presentation on Inventory management

1. ELEMENTS OF ORDERING COST
• TENDERING & PROCESSING COST
• STATIONARY & COMMUNICATION COST
• FOLLOW-UP COSTS
• INWARD RECEIPT & HANDLING COST
• INSPECTION & VERIFICATION COST
• SALARIES & WAGES OF PURCHASERS

2. ELEMENTS OF INVENTORY CARRYING COST
• INTEREST ON CAPITAL
• INSURANCE & TAX
• STORAGE & HANDLING
• MAITENANCE & PRESERVATION
• DETERIORATION & OBSOLESCENCE
• THEFT & PILFERAGE
• WAREHOUSE RENTAL
• SALARIES & WAGES OF STORES STAFF

3. 100
4 MONTHS 4 4
MAX INV. LEVEL
ANNUAL DEMAND=300
QUANTITY

4. TOTAL ANNUAL COST
INVETORY
CARRYING COST
ORDER QUANTITY
COST
EOQ
ORDERING COST

5. ECONOMIC ORDER QUANTITY
(EOQ)
• ANNUAL DEMAND IN QUANTITY : A
• QUANTITY PER ORDER (ECONOMIC ORDER QUANTITY) : Q
• ORDERING COST or BUYING COST ( COST PER ORDER IN RUPEES ) : B
• INV. CARRYING COST IN RUPEES PER UNIT PER YEAR :
• NO. OF ORDERS PER ANNUM: A/Q
• ANNUAL ORDERING COST: (A /Q ) x B
• AVERAGE INV. CARRIED DURING THE YEAR: (MAX + MIN) / 2
(Q + 0 ) / 2 = Q / 2
• COST OF CARRYING INVENTORY PER YEAR : (Q/2) x C

6. ECONOMIC ORDER QUANTITY
(EOQ)
ANNUAL ORDERING COST = ( A/Q ) . B
ANNUAL INV. CARRYING COST =( Q/2 ) . C
AT EOQ POINT:
• ORDERING COST = INV. CARRYING COST
( A/Q ) . B = ( Q/2 ) . C
Q X Q = 2 X A X B / C
• Q = √ ( 2A . B / C )
• ‘Q’ IS THE ECONOMIC ORDER QUANTITY

7. PROBLEM
• ZEN BICYCLE LTD. SOURCES 3000 SEAT COVERS FOR ITS BICYCLES FROM
OUTSIDE SUPPLIER.
• ORDERING COST IS Rs 10 PER ORDER
• INV. CARRYING COST PER UNIT PER YEAR IS Rs. 6
• COMPANY HAS 300 WORKING DAYS
• FIND:
• EOQ
• NO. OF ORDERS PER YEAR
• TOTAL INVENTORY COST
• NO. OF INVENTORY CYCLES IN A YEAR
• DURATION OF INV. CYCLE

8. SOLUTION
• EOQ: Q = √( 2A. B / C )
= √( 2 X 3000 X 10 / 6 )
= 100
• Q = 100 UNITS
• NO. OF ORDERS PER YEAR:
• 3000 / 100 = 30
• ANNUAL ORDERING COST = 30 X 10 = Rs 300
• AV. INV. PER CYCLE= ( 100 X 6 ) / 2 = Rs 300
• TOTAL COST = Rs 300 + Rs 300 = Rs 600
• NO OF INV CYCLE PER YEAR (300 WORKING DAYS) =30
• DURATION OF EACH CYCLE = 300 / 30 = 10 DAYS

9. PROBLEM
• YANTRA INDIA IS A SUPPLIER OF SPEEDOMETERS TO SPEED AUTO LTD. –
MANUFACTURERS OF 60 cc TWO-WHEELER.
• IT SUPPLIES 20000 SPEEDOMETERS TO SPEED AUTO PER ANNUM.
• ORDERING COST PER ORDER FOR SPEED IS Rs 5 AND INV. CARRY. COST IS
2.5% OF THE AV. INV. VALUE.
• PRICE PER UNIT IS Rs 200.
• THE COMPANY PRESENTLY PLACES 10 ORDERS EVERY YEAR.
• ADVISE MGMT. OF SPEED AUTO WHETHER THEY SHOULD CONTINUE
WITH EXISTING PRACTICE OR SWITCH OVER TO THE EOQ MODEL OF
PROCUREMENT

10. SOLUTION
• Annual Demand (A = 20,000 ; Ordering Cost (B) =Rs 5: Price=Rs 200
• Inv Carrying Cost (C) = 2.5% of Inv Value = 0.025X 200 = Rs 5
OPTION I: ( SWITCHING TO EOQ MODEL):
• EOQ: Q = √( 2A.B / C )
= √( 2 X 20000 X 5 / 5 ) = 200
• NO. OF ORDERS PER YEAR: 20000 /200 = 100
• ANNUAL ORDERING COST = 100 X 5 = Rs 500
• AV. INV. CARRYING COST= ( 200 /2 ) X 5 = Rs 500
• TOTAL ANNUAL COST = Rs 500 + Rs 500 = Rs 1000
OPTION II: ( CONTINUE WITH EXISTING POLICY):
• ORDERS PER YEAR=10 :ANNUAL ORDERING COST = 10X5 = Rs 50
• QUANTITY PER ORDER = 20000 / 10 = 2000
• AV. INV. CARRYING COST= ( 2000 /2 ) X 5 = Rs 5000
• TOTAL ANNUAL COST = Rs 50 + Rs 5000= Rs 5050
OPTION I BEING MORE ECONOMICAL, MGMT. SHOULD SWITCH TO
EOQ MODEL OF PROCUREMENT

11. PROBLEM
• TRINITY HOSPITAL, BANGLORE SOURCES 20,000 SYRINGES
EVERY YEAR FROM A LOCAL SUPPLIER
• ORDERING COST PER ORDER IS Rs 100 AND INV. CARRY COST
IS Rs 1 PER UNIT PER YEAR.
• THE PRICE OF A SYRINGE IS Rs 5.
• THE SUPPLIER OFFERS A 5% DISCOUNT IF PURCHASES ARE
MADE IN LOTS OF 10,000 SYRINGS OR MORE. DETERMINE
WHETHER THE DISCOUNT MODEL IS BETTER THAN THE EOQ
MODEL IN THIS SITUATION

12. SOLUTION
• D=20000; Co= 100; Cc= 1 ; P=5
• EOQ ‘Q’ = √( 2DCo / Cc ) = √( 2.20000.100/ 1)
• = 2000 UNITS
• INV. CARRY COST = (2000/2) X 1=1000
• ORDERING COST = 20000/2000 X 100 =1000
• TOTAL ANNUAL COST:
• = 20000X5 + 1000 + 1000 = 102,000

13. SOLUTION
• DISCOUNT MODEL:
• D=20000; Co= 100; Cc= 1 ; P=5
• 2 0RDERS OF 10000 EACH
• COST OF MATERIALS= 20000 X 5 = 100000
• DISCOUNT= 100000X .05=5000
• NET COST OF MATERIAL= 95000
• INV. CARRY COST = (10000/2) X 1=5000
• ORDERING COST = 2 X 100 =200
• TOTAL ANNUAL COST:
• = 95000+ 5000 + 200 = 100,200
• DISCOUNT OFFER IS PREFERABLE

14. PROBLEM
• MICROCOSM SOFTWARE SOURCES 16000 BLANK CDs ANNUALY FROM A
SUPPLIER IN BANGLORE.
• ORDERING COST PER ORDER IS Rs 10 AND CARRYING COST IS 10% OF CD
PRICE OF Rs 20 EACH.
• SUPPLIER OFFERS QUANTITY DISCOUNTS FOR LOT SIZES AS FOLLOWS:
• 800 DISCOUNT 2%
• 1000 DISCOUNT 4%
• 2000 & ABOVE, DISCOUNT 5%
• ADVISE MGMT. BEST PURCHASE LOT SIZE EOQ OR PARTICULAR
DISCOUNT MODEL

15. Q
T T T
MAX INV. LEVEL
TIME
QUANTITY
RE-ORDER POINT
L L L
MIN. INV. LEVEL

16. Q
T T T
MAX INV. LEVEL
TIME
QUANTITY
RE-ORDER POINT
L L L

17. Q
T T T
MAX INV. LEVEL
TIME
QUANTITY
RE-ORDER POINT
L L L

18. MAX INV. LEVEL = SAFETY STOCK + RE-ORDER QUANTITY
L L L
BUFFER STOCK OR SAFETY STOCK ==
RE-ORDER POINT= SAFETY STOCK + LEADTIME CONSUMPTION
RE-ORDERQUANTITY=EOQ
S S MIN. INV. LEVEL

19. LEVELS FOR INVENTORY CONTROL
• MINIMUM INVENTORY LEVEL: BUFFER / SAFETY STOCK
• RE-ORDER LEVEL:
ROL = LEAD TIME DEMAND ( LTD ) + SAFETY STOCK ( SS )
• RE-ORDER QUANTITY: ROQ = EOQ
• MAX INV. LEVEL = ROQ + SAFETY STOCK

20. NEED FOR SAFETY STOCK
• STOCKOUT COSTS ARE VERY HIGH
• TO TAKE CARE OF THE UNCERTAINTY
OF DEMAND AND SUPPLY DURING THE
LEAD TIME SAFETY STOCKS ARE
MAINTAINED
• SAFETY STOCK =
K X STD. DEVIATION OF LTD X
√AVERAGE LEAD TIME
• ‘K’ : IS A FACTOR DEPENDING UPON
CRITICALITY OF DEMAND
• ‘LTD’ ; IS AVERAGE DEMAND DURING
THE LEAD TIME
• GENERALLY VALUE OF ‘K’ VARRIES
FROM 0.1 – 3.0 AS IN FLG. TABLE:
CERTAINTYAND
CRITICALITY
‘K’ SEVICE
LEVEL
%
CERTAIN &
UNCRITICAL
0.1 54.0
CERTAIN &
SEMI CRITICAL
0.2 57.9
UN CERTAIN &
SEMI CRITICAL
0.3 61.8
CERTAIN &
CRITICAL
0.5 69.2
UN CERTAIN &
CRITICAL
1.0 84.1
CERTAIN &
SUPER CRITICAL
2.0 97.7
UNCERTAIN & SUPER
CRITICAL
3.0 99.87

21. ESTIMATION OF SAFETY STOCK
( BASED ON STANDARD DEVIATION IN LEAD TIME DEMAND)
• STANDARD DEVIATION IN DEMAND PER MONTH = 20
• LEAD TIME =4 M0NTHS
• STANDARD DEVIATION IN LEAD TIME DEMAND
SD LTD = SD OF DEMAND PER UNIT TIME X √ LEAD TIME
= 20 X √ 4 = 40
• UNDER SUPER CRITICAL CIRCUM STANCES:
• SERVICE LEVEL = 99.9 PERCENT
• CORRESPONDING VALUE OF ‘K’ = 3
• SAFETY STOCK = K X SD LTD
• SAFETY STOCK = 3 X 40 = 120

22. PROBLEM :
• AVERAGE WEEKLY DEMAND OF PARLE-G BISCUITS IN BIGBAZAR =2500 PACKS
• LEAD TIME = 4 WEEKS
• STANDARD DEVIATION IN LEAD TIME DEMAND = 100
• BIG BAZAR POLICY IS TO PROVIDE 60% SERVICE LEVEL FOR SUCH NON CRITICAL
PRODUCTS
• CORRESPONDING VALUE OF K =0.2
• ESTIMATE THE SAFETY STOCK TO BE MAINTAINED FOR 60% SERVICE LEVEL

23. SOLUTION
• STANDARD DEVIATION IN DEMAND PER WEEK = 100
• LEAD TIME =4 WEEKS
• STANDARD DEVIATION IN LEAD TIME DEMAND
SD LTD = SD OF DEMAND PER UNIT TIME X √ LEAD TIME
= 100 X √ 4 = 200
• UNDER NON-CRITICAL CIRCUM STANCES:
• SERVICE LEVEL = 60 PERCENT
• CORRESPONDING VALUE OF ‘K’ = 0.2
• SAFETY STOCK = K X SD LTD
• SAFETY STOCK =0.2 X 200 = 40 PACKS