Basic concept of Inventory Management

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Inventory management for engineers

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Basic concept of inventory management :

Basic concept of inventory management M.G.Morshad / ACM ( Electrical Maintenance ) Thermal power Station II / NLC Ltd

Flow diagram for inventory management :

Flow diagram for inventory management Purchase (Purchase procedure ) Store ( Number of stock available) Consumption (Rate of consumption) User Division Nature of materials to be procured Nature of budget When to procure How much Qty to be procured

Impact of higher & Lower inventory:

Impact of higher & Lower inventory High Inventory Label Locking of high working capital that leads to reduction of profit margin Increases the storing cost Chance of getting obsolete is high since the technology is improving at faster rate. Loss of working capital due to damages / obsolesce / pilferages . No risk of stock out Low Inventory Label Risk of loss of production due to non availability of required spare High lead time can not ascertain the availability of spare at right time Risk of stock out at any point of time . Financial loss due to high investment on inventories Financial loss due to loss of production as result of non availability of stock Inventory management is a balancing act between financial loss due to high stock and loss of production due to non availability of stock

Inventory measuring parameters :

Inventory measuring parameters Inventory Turn over Ratio (ITR) = (Total consumption for the year ) (Inventory available at the end of the year) ITR indicates the Inventory condition at any point of time The ratio is assigned between 1 and 10 depending upon the nature of Materials Ratio 1 implies number of inventory available is equal to the number of consumption per year. Ratio 10 implies number of inventory available is only 10% of the consumption per year. Higher ratio indicates better inventory management

Classification of materials:

Classification of materials Type wise Cost wise Budget wise Rotatable spare – Replaced, Reconditioned & Reused as a whole Insurance spare – S tandby materials for critical equipment Reconditioning spare – Materials f or reconditioning purpose. Consumables - Materials required for operating & reconditioning Capital items – Plant and equipments High value – More than one lakh Low value – Less than one Lakhs Capital budget – Plant & equipment : Having asset number, fixed life, Depreciation , Residual value, replaced after expiry of life Revenue budget – Spares & consumables : No asset number, fixed life & depreciation , having scrap value, used for operating and reconditioning of equipments / system Application wise Critical – Without this materials production will be halted Important - Without this materials production will not be halted but can not be ascertained Desirable - Without this materials neither production will be halted or affected but it is required for the plant

1. Rotatable spare:

1. Rotatable spare it is the identical units of the operating machineries Failed / defective operating units are replaced with this identical unit Released failed / defective units are repaired / reconditioned at shortest time and kept ready for replacement. As the spare is always in rotation – it is called rotational spare. Example : Electrical motor , pump, fan, blower compressor , gear box, transformer , switcher gear etc Normally this type of spare is maintained within 10% of total population. Initially it is supplied along with the package as mandatory spare. On expiry of life, it is disposed at scrap value and a new is procured through revenue budget. Failed / defective unit Identical healthy unit Failed Location Repaired shop

2. Insurance spare :

2. Insurance spare The insurance spare are those vital parts of a machine which have life nearly equal to that of a machine itself and are held as a stand by against any break down . These stand by units have a high reliability of performance and can be capitalised. It is supplied by the manufacturer along with the main equipment. Example : Generator Rotor, Turbine Rotor , Winding of Generator Transformer. It is some time referred as critical spare for 90% PLF Part A Part B Part C Part D Part A Part B Part C Part D Machine I Part A Part B Part C Part D Machine II Part A Part B Part C Part D Machine III Insurance spare parts for all identical machines

3. Reconditioning spare:

3. Reconditioning spare This are the spare parts of the operating machineries It is used for reconditioning / repair of various machine /equipments All these items comes under critical category because without these items machine & equipment can not be reconditioned / repaired These materials are procured under revenue budget Used materials are disposed at scrap value Example :Various identical component s of machine & equipments such as motor bearings, impellers of pump & fans, Pulley & hubs of gear box , light fittings (choke, tube, starter), transformer bushings, transformer oil etc. Number of stock should be sufficient enough to meet out the regular as well as emergency demand. Stocks are decided based on Consumption rate and Lead time for procurement Procurement is controlled through EOQ method Part A Part B Part C Part D Machine I Part A Part B Part C Part D Machine II Part A Part B Part C Part D Machine III Part A Part B Part C Part D Machine IV Part A Part B Part C Part D Reconditioning spare parts for all identical machines

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4. Consumables This materials are required for reconditioning / repair / operation of various machine /equipments . Example : Gaskets, Hardwires , Lubricants , fuse , contractor, chemical items, gas etc. All these items comes under important categories Consumption rate is very high Disposal is not assigned with these materials. Procurement through revenue budget at a fixed interval Stocks are decided based on Consumption rate and Lead time for procurement Procurement is controlled through Maxima- Minima basis Maxima Minima Interval for procurement Interval for procurement Interval for procurement Time Consumption rate Consumption rate Consumption rate

5. Capital items:

5. Capital items The Equipment , Machine, Tools & tackles, Instrument etc which are procured for setting up the plant and are directly or indirectly used for the production of the plant, are known as capital items. It comes under plant & equipment category and the investment is capitalized. All these items have asset number , fixed life and depreciation During service life depreciation amount is collected and kept aside for the procurement of new item at the end of life. At the end of life, it is disposed (survey reported) at residual ( salvage ) value. New item is procured from the depreciation fund against the disposal of the old items. Since procuring of new item is done from the depreciation fund it is considered as the reinvestment of the capital fund and therefore it can not be capitalized Procurement is through depreciation fund under capital budget and is done at the end of service life . Residual value Salvage value (10%) Depreciation fund (NV – SV) Asset life in years 15 0 Fund is used for procurement New Items Installation after disposing old items

Inventory controlling methods:

Inventory controlling methods × = × = High Value Low consumption rate Economic order Quantity Low Value High consumption rate Maxima Minima Materials ( Reconditioning spares & consumable items)

Economic order quantity (EOQ):

Economic order quantity (EOQ) Economic Order Quantity ( EOQ) = (Average yearly Consumption X Lead Time [in years] ) + Emergency Stock – Stock on hand Transformer oil 1. Average yearly consumption = 80KL 2. Lead time for procurement = 1 year 3. Emergency stock = 80 KL 4. Stock in hand = 100 KL 5. EOQ = (80 x 1) + 80 -100 = 60 KL 16 mm 2 copper cable 1. Average yearly consumption = 1000 Mtr 2. Lead time for procurement = 1 year 3. Emergency stock = 100 Mtr 4. Stock in hand = 20 Mtr 5. EOQ = (1000 x 1) + 100 -20 = 1080 Mtr Conveyor roller 1. Average yearly consumption = 300 Nos 2. Lead time for procurement = 1 year 3. Emergency stock = 50 Nos 4. Stock in hand = 10 Nos 5. EOQ = (300 x 1) + 50 -10 = 340 Nos Roller Bearing ( NU320) 1. Average yearly consumption = 20 Nos 2. Lead time for procurement = 1 year 3. Emergency stock = 6 Nos 4. Stock in hand = 10 Nos 5. EOQ = (20 x 1) + 6 -10 = 16 Nos

Maxima - Minima:

Maxima - Minima 2. Re order Level (ROL) [ At this level next order to be placed] = (Max consumption X Maximum lead time) 3. Minimum order Level (MIOL) [This is the quantity to be maintained at the store to prevent stock out condition] = ROL - (Average consumption X Average lead time) 4. Maximum order Level (MAOL) [This is the quantity above which stock is not allowed to exceed] = ROL + EOQ - (Minimum consumption X Minimum lead time) 1. Economic order quantity ( EOQ) [ This is the quantity to be procured] = (Minimum consumption X Maximum lead time) 5. Avg inventory (MAOL) [This is the quantity always available in the store ] = (MIOL + MAOL)/2

Maxima - Minima:

Maxima - Minima Max Mini Avg Yearly consumption pattern ( C ) 75 Nos 25 Nos 50 Nos Lead time for procurement (LT) 0.5 Yr 0.3 Yr 0.4 Yr Formula Qty EOQ Mini( C ) x Max ( LT ) (25 x 0.5) = 13 Nos ROL Max ( C ) x Max ( LT) (75 x 0.5) = 38 Nos MIOL ROL – [ Avg ( C ) x Avg ( LT) ] (38 – 20) = 18 Nos MAOL ROL + EOQ – [ Mini ( C ) X Mini ( LT)] (38+13 – 8) = 43 Nos Avg Inventory (MIOL +MAOL)/2 (18 +43)/2 = 31 Nos MIOL MAOL 18 43 ROL 38 EOQ = 13

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