Inventory Control

Inventory control

• Why ? Because inventory is money, and its needs to be well utilised

• What ? Have the optimum level to minimise the cost of overstocking or stocking out

• How ? Understanding better demand and costs

High inventory means …

High cost of carrying inventory - obsolescence, insurance, ect

Low inventory means…

Potential shortage and increasing ordering costs

Why inventory control ?

• Inventory is money

• Reduces inefficiencies, such as purchasing and sales managers spending more time in following up on orders

inventory is harder to control when:

• Demand is unpredictable

• Customer demand must be met quickly

  • Follows made to stock process

Purpose of Inventory

• To maintain independence of operations

  • Each workstation can work at its most efficient schedule, and not depend on incoming material

• To meet variation in demand

• To allow flexibility in production scheduling

  • If setup cost is high, it is economical to produce a large number of units

• To provide safeguard in variation against supplier's delivery schedule

  • Supplier cannot produce, or cannot deliver according to required production schedule

• To take advantage of economic purchase order size

Dependency

• Independent demand (ex: IKEA produces mugs and curtains. Demand for the two are independent)

• Dependent demand (ex: IKEA produces frames and slats for beds, demand for both are dependent)

Cost of inventory

• Ordering cots

• Holding cots

• Shortage costs

Holding costs

• storage facilites

• Breakage obsolescence

• Depreciation

• Opportunity cost of capital

Ordering costs

• Cost of purchasing each order:

  • Clerical, managerial

  • calculating order counting quantities

  • Counting items

Shortage costs

• Lost customers

• Lost profits

• Penalty for late delivery

• Penalty for non delivery

ABC valuation

• A ltems:

  • High usage rate or high cost.

  • Tight control

• B Items:

  • Less essential

  • Lower money value

• C Items:

  • Least impact on sales

ABC helps to….leading to….

Single Period Inventory Model

One time purchase (ex: Christmas trees, newspapers, airline seat reservation)

Where

Q is Quantity to be Ordered

μ is Average Demand

σ is Standard Deviation

Z is probability of running out of the item

Where :

Co = Cost per unit of demand over estimated

Cu = Cost per unit of demand under estimated

P = Probability that the unit will not be sold