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Inventory Management-M.pharm (Pharmaceutics )

  2. ROLE OF MATERIAL MANAGEMENT Sales Forecast A sale forecasting is a process of estimating future revenue by predicting the amount of product or services of a sale unit which will sell in the next week ,month , quarter, or year Production forecast Production forecasting is integral to your direct-to- consumer(DTC) brand’s success. It is the process of estimating future demand for retail products, as well as the resources required to manufacture those products. Raw Materials Finishing Supplies Intermediates Equipment Loading Labor hours Material Management= Production Planning + Inventory Control
  3. What is Inventory? • Inventories are a stock of items needed to satisfy future demands. • Inventory is a list for goods and materials, or those goods or materials themselves, held available in stock by a business. • Inventories may be described as combination of fluctuations in anticipation, lot size inventories, and inventories to cover movement of materials from one location to another.
  4. [MATERIALS] Chemicals as active ingredients, diluents, needed to manufacture intermediates or components of finished product. Also finishing supplies such as containers, labels , caps, and shippers needed in packaging operations. [COMPONENTS] These are parts or sub-assemblies needed for final assembly of end product(e.g. bulk tablets awaiting packaging) [WORK-IN-PROCESS] These are materials and components on which work is being done. [FINISHED GOODS] These are stable items , samples, or other promotional items held in inventory awaiting customer orders or made for specific customers. INVENTORIES
  5. INVENTORY MANAGEMENT • Inventory management in business refers to managing order processing, manufacturing, storage, and selling raw materials and finished goods. It ensures the right type of goods reach the right place in the right quantity at the right time and at the right price. Thus, it maintains the product availability at warehouses, retailers, and distributors. Requirements for Inventory Management: •Monthly, quarterly and yearly stock consumption for all products separately •Expansion Plan •Seasonal and Non seasonal Consumption •Distribution chain or Customer Type Several Point should be considered before taking step toward Inventory management: •Type of Distribution system and Supply Chain •Records and Reports that will provide the foundation to inventory management •Products classification with respect to moving and non moving •Balance between service level including stocking out cost, ordering cost and stock holding cost •When to order and quantity for re-ordering for a product.
  6. OBJECTIVES • Inventory management means a business strategy, which deals with managing order processing, manufacturing, storing, and selling raw materials and finished goods. • It ensures product availability at warehouses, retailers, and distributors. • Reducing administrative workload. • Giving satisfaction to customers in terms of quality- care, competitive price and prompt delivery • Inducing confidence in customers and to create trust and faith.
  7. • Inventory control or Stock control is a part of inventory management process . It is daily activity of managing stock within the warehouse .Inventory control activities include receiving, storing and transferring stock, as well as tracking and fulfilling orders and returns. • Taking control over your stock rotation is an important part of inventory control and an overall efficient inventory management process. Defining the flow of stock ensures you have control over what items are used to fulfill customer orders, and when. Depending on your product portfolio you can dictate how product is deployed to fulfill customer orders. Inventory Control Methods FIFO(First in , First out) LIFO (last in , First out) FEFO(First expiring, First out)
  8. OBJECTIVES OF INVENTORY CONTROL • To reduce the minimum idle time due to shortage of materials and spare parts. • To offer maximum service and satisfaction of customers. • To minimize as much as possible capital investment and cost of storage. • To provide a scientific basis for planning inventory requirement. • To hold reasonable inventories in order to avoid losses from inventory obsolescence. • To maintain reasonable safety stock. • To maintain necessary inventory record. ADVANTAGES OF INVENTORY CONTROL  To ensure continuous production by supplying material.  It helps to secure many economics through bulk purchase such as higher discount, lower price , better use of available resources.  It helps the management in maintaining efficient accounting particularly material aspect of cost accounting.  It ensures timely and continuous supply of goods to customers by maintaining sufficient stock of finished goods .  It eliminates overstocking of the inventories and maintain minimum investment.  It helps in optimum optimization of men, money, material, equipments, time and reduce cost of production.
  9. Inventory Control vs Inventory Management •Inventory control is a method of regulating the inventory level in the company warehouse. •The scope of inventory control is smaller compared to inventory management. •Main purpose of inventory control is to acknowledge what and how much products are being stocked and to ensure whether the goods are in usable condition. • Inventory management refers to the activity of forecasting and replenishing inventory which is focused on when to order the inventory, how much to order and from whom to order. •Inventory management represents a higher scope since effective relationships with suppliers should be maintained. •Main purpose of inventory management is to be responsive towards demand and manage external relationships with suppliers. COST OF INVENTORY It involves fixing or standardization individual item cost labour and burden rates for a period of usually a calendar or year. Cost control takes in to account seasonally deals , promotion, Introduction of new production & other factors that create a demand on inventory equipment and personnel .
  10.  Cost of Inventory involves three types:- 1. Material cost 2. Labor cost 3. Burden or over head cost  Material Cost- Based on needs expressed in the production forecast, the purchasing department negotiates contracts and price arrangements and ascertains the standard cost for each item. These standard cost form the basis of monthly price variance report, which measures effectiveness of purchasing but also monitors changes in cost. TYPES OF COST INVENTORY
  12. 2) Labor Cost- 2 types- Direct Labor Indirect labor • Direct labour includes all labour that varies with production volume. • Direct labour refers to any employee that is directly involved in the manufacturing of a product. • Direct labor requires higher cost than indirect labor. DIRECT LABOR • Indirect labor is labor that is not directly related to the production of a product. For example, once a product has been completed, the salespeople you employ would be responsible for selling the product, but because they were not involved in making the product, they would be considered indirect labor. INDIRECT LABOR
  13. Burden or over-head cost- 2 Types- 1) Direct Burden 2) Fixed Burden DIRECT BURDEN Direct burden are such expenditures as supervision and clerical help; lost time ; premium on overtime; vacation; holiday , and sick pay; and employee benefits as hospitalization insurance and retirement benefits . Addition items falling into direct burden and controllable expenses incurred in the operation of each department and commonly called operating expenses. FIXED BURDEN In addition to operating departments ,other such as engineering, quality control, materials management –cost of fuel, electricity, land and real estate taxes and depreciation on the buildings and equipment.
  14. Techniques involved in Inventory Management • ABC Analysis • VED Analysis • EOQ Analysis • Perpetual Inventory System • Lead time • Buffer Stock One of the most important and simplest tools for inventory management in the classification of Inventories. This classification is based on a principle first outlined in the late 1800s by V Pareto, an Italian engineer and mathematician . In simplest term it states that in large population in which many items are involved , relatively few items account for major activity. In this technique all the materials are classified according to their value high, medium or low. ABC Analysis
  15.  A Class- Materials having small % of items but having higher values.  B Class- Materials that are the medium value of the material should be in the normal control. In other words, these materials having more % of total items but having medium value  C Class- The low value of materials should be under simple method of control . In other words, these materials having high % of total item but having low value. A Class •It covers 10% of total inventory. •It consumes about 70% of total budget. •Very Strict control •It requires either no safety stocks or low safety stocks. •It must be handled by senior officer. B Class It covers 20% of total inventory. It consumes about 20%of total budget. Very moderate control. It requires low safety stocks. It can be handled by middle management. C Class •It consumes about 10% of total budget. •It covers 70% of total inventory . •Very loose control. •It requires high safety stocks. •It can be handled by any office management.
  16. VED Analysis VED analysis is an inventory management techniques that classifies inventory based on its functional importance . It categorizes stock under three heads based on its importance and necessity for an organization or any of its other activities. VED analysis stands for Vital, Essential, and Desirable. V-Vital Category- It includes inventory necessary for production or any other process in an organization. The shortage of items under this category can severely hamper or disrupt the proper functioning of operations. Hence, continuous checking, evaluation, and replenishment happen for such stocks. If any of such inventories are unavailable, the entire production chain may stop. Also, a missing essential component may be of need at the time of a breakdown. Therefore, the order for such inventory should be beforehand. Proper checks should be put in place by the management to ensure the continuous availability of items under the “vital” category. E- Essential Category -The essential category includes inventory, which is next to being vital.
  17. These, too, are very important for any organization because they may lead to a stoppage of production or hamper some other process. But the loss due to their unavailability may be temporary, or it might be possible to repair the stock item or part. The unavailability of inventory under this category should not cause any stoppage or delays. D- Desirable category- The desirable category of inventory is the least important among the three, and their unavailability may result in minor stoppages in production or other processes. Moreover, the easy replenishment of such shortages is possible in a short duration of time.
  18. The economic order quantity (EOQ) is a company's optimal order quantity that meets demand while minimizing its total costs related to ordering, receiving, and holding inventory. The EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time. One of the important limitations of the economic order quantity is that it assumes the demand for the company’s products is constant over time. Formula for Calculating Economic Order Quantity (EOQ) Where A= Annual usage in Dollars S= Ordering Cost in Dollars I= Inventory carrying cost (in decimal) Using simple figures for ease of calculation the following trial and error method shows the EOQ. EOQ Analysis EOQ= √2AS∕ I
  19. Total amount cost for various order quantities assumed 1. Annual usage of 12,000 units 2. Unit cost of $3.00 3. Cost of carrying inventory 10% per year 4. Ordering cost per order $50 EOQ= √2(12000 x 3) x 50∕ 0.10 =$600
  20. Perpetual inventory is an accounting method in which a business continuously tracks its inventory levels in real-time. This method makes more precise inventory counts available to a business at all times. Perpetual inventory is distinguished from a perpetual inventory system, which usually refers to the software or program that executes the perpetual inventory accounting method. Perpetual Inventory System Lead Time Lead time in inventory management is the lapse in time between when an order is placed to replenish inventory and when the order is received. Lead time affects the amount of stock a company needs to hold at any point in time Therefore, the formula for calculating inventory lead time is as follows: Lead time = reordering delay + supply delay
  21. Buffer Stock • Buffer stock is an additionally stored volume of goods which is kept to meet any sudden future demand or supply fluctuations. It is a backup stock, which retains some kind of buffer to protect in case of uncertain future. Buffer stock is kept as an extra backup to prepare for any uncertain business situations. • Buffer stock is also known as strategic stock or safety stock or buffer inventory.
  22. REFERENCES 1. 2. 3. 4. terms/7353-buffer-stock.html 5. Lachman/Lieberman's the Theory and Practice of Industrial PharmacyBook by Roop K. Khar and S. P. Vyas 6.