basic Functions of Inventory:

Basic Functions of Inventory 1. If product demand is high in summer, a firm might produce during winter. (Decoupling). 2. Inventory can be a hedge against price changes and inflation . 3. Another use of inventory is to take advantage of quantity discounts (when buying). 4. Many suppliers offer discounts for large orders 5/23/2011 4 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis ABC analysis divides on-hand inventory into three classifications on the basis of dollar (TL) volume. It is also known as Pareto analysis. (which is named after principles dictated by Pareto). 5/23/2011 5 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis The idea is to focus resources on the critical few and not on the trivial many . (Annual Dollar Volume of an Item) = (Its Annual Demand) x (Its Cost per unit) 5/23/2011 6 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis Class A items are those on which the annual dollar volume is high. They represent 70-80% of total inventory costs, but they account for only 15% of total inventory items. 5/23/2011 7 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis Class B items are those on which annual dollar volume is medium. They represent 15-25% of total dollar value, and they account for 30% of total inventory items on the average. 5/23/2011 8 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis Class C items are low dollar volume items. They represent only the 5% of total dollar volume, but they include as many as 50-60% of total inventory items. 5/23/2011 9 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis 5/23/2011 10 Department Of Pharmaceutics (PSIT)

ABC Analysis:

ABC Analysis Some of the Inventory Management Policies that may be based on ABC analysis include: a) Class A items should have tighter inventory control. b) Class A items may be stored in a more secure area. c) Forecasting Class A items may warrant more care. 5/23/2011 11 Department Of Pharmaceutics (PSIT)

Cycle Counting of Inventory:

Cycle Counting of Inventory Inventory records must be verified through a continuing audit. Such audits are known as (periodical) cycle counting .. (e.g., counting items at supermarket). 5/23/2011 12 Department Of Pharmaceutics (PSIT)

Cycle Counting of Inventory:

Cycle Counting of Inventory Cycle counting uses inventory classifications developed by ABC analysis. That is: Class A items are counted frequently, perhaps once a month. Class B items are counted less frequently, perhaps once a quarter. Class C items are counted perhaps once every six months. 5/23/2011 13 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory Just in Time Inventory is the minimum inventory that is necessary to keep a system perfectly running. 5/23/2011 14 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory With just in time (JIT) inventory, The exact amount of items arrive at the moment they are needed , Not a minute before OR not a minute after. To achieve JIT inventory, Managers should Reduce the Variability Caused by some Internal and External Factors. (Goldratt’s boys scout example – Apply the pace of the slowest boy). Existence of Inventory hides the variability. What causes variability? 5/23/2011 15 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory Most variability is caused by tolerating waste (inventory). For example, employees or machines produce units that do not conform to standards. These are waste. And they cause variability. 5/23/2011 16 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory engineering drawings are inaccurate, Again resulting in loss of production And consecutively resulting in Variability. These are the internal (controllable) factors that cause Variability. However, Some of the variability is caused by some external factors. 5/23/2011 17 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory For example, customer demands may change due to some external factors (such as competitors’ actions or promotions) In summary, To achieve JIT inventory, Managers must begin with Reducing Inventory. 5/23/2011 18 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory 5/23/2011 19 Department Of Pharmaceutics (PSIT)

Just-in-Time Inventory:

Just-in-Time Inventory In the figure, the section called “Others” are the Rocks on the river. Those rocks include Quality Variability, In-transit Delays, Machine Breakdowns, Large Lot-sizes, Inaccurate drawings, Employee attendance variability. 5/23/2011 20 Department Of Pharmaceutics (PSIT)

Just-In-Time Production :

Just-In-Time Production JIT production means (1) Elimination of Waste, (2) Synchronized Manufacturing, and (3) Little Inventory. Reducing the order batch size can be a major help in reducing inventory. Average Inventory = (Maximum Inventory + Minimum Inventory) / 2 5/23/2011 21 Department Of Pharmaceutics (PSIT)

Just-In-Time Production:

Just-In-Time Production Average Inventory drops as the inventory re-order quantity drops because the maximum inventory level drops. (show by drawing) Moreover, the smaller the lot size, the fewer the problems are hidden. One way to achieve small lot sizes is to Move Inventory through the shop Only as needed. 5/23/2011 22 Department Of Pharmaceutics (PSIT)

Just-In-Time Production:

Just-In-Time Production This is called a “pull” system. In this system, Ideal Lot size is 1. Japanese call this system as “Kanban” system. Kanban is a Japanese word for Card. A card is used to signal the need for material in a work center. 5/23/2011 23 Department Of Pharmaceutics (PSIT)

Just-In-Time Production:

Just-In-Time Production Sending a card authorizes the previous work center to send its finished batch to the subsequent work center. Batches are typically very small. Such a system requires tight schedules and frequent set-ups for machines. 5/23/2011 24 Department Of Pharmaceutics (PSIT)

Just-In-Time Production:

Just-In-Time Production On the other hand, Small batches allow a very limited amount of faulty material, less damages, less space occupation, less material handling, less accidents, etc. 5/23/2011 25 Department Of Pharmaceutics (PSIT)

Holding, Ordering and Set-up Costs:

Holding, Ordering and Set-up Costs Holding Costs are the costs associated with holding or “carrying” inventory over time. It includes costs related to Storage; such as insurance, extra staffing, interest, and so on. Some example holding costs are building rent or depreciation, building operating cost, taxes on building, insurance on building, material handling equipment leasing or depreciation, equipment operating cost, handling manpower cost, taxes on inventory, insurance, etc. 5/23/2011 26 Department Of Pharmaceutics (PSIT)

Holding, Ordering and Set-up Costs:

Holding, Ordering and Set-up Costs Ordering Costs include, cost of supplies, order processing, clerical cost, etc. The ordering cost is valid if the products are purchased NOT produced internally. Set-up cost is the cost to prepare a machine for manufacturing an order. Set-up cost is highly correlated with set-up time. 5/23/2011 27 Department Of Pharmaceutics (PSIT)

Holding, Ordering and Set-up Costs:

Holding, Ordering and Set-up Costs Machines that traditionally have taken long hours to set up Are Now being set up in less than a minute by employing FMSs or CIM systems. Reducing set up times is an excellent way to Reduce Inventory. 5/23/2011 28 Department Of Pharmaceutics (PSIT)

Inventory Models:

Inventory Models Demand for an item is either dependent on the demand for other items or it is independent. For example, demand for refrigerator is independent of the demand for cars. But, demand for auto tires is certainly dependent on the demand of cars. 5/23/2011 29 Department Of Pharmaceutics (PSIT)

Inventory Models:

Inventory Models In this section, we will deal with the Independent Demand Situation. In the independent demand situation, we should be interested in answering: a) When to place an order for an item, and b) how much of an item to order. 5/23/2011 30 Department Of Pharmaceutics (PSIT)

Inventory Models:

Inventory Models There are Four Basic Independent Demand Inventory Models: 1) Economic Order Quantity (EOP) Model (the most known model). 2) Production Order Quantity Model. 3) Back order inventory model. 4) Quantity discount model. 5/23/2011 31 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model EOQ model makes a number of assumptions: 1-) Demand is known and constant. 2-) Lead time (the time between placement of order and receipt of the order) is constant and known. Orders arrive in one batch at a time, and they arrive in one point in time. 4-) Quantity discounts are not possible. 5-) The costs include only setup cost (or ordering cost when buying) and holding cost. 6-) Orders are always placed at the right times. Therefore, stock outs (or shortages) can be completely avoided. 5/23/2011 32 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model With these assumptions, the graphic of inventory usage over time is as follows: 5/23/2011 33 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model Q = order quantity (That is also equal to the Maximum Inventory) Minimum Inventory = 0 When inventory level reaches 0, a new order is placed and received. The objective of inventory models is to minimize total cost. If we minimize the setup and holding costs, we will be able to minimize total cost: 5/23/2011 34 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model 5/23/2011 35 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model As the quantity ordered (Q) increases, holding cost increases, And setup cost decreases. In this graph, Optimal order quantity (Q*) occurs at a point where setup cost is equal to the total (annual) holding cost . 5/23/2011 36 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model By using this fact, we can write an equation for Q* as follows: D: Annual Demand in units for the inventory item. S: Setup cost (or the ordering cost) for each order. Notice: (Setup cost for production, order cost for buying). H: Annual Holding cost of inventory per unit. 5/23/2011 37 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model There will be (D/Q) times of ordering in a whole year. Therefore, Annual Setup cost = (D/Q) . S Average Annual Holding Cost = (Average Inventory) . H = (Q/2) . H Annual Setup Cost = Annual Holding Cost (D/Q) . S = (Q/2) . H 5/23/2011 38 Department Of Pharmaceutics (PSIT)

Economic Order Quantity (EOQ) Model:

Economic Order Quantity (EOQ) Model Therefore, Q2 = 2DS / H Q* = [2DS / H]1/2 Q* value is also called as EOQ. 5/23/2011 39 Department Of Pharmaceutics (PSIT)

Example:

Example An Inventory model has the following characteristics: Annual Demand (D) = 1000 units Ordering (Setup) cost (S)= $10 per order; Holding cost per unit per year (H) = $.50 Assume that there are 270 working days in a year (excluding holidays and weekends). 5/23/2011 40 Department Of Pharmaceutics (PSIT)

Example:

Example Questions : a) Find the Economic Order Quantity (Q*) for this inventory model. b) How many orders should be placed during one year? c) What is the expected time between two consecutive orders? d) What is the total annual cost of this inventory model? 5/23/2011 41 Department Of Pharmaceutics (PSIT)

Example:

Example Answers : a) Q* = [2(1000)10 / .50]1/2 = 200 units b) Expected number of orders placed during the year (N) = D / Q* = 1000 / 200 = 5 times. 5/23/2011 42 Department Of Pharmaceutics (PSIT)

Example:

Example c) Expected time between orders (T) = (Working days in a year) / N = 270 / 5 = 54 days. d) Total Annual Cost = Annual Setup Cost + Annual Holding Cost = DS / Q* + (Q*)H / 2 = 1000 (10) / 200 + (200) (.50) / 2 = $100 5/23/2011 43 Department Of Pharmaceutics (PSIT)

Considering the Reorder Point:

Considering the Reorder Point So far, we only decided how much to order (That is Q*). Now, we should find what time to order. We assumed that firm will wait until its inventory reaches to zero before placing an order. And, we also assumed that the Orders will receive immediately. However, there is a time between placement and receipt of an order. This is called LEAD TIME or delivery time. 5/23/2011 44 Department Of Pharmaceutics (PSIT)

Considering the Reorder Point:

Considering the Reorder Point Here, we will use the term “Reorder Point” (ROP) for when to order. ROP (in units) = (Demand Per Day) . (Lead time for a new order in days) ROP = d . L 5/23/2011 45 Department Of Pharmaceutics (PSIT)

Considering the Reorder Point:

Considering the Reorder Point 5/23/2011 46 Department Of Pharmaceutics (PSIT)

Considering the Reorder Point:

Considering the Reorder Point When the inventory level reaches the ROP, a new order is required. It will take a time that is equal to the Lead Time (L) to receive the new order. Here, Demand per day (d) is found by the following equation: d = D / Number of working days in a year This ROP equation assumes that demand is uniform and constant. If this is not the case, an extra (safety) stock is added (because of uncertainty 5/23/2011 47 Department Of Pharmaceutics (PSIT)

Example:

Example Annual demand for an item is D = 8000/year. This year there will be 200 working days in a year. Delivery of an order for this item takes 3 working days (L = 3 days). 5/23/2011 48 Department Of Pharmaceutics (PSIT)

Example:

Example Questions : a) Find the demand per day for this item. b) What is the ROP for this item? 5/23/2011 49 Department Of Pharmaceutics (PSIT)

Example:

Example Answers : a) Demand per day for this item (d) = 8000 / 200 = 40 units / day. b) ROP = d . L = 40 . 3 = 120 units. When inventory level becomes 120 units, an Order should be placed. 5/23/2011 50 Department Of Pharmaceutics (PSIT)

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