Production Technology

Chapter No.6 INVENTORY CONTROL

1. Define Inventory and Inventory Control? Ans: - INVENTORY and INVENTORY CONTROL INVENTORY Inventory is detailed list of those movable items which are necessary to manufacture a product and maintain the equipment and machinery in good working order.

INVENTORY CONTROL 1. Inventory CONTROL is the techniques of maintain the size of the inventory at some desired level keeping in the view the best economic interest off an organization. 2. It may be defined as the systematic location, storage and recording of goods in such a way that desired degree of service can be made to the operating shop at minimum ultimate cost.

2. State the need of INVENTORY CONTROL? Ans :- NEED OF INVENTORY CONTROL 1. For smooth and uninterrupted production. 2. For efficient utilization of work, capital. 3. For minimizing loss due to damage, deterioration. 4. For eliminating the possibilities of duplicated purchasing. 5. Economy purchasing.

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

3. List down the various types of inventories used in industry? Ans:-COMPONENTS OF INVENTORIES Inventory consist of the following 1. Raw material Raw material is the basic input get converted into output. Example: Wood is the basic material for furniture for furniture making.

2. Bough out parts/Purchased parts These are finished part or sub assemblies purchased from outside suppliers Example: Compressor is bought parts in AC

3. IN PROCESS INVENTORIES OR SEMI FINISHED GOODS OR WORK IN PROGRESS These refer to the items or material which is partially completed. Example: the stage of book before binding.

4. FINISHED GOOD INVENTORY These include manufactured or processed item which are ready for dispatch. Example: Ball bearing, Screw and nuts.

4. State the objective of INVENTORY CONTROL? Ans:-OBJECTIVES OF INVENTORY CONTROL 1. To ensure adequate supply of product to customer. 2. To make sure that the investment in the inventories is minimum. 3. To maintain stock within desired limits 4. To take correct and timely decision fro replenishment. 5. To maintain timely records of inventory of all items

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

5. What do you know about the Inventory cost relationship ? Ans:- INVENTORY COST RELATIONSHIP There are two types of major cost related to the inventory 1. Cost associated with inventory. 2. Inventory carrying holding cost

A. COST ASSOCIATED WITH INVENTORY 1. Purchase price It is a very important cost which is expressed in the terms of unit price. It is a very useful when price discount are offered.

2. Procurement cost Procurement cost involves money spent to give order. The cost of placing an order varies from company to company.

3. Clerical and administration cost It is associated with purchasing like inviting tenders through advertisement, placing follow up through medias like personal visits, telephone fax,etc.

4. Inspection accounting This involves cost of incoming raw material, inspection and maintains record s of the receipts.

5. Transportation cost This involves cost associated with checking of each order and maintaining records of purchase.

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

B. INVENTORY CARRYING HOLDING COST

1. These are cost associated with holding given level of inventory. 2. This cost varies in direct proportion to the amount of holding period of holding stock in the store. 3. The holding cost include a. Storage cost in terms of rent, heating and lighting system. b. Deprecation, deterioration and obsolesce cost. c. Cost of record keeping d. Taxes and insurance. e. Handling, maintenance, repair and operating cost. f. Spoilage, breakage, loss due to fire.

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

6. Explain some Quality standards of Inventory Control Ans: -QUALITY STANDARDS OF INVENTORY CONTROL

Figure: Quality standards of Inventory Control

1. Maximum level of inventory It represents the upper limit beyond which the quantity of any item is not normally allowed to rise. To ensure that un-necessary working capital is not blocked in stores. Maximum Stock =recorder level + recorder quantity minimum consumption

2. Minimum stock level (safety stock) It represents the lower limit below which the stock of any item is not normally allowed to fall. To protect against stock out of a particular item. Minimum stock= Reorder level- (normal usage per periods x average delivery time)

3. Standard order It is the quantity to be purchased any time amount of standard order should be adjusted to situation. The same value should not be used for long period.

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

4. Recorder level Re-order level is fixed between the minimum and maximum level. It represents the level or point at which the replenishment action is initiated. Reorder level = lead time +safety stock

5. Lead time a. It is the time gap between of an order and time of actual supply b. It is composed of three component Lead time = servicing time +delivery time +receiving time

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

7. Write down the formula of EOQ for model with uniform demand. Explain the meaning of each term used there in? State the assumption made for deriving the formulas? Ans:- ECONOMIC ORDER QUANTITY (EOQ) 1) It is the quantity which permits low cost per unit. 2) It is an important strategic factor in inventory control and indicates the quantities, which can be reasonable ordered economically at a time.

Formula for ECONOMIC ORDER QUANTITY (EOQ)

where u = annual usage p=procurement cost associated with one order c= cost per unit. I = cost of carrying inventory in percentage per period including insurances, obsolescence taxes.

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

8. Explain EOQ with example? Ans: ECONOMIC ORDER QUANTITY (EOQ)

EOQ is explained by the following example Let q = economic lot size or EOQ c = cost for 1 item i= cost of carrying inventory in % per period. p=procurement cost associated with one order. u= total quality used per period.

a. Total procurement cost= No of purchased order placed in a pear x cost involved in one purchase

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

b. Average annual inventory=q/2

Inventory carrying cost =average inventory x cost per item x cost of carrying inventory per period

To minimize the total cost, differentiate t with respect to q ,

INVENTORY CONTROL

Vaibhav Vithoba Naik

Production Technology

9: -Derive the relation for ECONOMIC ORDER QUANTITY EOQ? Ans: - ECONOMIC ORDER QUANTITY EOQ
ECONOMIC ORDER QUANTITY, EOQ is that order which will minimize the total variable cost of managing inventory.

METHODS OF CALCULATING OF EOQ Assuming that the inventory decreases at a constant rate from the order quality q to zero and then replenished by another quantity.

Symbols used: Let, S =annual consumption of the product (units) C0 = Cost of placing an order. Cu = Unit cost of an item (unit price Rs) q = order quantity (units) I = interests rate charged pr unit per year

Now, The total variable cost of managing the inventory per year= Annual ordering cost+ Annual cost of carrying Inventory = E

INVENTORY CONTROL

10

Vaibhav Vithoba Naik

Production Technology

To determine Economic Order quantity (qO) that minimized the total cost of managing the inventory, we must differentiate E with respect to decision variable q and set the first derivative to zero i.e for minimum

INVENTORY CONTROL

11

Vaibhav Vithoba Naik

Production Technology

Q.10: -Inventory is a necessary evil Comment? Ans:-Inventory Control: Inventory control means making the desired item of required quantity available to various departments when needed. Too much inventory created a problem of their storage, huge investment and the maintenance of stored items from deterioration, pilferage, damage etc. However .low inventory leads o chance of stoppage of production increase in overheads and disruption in production schedules and delivery promises. Therefore, optimum amount of inventory should be maintained in stores. Every firm must maintain adequate stock of inventories for the following reasons: 1. To ensure against delays in Deliveries: When an order is places for fresh stock, the materials are not immediately available but sometime elapses before it arrives. This period between the time of placing the order and time of stock arrival is often subjected to variations. A firm must therefore hold some reverse stock to low production operations to continue it delay in procurement occurs.

2. To ensure against delays in Deliveries: Change in manufacturing programme may occur because of the variation in the demand. To meet the increased demand of the finished goods, the company should have enough stock or inventories so as to allow production without interference.

3. To ensure against delays in Deliveries: When a company has little inventory and run out of stock, stock out of essential material means interruption in production which raises the cost of production.

INVENTORY CONTROL

12

Vaibhav Vithoba Naik

Production Technology

4. To keep better Customer relations : Stock out means stoppage or interruptions in production, therefore it may delay re delivery of finished goods to the customer. After a few such delays even a most patient customer will start looking for supplier who will give him better services.

5. To take advantage of Quantity Discounts: Material and components may be cheaper when purchased in large quantities owing to larger discounts and lower transportation costs. Furthermore, paper work and inspection of incoming material are also simplified when larger quantities.

6. To have a better utilization of men and machinery : If there is a stock out of materials the men and machine will remain idle. Therefore the company should keep enough stock of inventories to have better utilization of men and machinery.

ADVANTGES OF INVENTORY CONTROL 1. There is no shortage of materials at any stage of production. 2. Materials are made available at most economical rates. 3. Exact and accurate delivery dates can be forecast. 4. Production schedules and delivery dates are maintained. 5. There is an increase in overall efficiency/productivity of the company.

INVENTORY CONTROL

13

Vaibhav Vithoba Naik

Production Technology

Q.11: -Describe the various order launching inventory control systems? 1. Ans: A problem which always remains is that how much material may be ordered at aime.An economic order quantity is one which permits the lowest cost per unit and is most advantageous. 2. Figure shows different quantity standards.

3. Starting from an instant which inventory OA is in the stores. It (Inventory) consumes gradually in quantity from A along AD at uniform rate. It is preknown that it take L number of days between initiating order and receiving the required inventory.Therfore, as the quantity reaches point B purchase requisition in initiated which takes from B to C, that is time R.From C to D is the inventory procurement time P.At the point D when only reserve stock is left, the ordered material is supposed to reach and again the total quantity shoots to its maximum value i.e .the point A (A=A). 4. Maximum quantity OA is upper or maximum limit to which the inventory can be kept in the stores at time. 5. Minimum quantity OE is lower or minimum limit to which the inventory can be kept in the stores at time. 6. Standard order (AD) is the difference between maximum and minimum quantity and it is known as economical purchase inventory size. 7. Recorder point (B) indicates that it is high time to initiate a purchase order if not done so the inventory may exhaust and even reserve stock is utilized before the new material arrives. 8. From B to D it is an lead time and it may calculated on the basis of past experience.

INVENTORY CONTROL

14

Vaibhav Vithoba Naik

Production Technology

Q.11: -State the reason for keeping the Inventories? Solution: REASONS FOR KEEPING INVENTORIES

7. To stabilize production: The demand for an item fluctuates because of the number of factors, e.g., seasonality, production schedule etc. The inventories (raw materials and components) should be made available to the production as per the demand failing which results in stock out and the production stoppage takes place for want of materials. Hence, the inventory is kept to take care of this fluctuation so that the production is smooth.

8. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying and to gain this price advantage the materials are bought in bulk even though it is not required immediately. Thus, inventory is maintained to gain economy in purchasing.

9. To meet the demand during the replenishment period: The lead time for procurement of materials depends upon many factors like location of the source, demand supply condition, etc. So inventory is maintained to meet the demand during the procurement (replenishment) period.

10. To prevent loss of orders (sales): In this competitive scenario, one has to meet the delivery schedules at 100 per cent service level, means they cannot afford to miss the delivery schedule which may result in loss of sales. To avoid the organizations have to maintain inventory.

INVENTORY CONTROL

15

Vaibhav Vithoba Naik

Production Technology

11. To keep pace with changing market conditions: The organizations have to anticipate the changing market sentiments and they have to stock materials in anticipation of non-availability of materials or sudden increase in prices. Sometimes the organizations have to stock materials due to other reasons like suppliers minimum quantity condition, seasonal availability of materials or sudden increase in prices.

INVENTORY CONTROL

16

Vaibhav Vithoba Naik

Production Technology

Q.11: -Explain the techniques of Inventory Control? Solution: TECHNIQUES OF INVENTORY CONTROL

In any organization, depending on the type of business, inventory is maintained. When the number of items in inventory is large and then large amount of money is needed to create such inventory, it becomes the concern of the management to have a proper control over its ordering, procurement, maintenance and consumption. The control can be for order quality and order frequency. The different techniques of inventory control are: 1. ABC analysis, 2. HML analysis, 3. VED analysis, 4. FSN analysis, 5. SDE analysis, 6. GOLF analysis and 7. SOS analysis.

The most widely used method of inventory control is known as ABC analysis. In this technique, the total inventory is categorized into three sub-heads and then proper exercise is exercised for each sub-heads.

INVENTORY CONTROL

17

Vaibhav Vithoba Naik

Production Technology

1. ABC analysis: a. In this analysis, the classification of existing inventory is based on annual consumption and the annual value of the items. b. Hence we obtain the quantity of inventory item consumed during the year and multiply it by unit cost to obtain annual usage cost. c. The items are then arranged in the descending order of such annual usage cost. d. The analysis is carried out by drawing a graph based on the cumulative number of items and cumulative usage of consumption cost. Classification is done as follows:

Category

Percentage of items

Percentage of annual consumption value

A B C

1020 2030 6070

7080 1025 515

The classification of ABC analysis is shown by the graph given as follows

INVENTORY CONTROL

18

Vaibhav Vithoba Naik

Production Technology

Once ABC classification has been achieved, the policy control can be formulated as follows: A-Item: Very tight control, the items being of high value. The control need be exercised at higher level of authority.

B-Item: Moderate control, the items being of moderate value. The control need be exercised at middle level of authority. C-Item: The items being of low value, the control can be exercised at gross root level of authority, i.e., by respective user department managers.

INVENTORY CONTROL

19

Vaibhav Vithoba Naik

Production Technology

INVENTORY CONTROL

20

Vaibhav Vithoba Naik