Inventory management system
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Inventory Inventory Management SystemManagement System
Job ThomasJob Thomas
#8, MBA (PT)#8, MBA (PT)
Word meaningWord meaning
Inventory = Inventory = stock at a particular stock at a particular locationlocation
classification of inventoryclassification of inventory• raw materials, raw materials, • work-in-progress, work-in-progress, • finished goods and finished goods and • MRO (Maintenance, Repairs and MRO (Maintenance, Repairs and
Operating supplies)Operating supplies)
Overview of developmentOverview of development
CARDEX (bin card) CARDEX (bin card) systemsystem
MM (material MM (material management) management) module in ERPmodule in ERP
WMS (warehouses WMS (warehouses management management system) in ERPsystem) in ERP
RF tags IDsRF tags IDs
Inventory decision ruleInventory decision rule
Q,R policyQ,R policy
Fixed quantity, variable time
Q
Q
T1 T2
S,T policyS,T policyVariable quantity, Fixed time
Q1 Q2Q3
S,R policyS,R policyVariable quantity, variable time
INVENTORY CLASSIFICATIONSINVENTORY CLASSIFICATIONS
ABC ClassificationsABC Classifications High, Medium and Low (HML) High, Medium and Low (HML)
ClassificationsClassifications Vital, essential and Desirable (VED) Vital, essential and Desirable (VED)
ClassificationsClassifications Scare, Difficult and Easy to obtain (SDE) Scare, Difficult and Easy to obtain (SDE)
ClassificationsClassifications Fast moving. Slow moving and Non-Fast moving. Slow moving and Non-
moving (FSN) Classificationmoving (FSN) Classification Multi-criteria classificationMulti-criteria classification
ABC ClassificationABC Classification
0
20
40
60
80
100
0
10
0
20
0
30
0
40
0
50
0
60
0
70
0
80
0
90
0
10
00
Number of items (N)
To
tal
Va
lue
($
) B
A
C
N $A 10% 70%B 20% 20%C 70% 10%
Classification based on relative importance
Risk of inventory in ABC Risk of inventory in ABC classificationclassification
Controlling based on ABC inventory Controlling based on ABC inventory classificationclassification
Control Control AA BB CC
Ordering Ordering controlcontrol
Very careful Very careful and accurateand accurate
NormalNormal SimpleSimple
Type of Type of inventory inventory controlcontrol
Very Very accurate accurate
GoodGood None or None or simplesimple
Cycle Cycle counting counting frequencyfrequency
6-12 times 6-12 times per yearper year
3-4 times 3-4 times per yearper year
1-2 times 1-2 times per yearper year
Priority Priority controlcontrol
High priorityHigh priority Normal Normal prioritypriority
Low priorityLow priority
High, Medium and Low (HML) High, Medium and Low (HML) classification classification
The items of the inventory are to be The items of the inventory are to be listed in the listed in the descending order of the descending order of the unit value.unit value.
The HML analysis is useful for The HML analysis is useful for keeping control over consumption at keeping control over consumption at departmental levels, for deciding the departmental levels, for deciding the frequency of physical verification, frequency of physical verification, and for and for controlling purchasescontrolling purchases
Vital, Essential and Desirable Vital, Essential and Desirable (VED) Classifications.(VED) Classifications.
based on based on criticalitycriticality of the items and of the items and its effect on other its effect on other productionproduction
For V items, a large stock of For V items, a large stock of inventory is generally maintained, inventory is generally maintained, while for D items, minimum stock is while for D items, minimum stock is enoughenough
Scarce, Difficult and Easy to obtain Scarce, Difficult and Easy to obtain (SDE)(SDE)
availabilityavailability of items of items vital to lead time analysisvital to lead time analysis of of
procurementprocurement
Fast-moving. Slow moving and Fast-moving. Slow moving and Non-moving (FSN) ClassificationNon-moving (FSN) Classification
classification is based on the classification is based on the pattern pattern of issuesof issues from stores from stores
In and out date of items are In and out date of items are evaluated.evaluated.
The items are usually grouped in The items are usually grouped in periods of 12 monthsperiods of 12 months
Multi-criteria ClassificationMulti-criteria ClassificationItem Value
(w1=0.2)Lead
time(w2=0.2)
Criticality(w3=0.4)
Substitutable
(w4=0.2)
Total (w=1.0)
101 A(100)
B(50)
C(10)
C(10)
B(36)
102 B(50)
A(100)
B(50)
B(50)
A(60)
103 B(50)
B(50)
A(100)
C(10)
A(62)
104 C(10)
C(10)
B(50)
A(100)
B(44)
105 C(10)
A(100)
C(10)
C(10)
C(28)
INVENTORY MODELSINVENTORY MODELS
Deterministic modelsDeterministic models• Economic Order Quantity (EOQ) modelEconomic Order Quantity (EOQ) model• Sensitivity analysisSensitivity analysis• A price-break Model A price-break Model
Probabilistic Inventory modelsProbabilistic Inventory models• Single-period inventory modelsSingle-period inventory models• A fixed order quantity modelA fixed order quantity model• A fixed time period modelA fixed time period model
Inventory fluctuations as a function Inventory fluctuations as a function of timeof time
IDEAL
ACTUAL
Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) modelmodel
Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) modelmodel
Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) modelmodel
Economic order quantity Economic order quantity = (2 x setup cost x demand rate/ = (2 x setup cost x demand rate/
carrying cost)^0.5carrying cost)^0.5
Limitation of the economic order Limitation of the economic order quantity model is that the quantity model is that the demands demands remain constantremain constant throughout the throughout the year. It is also necessary that the year. It is also necessary that the inventory be delivered in full when inventory be delivered in full when the inventory levels reach zerothe inventory levels reach zero
Re-order points and lead time Re-order points and lead time
Safety stock in inventory Safety stock in inventory managementmanagement
Sensitivity analysisSensitivity analysis
Production inventory modelProduction inventory model
Backorder inventory modelsBackorder inventory models
Price-break ModelPrice-break Model
EOQ Model with Price Breaks EOQ Model with Price Breaks
Incremental unitsIncremental units: discount is applied : discount is applied to the additional units beyond the to the additional units beyond the breakpoint breakpoint
All unitsAll units: discount is applied to all : discount is applied to all units beyond the certain level of units beyond the certain level of orderorder
EOQ Model with Price Breaks EOQ Model with Price Breaks
$3.2 /unit
$2.9 /unit
$2.8 /unit
Feasible cost
Order quantity
Total annual cost
Single period inventory modelSingle period inventory model
Order seasonalOrder seasonal The Newsboy Problem:The Newsboy Problem:
Fixed order quantity modelFixed order quantity model
Item must have a reasonable stable usageItem must have a reasonable stable usage Lead time should not have radical variationLead time should not have radical variation Supplier should be able to accept Supplier should be able to accept
irregularly timed and unscheduled ordersirregularly timed and unscheduled orders
Fixed time period modelFixed time period model
VENDOR MANAGED INVENTORY VENDOR MANAGED INVENTORY (VMI)(VMI)
the vendor (the Manufacturer) manages the vendor (the Manufacturer) manages the inventory of the distributor.the inventory of the distributor.
manufacturer has access to the manufacturer has access to the distributor’s inventory data used for distributor’s inventory data used for generating purchase ordersgenerating purchase orders
The manufacturer reviews this information The manufacturer reviews this information and decides when it is appropriate to and decides when it is appropriate to generate a Purchase Ordergenerate a Purchase Order
symbiotic relationship
INVENTORY ON WHEELSINVENTORY ON WHEELS
freight on board (FOB)freight on board (FOB) Rule of ownershipRule of ownership
• FOB shipping pointFOB shipping point. If the shipment is . If the shipment is designated as freight on board (FOB) designated as freight on board (FOB) shipping point, ownership transfers to shipping point, ownership transfers to the buyer as soon as the shipment the buyer as soon as the shipment departsdeparts the seller. the seller.
• FOB destinationFOB destination. If the shipment is . If the shipment is designated as freight on board (FOB) designated as freight on board (FOB) destination, ownership transfers to the destination, ownership transfers to the buyer as soon as the shipment buyer as soon as the shipment arrivesarrives at at the buyer.the buyer.
Thank you for your kind attentionThank you for your kind attention