2. An inventory can be defined as a stock of goods which is held for the purpose of future production or sales. The stock of goods may be kept in the following forms:

3. Raw Materials

4. Partly finished goods

5. Finished goods

7. Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.

8. Variables in an Inventory Problem:

9. The variables associated with the inventory problems are classified into two categories.

10. The Controlled variables

11. The uncontrolled variables

12. The variables that may be controlled, separately or in combination are following:

13. The quantity acquired – By purchase, production, or some other means. The decision maker may have a control over the production or purchase level.

14. The frequency of timing of acquisition – The decision maker may have control over how often or when the inventory should be replenished.

15. The stage of completion of stocked items – The decision maker may have a control over the stage at which the unfinished items be held so that there is no delay in supplying customers.

16. The uncontrolled variables – The variable that may not be controlled in an inventory problem are divisible into cost variables and others.

17. Inventory management:

18. Inventory management is the branch of business management concerned with planning and controlling inventories.

19. Inventory is stock of items held to meet future demand.

20. It deals with two basic questions:

21. How much to order

22. When to order?

23. Types of Inventory:

24. Raw Material

25. Work in progress

26. Finished Goods

27. Nature of Inventories

28. Raw Materials – Basic inputs that are converted into finished product through the manufacturing process.

29. Work-in-progress – Semi-manufactured products need some more work before they become finished goods for sale.

30. Finished Goods – Completely manufactured products ready for sale.

31. Supplies – Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment.

32. Reasons To Hold Inventory

33. Meet variations in customer demand:

34. Meet unexpected demand

35. Smooth seasonal or cyclical demand

36. Pricing related:

37. Temporary price discounts

38. Hedge against price increases

39. Take advantage of quantity discounts

40. Process & supply surprises

41. Internal – upsets in parts of or our own processes

42. External – delays in incoming goods.

43. Objective of Inventory Management

44. To maintain a optimum size of inventory for efficient and smooth production and sales operations.

45. To maintain a minimum investment in inventories to maximize the profitability.

46. Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality.

47. An effective inventory management should:-

48. Ensure a continuous supply of raw materials to facilitate uninterrupted production.

49. Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes.

50. Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service.

51. Minimize the carrying cost and time.

52. Control investment in inventories and keep it at an optimum level.

53. An optimum inventory level involves three types of costs:-

54. Ordering costs:-

55. Quotation or tendering

56. Requisitioning

57. Order placing

58. Transportation

59. Receiving, inspecting and storing

60. Quality control

61. Clerical and staff

62. Stock-out cost

63. Loss of sale

64. Failure to meet delivery commitments

65. Carrying costs:-

66. Warehousing or storage

67. Handling

68. Clerical and staff

69. Insurance

70. Interest

71. Deterioration,shrinkage,

72. Taxes

73. Cost of capital

74. Dangers of Over investment:-

75. Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity cost

76. Excessive carrying cost

77. Risk of liquidity- difficult to convert into cash

78. Physical deterioration of inventories while in storage due to mishandling and improper storage facilities

79. Dangers of under-investment:-

80. Production hold-ups – loss of labor hours

81. Failure to meet delivery commitments

82. Customers may shift to competitors which will amount to a permanent loss to the firm

83. May affect the goodwill and image of the firm

84. Functions of Inventory Management:-

85. Track inventory

86. How much to order

87. When to order

88. Basic EOQ Model

89. Assumption

90. Seasonal fluctuation in demand are ruled out.

91. Zero lead time – Time lapsed between purchase order and inventory usage.

92. Cost of placing an order and receiving are same and independent of the units ordered.

93. Annual cost of carrying the inventory is constant.

94. Total inventory cost = Ordering cost + carrying cost

95. Inventory management:-

96. Two system followed

97. Periodic review

98. Fix order quantity

99. In periodic stock position is reviewed periodically rather than continuously. A new order is always placed at the end of the each review.

100. In Fixed order quantity system the stock of an item is continuously reviewed. A reorder level is decided on. Whenever the stock of the item equals the reorder level, a new order is placed. The time between orders can vary. In this system, the order quantity ordered is always fixe and is equal to the EOQ. EOQ (Economic Order Quantity) is calculated by a formula which ensures that the total cost is minimum.

101. Lead time is the lapsed time between the placement of an order and its actual delivery.

102. Safety stock level is also known as buffer stock. It is the extra quantity of merchandise that is stocked to take care of delay in delivery and higher demand during the lead time.

103. Lead time is the lapsed time between the placement of an order and its actual delivery.

104. Safety stock level is also known as buffer stock. It is the extra quantity of merchandise that is stocked to take care of delay in delivery and higher demand during the lead time.

105. Types of Inventory

106. Movement inventory:-This inventory is known as transit or pipeline inventory arises due to shipment of inventory items to distribution centres and from various production centers.

107. Buffer inventory:- This inventory is maintained to meet uncertainties of demand and supply. Such buffer inventory which are in excess of those necessary to just meet the average demand during the lead time.

108. Anticipation inventory:-This is known as seasonal inventories held because of future demand which is anticipated.

109. Decoupling inventory:-This is used to reduce interdependence of various stage of production systems are known as decoupling inventories.

110. Lot size inventory:-These are held for the reason that purchases are usually made in lots rather than for the exact amounts which may be needed at appoint of time.

111. EOQ – Three Approaches

112. Trial and Error method

113. Order-formula approach

114. Graphical approach

115. Model I: Basic EOQ

116. Typical assumptions made:-

117. Annual demand (D), carrying cost (C) and ordering cost (S) can be estimated

118. Average inventory level is the fixed order quantity (Q) divided by 2 which implies

119. No safety stock

120. Orders are received all at once

121. Demand occurs at a uniform rate

122. No inventory when an order arrives

123. Assumptions (continued)

124. Stock out, customer responsiveness, and other costs are inconsequential

125. Acquisition cost is fixed, i.e., no quantity discounts

126. Annual carrying cost = (average inventory level) x (carrying cost) = (Q/2)C

127. Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)S

128. Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C + (D/Q)S

129. The order quantity where the TSC is at a minimum (EOQ) can be found using calculus (take the first derivative, set it equal to zero and solve for Q)

130. Example: Basic EOQ

131. Zartex Co. produces fertilizer to sell to wholesalers. One raw material – calcium nitrate – is purchased from a nearby supplier at $22.50 per ton. Zartex estimates it will need 5,750,000 tons of calcium nitrate next year.

132. The annual carrying cost for this material is 40% of the acquisition cost, and the ordering cost is $595.

133. a) What is the most economical order quantity?

134. b) How many orders will be placed per year?

135. c) How much time will elapse between orders?

136. Economical Order Quantity (EOQ)

137. D = 5,750,000 tons/year

138. C = .40(22.50) = $9.00/ton/year

139. S = $595/order

140. = 27,573.135 tons per order

141. Total Annual Stocking Cost (TSC)

142. TSC = (Q/2)C + (D/Q)S

143. = (27,573.135/2)(9.00)

144. + (5,750,000/27,573.135)(595)

145. = 124,079.11 + 124,079.11

146. = $248,158.22

147. Number of Orders Per Year

148. = D/Q

149. = 5,750,000/27,573.135

150. = 208.5 orders/year

151. Time Between Orders

152. = Q/D

153. = 1/208.5

154. = .004796 years/order

155. = .004796(365 days/year)

156. = 1.75 days/order

157. Refrences:-

158. Google.com

159. Operation Management by Prof. Subir Guha

160. Production and Operations Management by EVERETT E. ADAM , Jr. RONALD J. EBERT4/7/20102<br />