Inventory Management Fundamentals

Nature and Importance of Holding Inventory

  • Definition: Inventory represents up to 50%50\% of total investment; effective management balances holding costs, customer satisfaction, and stockout costs.

  • Functions of Inventory: Decouples production processes, protects against uncertain demand/supply, facilitates variety, takes advantage of supplier discounts, and hedges against inflation.

  • Types of Inventory:     * Raw materials.     * Work in Progress (WIPWIP).     * Finished goods inventory (FGIFGI).     * Maintenance, repair, and operating (MROMRO) inventory.     * Inventory in transit.

  • Inventory Turnover Formula:     Inventory Turnover=Cost of Goods SoldAverage Inventory Level\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory Level}}

  • Tiger Wheel and Tyre Scenario Variables: Forecast demand (DD), holding cost (HH), and ordering cost (SS) are used to determine optimal replenishment cycles.

Methods for Stock Utilization and Control

  • Two-bin system: Replenishment is triggered when the first of two equal bins is empty.

  • Kanban: Use of cards or devices to communicate material demand between stations.

  • Supply in line sequencing (SILS): Parts supplied for specific models as they arrive on the manufacturing line.

  • Milk runs: Delivery method for mixed loads from different suppliers to maximize demand and minimize transport costs.

  • Supplier sub-assembly: Suppliers assemble components on the organization's premises to be used in larger assemblies.

Requirements for Effective Inventory Management

  • Inventory Counting Systems:     * Periodic System: Counts at fixed intervals (daily/weekly); lacks control between counts.     * Perpetual System: Ongoing updates with every withdrawal (e.g., barcoding) to optimize order quantities.

  • ABC Classification: Sorting items based on importance according to annual demand value (N\) to establish specific inventory policies.

  • Cycle Counting: Vital for audit accuracy; allows for ongoing record updates without closing down the plant or interfering with production.

  • Service Inventory Control: Measures like barcoding and magnetic tags are implemented to prevent pilferage and inventory shrinkage.

Economic Order Quantity (EOQ) Models

  • Assumptions: Demand is constant and independent, lead-time is fixed, and all inventory arrives in a single complete delivery.

  • Calculation Components:     * Annual holding cost = Q2×H\frac{Q}{2} \times H     * Annual ordering cost = DQ×S\frac{D}{Q} \times S     * Total Cost (TCTC) = Annual holding cost+Annual ordering cost\text{Annual holding cost} + \text{Annual ordering cost}

  • Optimal Order Quantity (QO) Model:     QO=2×D×SHQ_O = \sqrt{\frac{2 \times D \times S}{H}}

  • Variants: Includes the Basic EOQEOQ model, Economic production quantity model, and the Quantity discount model.