Inventory Control

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Inventory CONTROL

Inventory is any stock of economic resources that is stored for future us e it is normally used to hive away stuffs. in procedure wadding stuffs. spares etc. stocked in order to run into well-thought-of demand or distribution in the hereafter. Although stock list of any stuffs is an idle resources the sense. it is non meant for immediate usage. It is necessary to keep some stock lists lot the smooth operation f the organisation. Inventories are indispensable:

The followers is the list of the major grounds for keeping Inventory a ) Protect against irregular demand: Inventories are kept to run into fluctuating demand. B ) Protect against irregular supply: a work stoppage by the providers employees is one ground why bringings may non learn on clip. Lacks of stuffs at supplier’s degree. work stoppages in transit web are other possible grounds for holds in supply. Inventory is used as buffer that can be used until late bringings arrive. degree Celsius ) Protection against rising prices: Inventories are frequently kept as a hedge against rising prices. In this instance stock lists are constructing up in expectancy of monetary value addition. This bad pattern is common in trade good markets. vitamin D ) Benefits of big measures buying measures of an point frequently entities the purchasers to a price reduction. Similarly in instance of fabricating big production tonss. the use of make efficient automotive equipment can be equipment can be justified by cut downing the per unit fabrication cost.

vitamin E ) Salvaging the order cost: ordination in big measures reduces the figure of clip the order must be placed and processed. Since the fixed cost of telling will be.

degree Fahrenheit ) Other grounds: Inventories are kept for several other grounds ; an Inventory may better the bargaining power of house with a provider ( or with its ain employees ) by doing the company less dependant on them. Inventories are besides kept so that machine can be shut down for overhear.


The Inventory system involves a rhythm procedure. which is assumed to run over several periods. whose major features are:

a ) Inventory degree: an point is stocked in a warehouse. shop or any other storage country. This stock continues an Inventory. The size of the Inventory is called the Inventory degree ( or Inventory on Hand ) . B ) Depletion: the Inventory is depleted as demand occurs. Assume that one starts with an Inventory of 100 units. As clip passes the Inventory is reduced. The rate of demand can be changeless ( e. g three units every twenty-four hours ) . A changeless demand reduces the Inventory leveling equal stairss. degree Celsius ) Recording: to reconstruct an stock list. the point is replenished sporadically. When the stock list degree is reduced to a certain degree called the record point. a replacing order is placed.

The clip between reordering and receiving is called lead-time. vitamin D ) Replacement. deficits and excesss: in most basic stock list theoretical accounts. it is assumed that the reorder is scheduled so that the replacing will get precisely when the stock list degree reaches zero. Such an premise holds if the demand is changeless. However if the demand fluctuates and the lead- clip varies. the cargo may get either before or after stock is wholly depleted. that is the depletion and replacing and replacing does non co-occur. In such a instance a excess or deficit will happen. If the cargo arrives after depletion. so the demand can non be met and deficit will happen. When the cargo arrive anterior depletion. an stock list degree larger than zero or excess exists. vitamin E ) Safety stock: deficit can be eliminated or reduced by intentionally constructing up a safety stock.

It is excess stock list held against the possibility of stock out. degree Fahrenheit ) The mean stock list: the balance of stock list on manus in instance of changeless demand. it is about half the maximal stock list. g ) Basic stock list determinations: the major determinations the direction makes in the stock list country are: ? How much to order at one clip ( what order measure should be ) ? When to order this measure ( what the reorder point should be ) ? Should safety stock be build up? How big should it be?

Inventory transporting costs refers to the cost of managing stocks. The undermentioned elements constitute the Inventory carrying costs

a ) Capital cost is an of import point in finding the plague of transporting stock list. Capital cost is either the cost of borrowing capital or the cost of deviating companies finds to put in stock lists. The former means the involvement rate the ulterior implies the foregone chance cost. There are therefore two methods of finding capital cost. The first method is to utilize the bank loaning rate. if the money were to be borrowed. The other method is to see the chance cost of the money ( the return that the money will give if invested elsewhere ) . B ) Storage cost ; includes cost of storage ( i. e. one-year rent or depreciation ) . cost of saving i. e. rust preventative oils and ‘eases ) . cost of record maintaining. and cost of periodic/annual stock confirmation etc.

degree Celsius ) Deterioration and. obsolescence: impairment is the loss. from decrease in the stock list value due to one or more of the undermentioned grounds:

The part/item/material may hold limited shelf life and hence may deteriorate if stored for a long clip. e. g. gum elastic parts may check after approximative six months life. and for illustration. ammonia sheets may botch if stocked beyond three months. The points besides deteriorate when the storage conditions are unequal. unsatisfactory or both. Some of the parts may besides acquire moist. dried up. or spoilt Deterioration can besides ensue from hapless handling of the shops. Some of the delicate points may clash with other and interruption. This procedure of impairment. therefore. reduces the value of the stocks and they may non be now worth the value recorded in the histories book.

Obsolescence is the loss from decrease in stock list value of the items/ constituents rendered unserviceable by the company due to alterations in design or due to development in the field. The hazard of Obsolescence varies from industry to industry and is evidently greater than those industries where alterations are frequent and new. developments are regular. The job is still terrible in industries bring forthing manner goods. That is why many progressive concern houses tend to acquire rid of larceny excess stocks which otherwise would go disused by some kind of periodic action such as clearance gross revenues etc. vitamin D ) Insurance cost: stock lists. like other assets. are covered by insurance cost is therefore the premium paid or collectible to cover the company against loss due to unanticipated across such as fire. larceny etc.

Procurement Cost:
Procurement cost is besides called ordination cost. refilling cost or recumbent cost is the cost incurred to refill the stock of an point. It is in fact. the cost incurred at different phases of the procurance map & A ; is obtained by spliting the cost of activities like requisitioning order authorship. orders follow up. receiving and review. records maintaining and measure payment per period by the figure of orders processed during the period. Procurement cost. hence. represents mean cost to be expended to put an order and put to death the bringing one time. . Basic elements of procurance cost are as under:

( a ) Paper work cost:
The procurance map is built around paper work since all orders. little or large. need paper work. Buying map sets out with paper work ( stuffs requisitions ) pushes through paper work ( enquiry signifiers. purchase order signifiers goods reception notes. review notes stores’ reception notes ) and ends up with paper work ( checks to pay providers bills ) . The demands of this paper V vary straight with the order frequence and its cost is considered as one of the elements of procurance cost. ‘ ( B ) Postage cost:

Postage cost is the cost expended to get off paperss necessary to the concern dealing. Purchase orders are sent to authorise sellers to provide the goods. bringing agendas are mailed communicate immediate every bit good as future demands. amendments to buy orders are issued to change modify measure. monetary value or other footings. goods review notes: are posted to admit grosss of stuffs & A ; inform review consequences. disagreement notes are sent to highlight deficit in the measures received. checks are dispatched to settle providers measure etc. Postage cost is besides incurred for the exchange of statement of histories ; debit notes recognition notes & A ; other paperss required in the dealing. . ( degree Celsius ) Follow up cost ;

Follow up cost is the map of seeing that the providers affect bringings on clip. The Follow up map today has become the first map of the purchasers. Sellers be it little makers. bargainers or a provider at a distance takes small inaugural in presenting the goods on clip. Major part clip of the purchasers. hence. is spent in purchase follow up ; pre bringing follow up & A ; deficit chasing.

Telephones. bole calls. telegrams & amp ; telex are the AIDSs normally used by the purchasers for the pre-delivery follow up every bit good as for deficit chasing. The costs on such communicating Medias is yet another major component of procurance cost. ( vitamin D ) Costss of visits to the sellers workss:

Follow up with the sellers at times requires visits by purchase forces & A ; therefore costs of such visits are considered towards procurement cost. ( vitamin E ) Expediting cost:

Follow up with the sellers enables purchasers to procure beforehand information of expected holds. Pre-delivery follow up enables purchaser: & gt ; To do surrogates agreements ( i. e. request other providers for early bringing ) . & gt ; To make up one’s mind expedited routing of goods from providers.

For the single-source points. the purchasers in the event of detaining may hold no pick but to dire expedited routing of goods. The difference between the expedited routing costs and order routing costs. if borne by the purchaser excessively forms a portion of procurance cost. ( degree Fahrenheit ) Operating cost of vehicles ;

Vehicles are employed for aggregation & A ; bringing of stuffs from/and to the sellers. aggregation stuffs from transporters I railways godown etc. The operating cost of such vehicles should be considered ( if the vehicle is entirely used by the stuffs section for purchasing stuffs for local market. to trail sellers and / or to convey goods to the works ) . As yet another component procurance cost. ( g ) Inspection & A ; . testing:

Inspection & A ; proving costs include costs of destructive trial. Too frequent purchases increase review costs. ( H ) Administrative costs ;

Purchase is a major map & A ; it requires public presentation of figure of activities. Indents are to inform the purchase section of the impending demand. enquiries are floated. . citations received. rates are compared. footings of payment are looked into and so an order is placed providers whose footings are attractive. advancement on the order is reviewed and follow up with provider done wherever necessary stuffs on reaching are checked for measure & A ; inspected for quality providers bills are received. verified and paid for. All these activities add — up into large disbursals. the wages being the chief disbursal. Other related disbursals of these activities are indirect rewards. tip. fillip ESIC provident fund. depreciation on office equipment etc.

Selective control means fluctuations in method of control from point to item based on selection footing. The standard used for the intent may be cost of point. critically. lead to ingestion. procurance troubles. or something else. Assorted categorizations are employed render selective intervention to different types of stuffs. each categorization emphasizes in of peculiar facet. For illustration. ABC analysis emphasizes usage value ( Le. ingestion of points in footings of money ) . VED analysis considers critically. HML employs choice standard and 8DB analysis is based on procurance troubles.

Selective control can be divided into 8 types as per tabular array:

|Classification |Criterion Employed | |1. ABC analysis |Usage value ( i. vitamin E ingestion per period ten prize per unit ) | |2. HML analysis High-Medium-Low |Unit monetary value ( i. vitamin E it doesn’t take ingestion into history ) | |3. VED analysis Vital-Essential- Desirable ) |Critically of the point ( i. vitamin E loss of production ) | |4. SDE analysis ( Scarce- Difficult-Easy ) |Procurement troubles. | |5. Golf analysis ( Government-Ordinary- local-Foreign ) |Source of procurance | |6. SOS analysis ( Seasonal-OFF-Seasonal ) |Seasonal | |7. FSN analysis ( Fast-Slow-Non Moving ) |Issue from shops | |8. XYZ analysis
|Inventory investing |


ABC analysis underlines a hankering of import rule ‘vital few fiddling many’ . Statisticss reveal that merely a smattering of points account for majority of one-year outgo on stuffs. These points are called ‘A’ points. hence hold the cardinal to concern. Are legion in Numberss but their part is less important. ABC analysis therefore tends segregate all points into three classs: A. B and C on the footing of their one-year use. The classifications made enables us top ay the right sum of attending as merited by the points. A-items: It is normally found that barely 5 to 10 % of the entire points account for 70 to 75 % to entire money spent on the stuffs. This points required elaborate and stiff control and demand to be stock in smaller measures.

These points should be procured often. the measure juncture being little. A healthy attack. nevertheless. would be to come in into contract with the maker of this points and have their supply in lurch tonss harmonizing to pre determine programme of the purchaser. This nevertheless will be possible when the demand is steady. Alternatively. the stock list can be at minimal by frequent telling. B-items: This point are by and large 10 to 15 % of the entire points and stand for 10 to 15 % of the entire outgo on the stuffs. These are intermediate points.

The control on this point need non be as item and every bit stiff as apply to A points C-items: These are legion ( every bit many as 70 to 80 % of the entire points ) . cheap ( represent barely 5 to 10 % of entire one-year outgo on stuffs ) . and hence insignificant ( make non necessitate loose control ) points. The procurance policy of these points is precisely the contrary of A points. Items should be procured infrequently and in sufficient measures. This enables the purchaser to avail monetary value price reduction and cut down work load of the concern section.

Conducting ABC Analysis
To carry on ABC analysis following 6 stairss are necessary:
1 ) Fix the list of the points and gauge their one-year ingestion ( units )

2 ) Determine unit monetary value ( or cost0 of each point.
3 ) Multiply each one-year ingestion by its unit monetary value ( or cost ) to obtain its one-year ingestion in rupees ( one-year use ) 4 ) Arrange points in go uping order of their one-year use get downing with the highest one-year use get downing with the highest one-year use down to the smallest use. 5 ) Calculate cumulative one-year use and show the same as cumulative use % so express the figure of point into cumulative point per centum. 6 ) Plot cumulative use per centum against cumulative point per centum and segregate the point to A. B. C classs.

ABC Analysis can be applied about to all facets of material direction such as: a ) Buying
B ) Receiving
degree Celsius ) Inspecting
vitamin D ) Shop maintaining and
vitamin E ) Issue of shop
degree Fahrenheit ) Confirmation of measures
g ) Inventory control and
H ) Value analysis etc.

Purpose of A-B-C Analysis:
I. To divide the pre dominant few from huge bulk of points whose one-year ingestion is really low. two. To avoid to be
three. To give selective control
four. For better purchase policy to give maximal attending to A points v. For better pre-design and pre purchase analysis
six. Effective value analysis
seven. Realistic market research
eight. Reliable beginning development and
nine. Better follow up

|A |B |C | |Very tight control on stock list |Moderate Control |Loose Control | |Only exact demand to be procured |More or less exact
demand |On estimated usage | |Posting of single issues in shops card |Individual postage |Collective poster | |Continuous cheque on production agenda and |Broad cheque |Hardly any cheque | |revision of bringing trades | |

| |Very low safety stock if possible non at all |Low safety stock Bi-Monthly ordination or quarterly|Fairly big safety stock by Ordering | |Regular expediting and follow up & A ; decrease in |Some follow up |No follow up necessary | |lead clip | | | |Very Strict ingestion control |Past ingestion is the base |Desirable ingestion comes with less attending | |Accurate stuff planning needed with regard to|Past ingestion is the base |Rough estimation | |forecasts. Data base should be accurate & A ; up to | | | |date | | | |Concerted attempt of cost decrease |Moderate efforts are adequate |Annual Review suffices |


H-M-L Analysis is similar to ABC analysis. except for the difference that alternatively of usage monetary value standard is used. The points under this analysis are classified into three groups ) which are called high. medium and low. To sort. the points are listed he falling order of Unit monetary value the direction for make up one’s minding the three classs so fixes the cut of lines. For illustration. the direction may make up one’s mind that all points of unit. Price above RS. 1000 will be category. and those holding unit monetary value between Rs 100 to R. 1000 will be of ‘M’ class. and holding unit monetary value below RS. 1 00 will be
of ‘L’ class.

HML analysis helps to

# Assess storage and security demands e. g. high priced points like bearings. worm wheels etc. ( required to be kept in closets ) .

# To maintain control over ingestion at the departmental caput degree e. g. indents of high medium priced points are authorized by the departmental caput after careful examination of the ingestion figures.

# Determine the frequence of stock confirmation. eg. high priced points are checked more often than low priced points.

# To germinate purchasing policies to cntro1 purchases. e. g. extra supply than the order measure may be accepted for ‘H’ and ‘M’ groups While it may be accepted for ‘L’ group.

# to depute governments to different purchasers to do junior-grade hard currency purchases. e. g ‘H’ and ‘M’ may be purchased by senior purchasers and L’ points by junior purchasers.

VED Analysis

VED analysis represent categorization of points based on criticalness. The analysis classifies the point into three groups called Vital. Essential and Desirable.

Via1 class encompasses those points for privation of which production would come to a arrest. Essential group includes points whose stock out cost is really high and desirable group comprises of points. which d non cost any immediate loss of production. The stock these points entail nominal outgo and cause major breaks for a short continuance.

VED analysis is best suited for trim stock list. Inflict it is advantageous
to utilize more than 1 method. E. g. ABC & A ; VED analysis together would be helpful would be helpful for stock list control of spares.


SD E analysis is based on jobs of procurance viz. :

# Non-availability # scarceness # longer lead clip

# Geographical location of providers and

# Reliability of providers etc.

S-DE analysis classifies the points into three groups called ‘Scares’ . ‘Difficult’ and ‘Easy. The information so developed is so used to make up one’s mind buying schemes.

‘Scarce’ categorization comprises of points which are in short supply. imported chanalised through authorities bureaus. Such points are best to secure one time a twelvemonth in stead of attempt and outgo involved in the process for import. ‘Difficult’ categorization includes those points. which are available indigenously but are non easy to procure. Besides points which come from far off distance and for which dependable beginning do non be autumn into this class. Even the points. which are difficu1t to. industry arid merely one or two makers are available belong to this group. Supplies of such points require several months of progress notice.

‘Easy’ categorization covers those points which are redily available. Items produced to commercial criterions. points where supply exceeds demand and others which are locally available autumn into this group.

The SDE analysis is employed by the purchase section:
( I ) To make up one’s mind on the method of purchasing. E1g. Forward purchasing method may be followed for some of the points in the ‘Scare’ group ) scheduled purchasing and contract purchasing for Easy group. ( two ) To repair duty of purchasers. E. g. senior purchasers may be given the duty of ‘S and ‘D’ groups while points in ‘E’ group may be handled by junior purchasers or even straight by shopkeeper.


The G-NG-LF analysis ( or GOLF analysis ) like SDF analysis is based on the nature of the providers. which deteiir1ine quality. lead-time. and footings of payment. continuity or otherwise of supply and administrative work involved. The analysis classifies the points into four groups viz. G. NG. L and F.

‘G’ group covers points procured from ‘Government’ providers such as the STC. the MMTC and the public sector projects. Minutess with this class of providers involve long lead-time and payments in progress or against bringing. ‘NG’ ( 0 in GOLF analysis ) group comprises of points procured from Non-Government ( or Ordinal Suppliers. Minutess with this class of providers involve moderate bringing clip. end handiness of recognition. normally n the scope of 30 to 45 twenty-four hours. ‘L’ group contains points bought from ‘Local provider the points bought from local providers are those which are hard currency purchase or purchased on clean orders. .

‘F’ group contain those points. which are purchased from ‘Foreign suppliers’ . The minutess will such providers. # Involve a batch of Administrative and procedural work.
# Require initial clearance from authorities bureaus such as DGTD. # Necessitate search-of foreign providers.
# Require gap of missive of recognition.
# Require devising of agreement for transportation and larboard clearance.

S-OS Analysis

S-OS analysis is based on seasonality or otherwise of the points. The analysis classifies the point into two groups: SOS ( I. e. seasonal ) and OS ( off scasona1 ) . The analysis identifies points. which are: ( I ) Seasonal points are available merely for a limited period. For illustration agribusiness merchandises like natural Mangifera indicas natural stuff for coffin nail and paper industries. etc are available for a limited clip and hence such points are procured to last the full twelvemonth. ( two ) Seasonal but are available throughout the twelvemonth. Their monetary values nevertheless are lower during the crop clip. The measure of such points requires to be fixed after comparing the cost salvaging due to take down monetary values against higher cost of transporting Inventories. ( three ) Non-Seasonal points whose measure is decided On different considerations.

F-S-N Analysis

F-S-N analysis is based on the ingestion figures of the points. The points under this analysis are classified into three groups: F ( Fast traveling ) . S ( Slow traveling ) and N ( Non traveling ) . To carry on the analysis. the last day of the month of reception or the last day of the month of issue whichever is subsequently taken into history. and the period normally in footings of figure of months that has elapsed since the last motion is recorded.

Such an analysis helps to place:
( I ) Active points which require to be reviewed on a regular basis.
( two ) Surplus points whose stocks are higher than their rate of ingestion and ( three ) Non traveling points which are non being consumed.
The last two classs arc reviewed further t decide on disposal action to consume t stocks and their stocks and thereby let go of companies productive capital.

Further elaborate analysis is made of the 3rd class in respect to their year-wise stocks and the points can be sub-classified. As non-moving for 2 old ages. 3 old ages. 5 old ages and so on.


X-Y-Z Analysis is based. on value of the stocks on manus ( i. e. inventory investing ) ; Item whose stock list values are high are called X points while those whose stock list values are low are called Z points. Y points are those. which have moderate stock list stocks. Normally X-Y-Z analysis is used in
concurrence with either ABC analysis or HML analysis. ; ‘ . X-Y-Z analysis when combined with- ABC analysis is used as under. |Class of Item |A |B |C | |X |Efforts to be made to cut down stock to Z|Effort to be made change over them to Y |Steps to be taken dispose of excess | | |category. |category |stocks | |Y |Efforts to be made to change over to Z | |Control may be farther tightened | | |category | | | |Z | |Stocks degrees may be reviewed | |

Basic ( Wilson ) EOQ theoretical account with infinite refilling rate.

Premises underlying the EOQ theoretical account:

1. The demand of the point occurs uniformly over the period at the known rate.

2. The refilling of the stock is instantaneous.

3. The clip that elapses between the puting a refilling order & A ; having the point into stock. called lead-time is zero.

4. The monetary value per unit is fixed & A ; is independent of the order size.

5. The cost of puting an order & A ; process the bringing is fixed & amp ; does non vary with the size.

6. The stock list carrying charges vary straight & A ; linearly with the size of the stock list as is expressed as a per centum of mean stock list

7. The point can be produced in measures desired there being no limitation of any sort.

8. The point is reasonably long shelf life. there being no fright of impairment of spoilage.

Presents an EOQ technique is non much in Sue because an unfastened order with bringing agenda can be placed on a provider for all future periods. This keeps down the buying cost. With the handiness of computing machine links ( networking techniques/email etc. ) between the purchaser & A ; the provider there is no demand to physically raise a purchase order. avoiding major buying cost. At the same clip computing machine helps in guaranting Just-In-Time stock list.

Restrictions of EOQ

The premise listed supra may non come true in existent life state of affairss. therefore restricting the usage of theoretical account.

Monetary value of stuff may non stay same throughout the twelvemonth. Availability of stuffs is another restraint stuff will hold to be purchased at the same clip at which is available.

There can be delay in existent state of affairs in puting orders since many times the deliberate EOQ is an inconvenient figure and some clip is wasted in taking determination for rounding off this figure. In existent state of affairss providers receive in guerrilla.

Handiness of stuffs is another restraint stuff will hold to be purchased at the clip at which is available.

There can be delays in existent state of affairs in puting orders since many times the deliberate EOQ is inconvenient figure and some clip is wasted in taking determination for rounding off this figure. In existent state of affairss providers receive an irregular watercourse of orders since the usage of EOQ normally leads to orders at random points.

If providers are leting price reductions and if measures are purchased above a peculiar degree. the price reduction will besides hold to be taken into consideration for repairing the telling measure. Besides buying costs are today reduced to a great extent because of computing machine links between purchaser and marketer. So in pattern buying cost and stock list carrying cost are non precisely face-to-face to each other. Often the stock list transporting cost and buying cost can non be identified accurately and sometimes can non be even identified decently.

Replenishment Systems:

One of the occupations of the stuffs section is to guarantee uninterrupted supply of stuffs to the production section. To carry through this undertaking. the stuffs section has to supervise the stock degrees and topographic point order on a regular basis. Two inquiries that arise are- 1. When to put an order? & A ; 2. What quantities to order? Two chief systems are followed for the same.

1. Fixed order measure system

2. Fixed order interval system

Each system has certain conditions. which govern the fortunes of its usage.

Fixed order measure system ( Q-system of Inventory ) : Here the measure to be ordered is worked out as the economic order measure ( EOQ ) . and the minimal stock degree is besides worked out. When the stock in manus ranges this degree. an order is placed for a measure peers to the EOQ.

Features of fixes-order-quantity system:

a ) Reorder measure is ever the same. which is equal to the EOQ.

B ) The clip interval between the orders varies.

degree Celsius ) Reordering is done when the stock in manus is equal to safety stock plus the lead clip ingestion ( this is known as the reorder degree ) .

vitamin D ) Average stock list is equal to safety stock + Q/2.

vitamin E ) Maximum stock list will be equal to the safety stock + Q.

degree Fahrenheit ) Minimum stock list equals the safety stock.

g ) This system is usually used for points of lower value where orders are placed infrequently and the lead clip mean ingestion etc. is reasonably changeless.

To run this system it is necessary to post the grosss and issues on the material card and a book stock worked out on a regular basis. The reorder degree is usually shown on the top right manus corner of the card ; so that the book stock comes down to this degree an order can be initiated. To simplify this system many house utilize a two-bin system one is the main-bin & A ; the other is reserve-bin. The stock in modesty bin equals the reorder degree. When the chief bin is empty it indicates an order has to be placed for the said point.

Important expression:

1. Fixed order measure system:

Reorder degree = safety stock + lead clip ingestion

Reorder measure = Q

Maximum stock list = Q + safety stock

Minimum stock list = safety stock

Average stock list = Q/2 + safety stock

Entire cost of telling = no. of orders x cost per order = Annual ingestion x cost per order

Cost transporting stock list = mean stock list ten cost per unit ten stock list transporting cost

Entire cost of pull offing the stock list = cost of telling + cost of transporting.

Fixed order interval system ( P-system of Inventory ) :

Under this system the stock in manus is reviewed at periodic intervals and an order is placed for which vary with the stock in manus. the reappraisal period is decided by the direction and the ingestion during this reappraisal period. and lead clip ingestion is worked out. The measure ordered is distinct depending on the stock in manus. so that the order measure and the stock in manus will take attention of the demands till the following reappraisal period plus the lead clip ingestion plus the safety stock.

Features of fixed-order-interval system:

a ) The interval between two orders is fixed.

B ) The maximal degree ( basic parametric quantities of the system ) is equal to reexamine period ingestion. Lead clip ingestion + safety stock.

degree Celsius ) Reorder measure equals the maximal degree ( as worked out above ) minus the stock in manus plus stock on order.

vitamin D ) Average stock list peers safety stock + lead clip consumption/2.

vitamin E ) Maximum stock list peers safety stock + lead clip ingestion.

degree Fahrenheit ) This system is used for high ingestion value points ( A class ) necessitating a rigorous control. Reestablishment where big Numberss of points are produced and a uninterrupted sale is made as to follow such a system.

Important Formulas:

Maximal degree ( basic parametric quantities ) = Review period ingestion + lead clip ingestion + safety stock.

Reorder measure = Max degree – ( stock in manus +stock on order ) .

Maximum stock list = safety stock + lead clip ingestion.

Average stock list = safety stock + lead clip consumption/2

Entire cost of pull offing the stock list = cost of telling + cost of transporting.

Problem based on fixed order interval system:

The monthly ingestion of a unit bing Rs. 400 the order cost is Rs. 36. and the stock list transporting cost is 1. 5 % p/m. if the reappraisal period = lead clip = one month and the safety stock maintained is half the reappraisal period.

1. Repair the necessary parametric quantities to run a fixed order interval system.

2. What will be reorder measure if the stock during the first reappraisals of 650 units.

3. What will be the reorder measure if the stock during the 2nd reappraisal is 200 units and besides it is given that the order placed before has non yet been received.


Review period = lead clip = 1 month.

Review period ingestion = lead clip ingestion =400 units.

Safety stock = ? month’s ingestion = 200

Necessary parametric quantities ( maximal degree ) = review period ingestion + lead clip ingestion +safety stock = 400 + 400 + 200 = 1000 units.

During the first reappraisal.

The reorder measure = maximal degree – stock in manus =100 – 650 =350 units.

During the 2nd reappraisal.

The above ordered measure is still non received. hence

Reorder measure = maximal degree – ( stock in manus + stock on order )

= 100 – ( 200 + 350 ) = 1000 – 550 = 450 units.

Factors that influence the degree of safety stock:

a ) Class of point: In instance of ‘A’ class points where a better control is exercised it may non be required to maintain a high degree of safety stock. In add-on to this a high degree of safety stock and high value of ingestion point will besides increase the stock list carrying costs.

B ) Lead-time: Normally longer the lead clip more is the opportunities of fluctuation and therefore more is the demand of safety stock.

degree Celsius ) Number of providers: In instance there are a figure of providers available for an point. it is non necessary to maintain high degree of safety stock as any stock out state of affairs can be handled easy from alternate beginnings of supplies.

vitamin D ) Criticality of an point: Safety stock for critical points needs to be high e. g. in instance of packing stuffs the safety stock demand to be high as stock cut in packing stuff will impact the bringing of finished goods to the clients. but in instance of lubricators where lubrication can be delayed safely by a few yearss a lower safety stock can be maintained.

vitamin E ) Handiness of replacements: Lesser safety stock can be kept for points where replacements are available easy.

degree Fahrenheit ) Possibility makes the item in-house: If it is possible to do an point in-house at a short notice on instance of exigency. A lower safety stock will do.

g ) Hazard of obsolescence or impairment: It is better to hold lower safety stock for points where the cost of impairment is higher than the cost of no stock state of affairs.

H ) Space limitations: Restrictions in the storage infinite is another factor act uponing the safety stock degrees.

I ) Stock out cost/management policy: The cost of stock out and the management’s determination to let arrest of production due to no stock state of affairs ( depending upon the market and company’s fiscal conditions ) besides influence the determination on the safety stock degrees.

Service degree

The sum of safety stock needed to find by the service degree desired by their company. The service degree Idaho likely that sum of stock list had during the lead clip is sufficient to run into expected demand – i. e. the chance that a stock out will non happen. a service degree of 90 % means their id’s 90 chances that demand will be met during lead clip.

Service degree ( SL ) is the ratio of the no. The units delivered without the hold to the no. of units demanded.


SL = No. of units delivered without hold / No. of units demanded.

SL = No. of units demanded – No. of units short / No. of units demanded.

SL Range: 0 & lt ; SL & lt ; 1

I. e. SL = 0 means complete bringing failure.

SL = 1 agencies 100 % service ( No deficits )

SL is expressed as a % .

I. Percentage of stock outs = SL = No. of order periods when stocks were zero / Total No. of order periods x 100

This is declarative of the chance of being out of stock while expecting a supplier’s bringing and is. hence independent of the order size.

two. Percentage of stock outs = SL = No. of working yearss in which stocks were zero / Total no. of working yearss x 100

This ratio is a step of the chance of being out of stock during the twelvemonth.

three. Percentage of stock outs = SL = No. of units / No. of units demanded x 100

This ratio would demo the mean possible sale lost.

Service Level is a mark specified by direction defined in footings of.

a. Order Cycle Time

B. Cash Fill Rate

c. Line Fill Rate

d. Order Fill Rate

e. Any Combination of These.

a ) Order Cycle Time ( Performance Cycle of Lead Time ) :

The public presentation rhythm is the elapsed clip between the release of a purchase order by a client and the reception of the corresponding cargo.

B ) Case Fill Rate:

It defines per centum of instances or units ordered that can be shipped or requested e. g. a 95 % instance fill rate indicates that. on norm. 95 % instances out of 100 could be filled from available stock. The staying 5 instances would be back – ordered or deleted.

degree Celsiuss ) Line Fill Rate:

It is the per centum of order lines that could be filled wholly. Each line on an order is a petition for an single merchandise. So at order may hold multiple lines e. g. when a client order is received bespeaking 80 units of merchandise A and 20 units of merchandise B. the order contains 100 instances and two lines. If there are merely 75 units of merchandise A available and all 20 of merchandise A. the instance fill would be 955 ( 75 +20 ) / ( 80 + 20 ) and the line fill would be 50 % .

vitamin D ) Order Fill Rate:

It is the per centum of client orders that could be filled wholly. In the illustration above. the order could non be wholly filled. so the ensuing order fill would be zero.

The stock list map is a major component of the logistics procedure that must be integrated to run into service aims. While a traditional attack is accomplishing a higher service degree is to increase stock list. other attacks include usage of faster transit manners. better information direction to cut down uncertainness. alternate beginnings of supply.

While it is the undertaking of overall logistics direction to run into the prescribed service aims inventory direction plays a peculiar cardinal function.

Inventory Policy: Inventory policy consists of guidelines refering

• What to buy or fabricate

• When to take action

• In what measure

It besides includes determinations sing stock list placement and arrangement at workss and at distribution centres.

E. g.

• Some houses may make up one’s mind to prorogue stock list placement by keeping stock at the works.

• Other houses may take to put more merchandises in local distribution centres i. e. nearer to market.

Another stock list policy component concerns stock list direction scheme. One attack is to pull off stock list centrally. This
requires more coordination and communicating.

Average stock list: Average stock list consists of the stuffs. constituents. work in advancement and finished merchandises typically stocked in logistical installations. From a policy point of view. the appropriate degree of mean stock lists include: –

a ) Cycle stock list or base stock or batch size stock: It is the part of mean stock list that consequences from replenishment procedure. At the beginning of a public presentation rhythm. stock is at a minimal degree. Daily client demands “draw off” ( consumes ) stock list until the stock degree reaches zero. Prior to this. a replenishment order is initiated so that stock will get before a stock-out occurs. The replenishment order must be initiated when available stock list is greater than or equal to the client demand during the public presentation rhythm clip.

The sum ordered for refilling is called the order measure.

The mean stock list held as a consequence of the order procedure is referred to as Base Stock sing merely the order measure:

Cycle stock list or base stock or batch size stock = Order Quantity / 2

B ) Safety Stock Inventory: The 2nd portion of the mean stock list is the stock held to protect pass through the impact of uncertainness on each installation. This part of stock list is called safety stock. It is used merely at the terminal of refilling rhythms when uncertainness has caused higher than expected demand or longer than expected public presentation rhythm times.

Average Inventory = Order Quantity + Safety Stock / 2

degree Celsius ) Transit Inventory or Pipeline Inventory: It is the stock that is either traveling or expecting motion in transit vehicles.

Transit Inventory is necessary to accomplish order refilling. From a logistics direction position. theodolite stock list introduces two beginnings of complexness into the supply concatenation.

I. It represents existent assets and must be paid for even though it is non accessible or useable.

two. There has typically been a high grade of uncertainness associated with the theodolite stock list because shippers were unable to find where a conveyance vehicle was located or when it was likely to get.

Increase focal point on little order sums. more frequent order rhythms. JIT schemes have resulted in theodolite stock list going a larger per centum of entire stock list assets.

Ownership of Transit Inventory

• If transferred at finish: It is non owned by consignee.

• If transferred at beginning: It is owned by consignee.

Merely In Time ( JIT )

JIT is a Nipponese direction doctrine. which has been applied in pattern since the early 1970’s in many Nipponese fabrication organisations. It was foremost developed and perfected within the Toyota fabrication workss by Taiichi Ohno as agencies of run intoing consumer demands with minimal holds. Taiichi Ohno is often referred to as the male parent of JIT

Toyota was able to run into the increasing challenges for endurance through an attack that focused on people. workss and systems. Toyota realized that JIT would merely be successful if every person within the organisation was involved and committed to it. if the works and procedures were arranged for maximal end product and efficiency. and if quality and production plans were scheduled to run into demands precisely.

JIT fabrication has the capacity. when decently adapted to the organisation to beef up the organization’s fight in the market topographic point well by cut downing wastes and bettering merchandise quality and efficiency of production.

There are strong cultural facets associated with the outgrowth of JIT in Japan. The Nipponese work ethic involves the undermentioned constructs.

• Workers are extremely motivated to seek changeless betterment upon that which already exists. Although high criterions are presently being met. there be even higher criterions to accomplish.

• Companies should concentrate on group attempt. which involves the combine of endowments & A ; sharing cognition. problem-solving accomplishments. thoughts & A ; the accomplishment of a common end.

• Work itself takes precedency over leisure. It is non unusual for a Nipponese employee to work 14 – hr a twenty-four hours.

• Employees tend to stay with one company throughout the class of their calling span. This allows the chance for them to hone their accomplishments & A ; abilities at a changeless rate while legion benefits to the company.

• These benefits manifest themselves in employee trueness. low turnover costs & A ; fulfilment of company ends.

From above it is really clear what it needs to implement JIT successfully. In fact it besides suggests the critical logical thinking behind the fact that why in India JIT is non 100 per centum followed. One more important thing to be considered here is the right reading of JIT. JIT is more of a fabrication & A ; waste riddance doctrine than trade good buying technique. It originally referred to the production of goods to run into client demand precisely. in clip. quality & A ; measure. whether the client is the concluding buyer of the merchandise or another procedure farther along the production line.

It has now come to intend bring forthing with minimal waste. Waste is taken in its most general sense & A ; includes clip & A ; resources every bit good as stuffs. There are seven types of waste viz. :

• Waste from overrun

• Waste of waiting clip

• Transportation waste

• Processing waste

• Inventory waste

• Waste of gesture

• Waste from merchandise defects

Elementss of JIT System

Successful JIT system is the logical branch of the combination of the undermentioned patterns:

• Continuous betterment

• Attacking cardinal jobs – anything that does non add value to the merchandise

• Inventing systems to place jobs

• Endeavoring for simpleness – simpler systems may be easier to understand.
easier to pull off & amp ; less likely to travel incorrect

• A merchandise – oriented layout produces less clip spent in traveling of stuffs & A ; parts

• Quality control at beginning – each worker is responsible for the quality of their ain end product

• Poka-yoke – full cogent evidence tools. methods. gigues etc. to forestall errors

• Total productive care – guaranting machinery & A ; equipment maps absolutely when it is required. & A ; continually bettering it

• Good housework – workplace cleanliness & A ; organisation

• Set up clip decrease – increases flexibleness & A ; allows smaller batches

• Ideal batch size is 1 point per batch. i. e. individual piece flow

• Multi-process handling – a multi-skilled work force has greater productiveness. flexibleness & A ; occupation satisfaction

• Leveled/mixed production – to smooth the flow of merchandises through the mill

• Kanbans-simple tools to ‘pull’ merchandises & A ; constituents through the procedure

• Jidoka ( Autonomation ) – supplying machines with the independent capableness to utilize judgement. so workers can make more utile things than standing watching them work

• Andon ( problem visible radiations ) – to signal jobs to originate disciplinary action

Benefits of JIT Systems

JIT system has a figure of benefits. few major are mentioned below:

• Reduced degrees of in-process stock lists. purchased goods. & A ; finished goods.

• Reduced infinite demands

• Increased merchandise quality & A ; reduced bit & A ; rework

• Reduced fabrication lead times

• Greater flexibleness in altering the production mix

• Smoother production flow with fewer breaks

• Worker engagement in job resolution

• Pressure to construct good relationships with sellers

• Increased productiveness degrees & A ; use of equipment’s

It can be said in drumhead that JIT is the direction doctrine. which emphasizes on the waste riddance every bit good as seller integrating to make certainty in the stuff planning procedure. which finally consequences into no stock list. & A ; therefore stock list control means to follow JIT.


VMI can be defined as:

It is a streamlined attack to stock list & A ; order fulfilment. With it. the provider & A ; non the retail merchant. is responsible for pull offing & A ; refilling stock list utilizing an built-in portion of VMI. i. e. EDI. by electronic transportation of informations over a web. It can besides be seen as a mechanism where the provider creates the purchase orders based on the demand information exchanged by the retailer/customer.

Vendor Managed Inventory ( VMI ) is fundamentally evolved to ease the operations at retail shops. It involves a uninterrupted refilling plan that uses the exchange of information between the retail merchant & A ; the provider to let the provider to pull off & amp ; replenish ware stock at the shop or warehouse degree. In this plan. the retail merchant supplies the seller with the information necessary to keep merely plenty ware stock to run into client demand. These enable the provider to better undertaking & A ; expect the sum of merchandise it needs to bring forth or provide.

The maker has entree to the supplies stock list informations & A ; is responsible for bring forthing purchase orders. VMI was foremost applied to the food market industry. between companies like Procter & A ; Gamble ( provider ) & A ; Wal-Mart ( distributer ) . But if applied decently. VMI can supply the benefits of smoother demand. increased gross revenues. lower stock lists & A ; still reduced costs of lost gross revenues to the other industries.

Merely IN TIME ( JIT ) – II

VMI consequences into outsourcing of the stock list planning activity to the providers whereas JIT-II goes a measure in front where provider manages the complete production programs.

LANCE DIXON ther male parent of JIT 2 describes it as- :

“This is the ultimate partnership plan for the compatible clients and providers. because it is the following logical measure in the application of the direction rhythm to the value cahin through direction of clip within the supply concatenation. It represents the usage of alliance and mobilization of schemes with providers utilizing in-plant seller representatives to accomplish discovery changes” . JIT systrem was based upon the synchronized planning between the purchasers demands and providers porduction capablenesss. JIT 2 can be reagrded as a major accelerator for the productive alteration across organistions and qualifies a cardinal constituent of the macro logistics direction theoretical account. In other words. we can state that JIT
system assures the uninterrupted incoming stuff supply as per demand. whereas the JIT 2 ensures the uninterrupted production from fabricating lihnes. Infact JIT-2 eliminates the demand for the gross revenues planning activities for sipplier administration and the puirchasing and be aftering actrivities from the purchaser administration. which were carried out independently.

Bioth activitiea are carried out at the same time in JIT-2 environment this consequences into more incorporate and realistic programs to enable accomplishing marks It is based upon a common trust realtionship where the provider represenataive is empowered to utilize the company’s purchase oreders to put orders. which in theory replaces the buyer and the supplier’s gross revenues individual. In pattern the provider representative is brought into the works on a full clip footing. This individual is allowed to go to any merchandise design meetings for his merchandise and has full entree to all relevant installations. forces. and informations. Buying staff is freed up from all the paper work and administartive undertakings. leting them toi cultivate other accomplishments such as negotitiating and sourcing. PO arrangements and communicating is improved ; clip is saved ; material cost decrease is realized. JIT-2 provides a natural foundation for the EDI. effectual paper work and administrative nest eggs. Material costa rhenium reduced on an on-going footing. Supplier personnnel work onsite and execute assorted planning and purchasing aswell.

Because supplier forces interface day-to-day. increased insight leads to fewer agenda alteration surpirises. This consequences in decreased stock list as the provider programs straight from the clients MRP system on existent clip footing. JIT-2 brings considerable proficient cognition and support onsite involves buying to plan and technology. Supplier inplant reperesntatives aer empowered with the combined authorization of the stuffs contriver. purchaser and provider. ensuing in a uniquely effectual and empowered support function.

Another advantage of JIT-2 to the provider is that they normally get “EVERGREEN CONTRACT” which means n o terminal day of the months and rebidding. Coupled with EDI links and information engineering exchanges. which arfe a P [ art of the overall logistics bundles. the JIT-2 construct can offera supplier a really serious scheme advantage.


• Increased internal productiveness through faster information transmittal as reduced information entry redundancy. • Better truth by cut downing the figure of times and persons involved entry. • Improved channel relationships.

• Increased external producvtivity.
• Increased ability to vie internationally.
• Decreased operating cost through:
a ) Reduced labor and stuff costs associated with printing. mailing. and paper based minutess. B ) Reduced telephone. facsimile. and telex communications. degree Celsius ) Reduced clerical cost.

Personal Computers:
Personal computers are act uponing logistics direction in three ways: 1. Low cost and high portability wih a capableness of conveying accurate information to the determination shaper whether in offfice at he warehouse. ? Which markets to function

? Which merchandise to pick following in thw warehosue
? Driver coverage and bringing information.
? Reporting vehicle location
? Identifying lowest-cost fuel halt.
2 ) Repsonsiveness and flexibleness offered by decentralized Personal computers enable more for service capablenesss. The usage of local country webs ( LANs ) broad arear web ( WAN ) and client/server architecture offers benefits of decnetralized reactivity. flexibleness. and redundacy while supplying informations integrated throughout the endeavor.

LAN is a web of Personal computers that use phone lines or overseas telegram to commuinicate and resources such as storage and pressmans. LAN is resticted to relativiely geographical locations such as an office and warehouse. WAN operates across a broad geographics ; while the architecture uses the decnetralized processiing power of Personal computers to supply LIS operation flexibleness. Server is a big computing machine that allowes commom informations ot be shared by a numvber of users. Client implies web of Personal computers that entree the informations and pull strings them in different ways to supply extended flexiblity. The client/server web can globally track stock list in gesture. supply shipment informatio to the clients when desired and besides facilitate determinations sing installation location. invenrotry analysis. routing and programming.

AI descrivbes engineerings aimed at doing computing machines imitate human logical thinking and are concerned with symbolic logical thinkings instead than numeral processing. The applications of AI are:
? Carrier choice.
? International selling and logistics
? Inventory Management
? Information system design


Historically logistics activities had a distinc disadvantage since they involved motions in either a conveyance ot stuff handling vehicle or were really decntralized. But nowadays information engineering has significantly enhaced logistics perofrmance through faster and widespread communicating. Applicatgion of Radio frequence ( RF ) . satellite communcaitions. and image processing engineerings has overcome the jobs caused by porduct motion and geographical decentalisation.

RF engineering is used within comparatively little countries. such as ditribution. to ease bipartisan information exhange. The applications are in:

? Real clip communications with material hanlders such as forklift drivers and order pickers. ? Updating instructions and precedences to forklift drivers on existent clip footing. ? Bipartisan commuincations of warehouse choice direction. warehouse rhythm count verifaiction and
label prinintg for steering bundle motion.

Satellite Commuincations:
Satellite communicating is used for supplying a fast and high – volume channel for information motion around the Earth. THE applications are as follows:
? Communications dishes on the top vehicles allow commuinations between drivers and goings. ? Provides uptodate infoormation sing location and bringing and allows goings to airt trucks in repsonse to necessitate or traffic congestion. ? Used by retail ironss to convey rapidly day-to-day gross revenues bac to the central office that aid in triping shop refilling and besides to supply input to selling sing local gross revenues form.

It Exhibits the undermentioned features:
1. An addition in the figure of back-orders. bespeaking excessively many stockouts. 2. A changeless figure of back orders. but lifting stock list investing. 3. A higher than normal client turnover.
4. A increasing figure of off oreders from clients or intermediairies. 5. Insufficeicnt storage infinite for excessively much stock list.
6. An addition in the figure and RUPEE value of disused merchandises. All these symptoms have a big finanical impact on the house | | |INVENTORY PLANNING METHODS |


Fig7. 2 Inventory planning methods

It is a simplified stock list direction method that provides each ditribution installation with an just or just portion of available stock list
from a common beginning such as a works warehouse.

Fig 7. 3: Fair Share Allocation
The figure under mention indicates current stock list degree. and day-to-day demands for three distribution Centres served by a common works warehouse. Using just portion allotment regulations. the stock list director determines the sum of stock list that can be allocated to each distribution Centre from the available stock list at the works warehouse. Assume that from a entire stock list units of 600. ( see Fig. 7. 2 ) it is desirable to retain 100 units at the works warehouse ; hence 500 units are available for the allotment. The computation to find the figure of day’s supply is done as shown below.

DS= A + I/O
DS= No. of yearss supply for distribution Centre stock lists. A= Inventory units to be allocated from the warehouse.
I= Inventory in units for distribution Centre J.
D= Daily demand for distribution Centre J.
In the above illustration.
DS = 500 + ( 50 + 100 + 75 ) / ( 10 + 50 + 15 ) = ( 500 + 225 ) / 75 = 9. 67 yearss

Therefore. the just portion allotment means that each distribution Centre should be brought unis to 9. 67 yearss stock. The sum to be allocated to each distribution Centre is determined by the look: A = ( DS – I/D ) x D

A= Amount allocated to distribution Centres J
DS = Day’s supply that each distribution Centre is brought up to. I= Inventory in units for distribution Centre J.
D = Daily demand for distribution Centre J.
Therefore the sum allocated to distribution Centre 1 in the above illustration will be: A = ( 9. 67 – 50/ 10 ) x 0 = ( 9. 67 – 5 ) x 10 = 4. 67 ten 10 = 46. 7 ( rounded 247 units ) The allotment for distribution centres 2 and 3 can be determined likewise as 38 and 70 units severally. The cardinal characteristic of the just portion allotment method is that it coordinates inventory degree across multiple sites. It’s restriction lies in the fact that it does non see site specific factors such as difference in public presentation rhythm. clip. economic order. measure or safety stock demand. Hence. the major restriction is the inability to pull off multi phase stock lists. DISTRIBUTION REQUIREMENT Planning:

DRP is the logical extension of fabrication demands be aftering. MRP determined by production agenda that can be controlled by the enterpreise and by and large operates in a dependent demand state of affairs. DRP is guided by client demand which are non governable by the ebetrprise and operates in an independent environment where unsure client demand determines stock list demands. Fabrication demands be aftering co-ordinates to scheduling an integrating of stuffs into finished merchandises. DRP takes over the duty of coordination once the finished goods are received in the works warehouse. Constraints to the effectivity OF INVENTORY Planning:

1. Requires accurate and cordinated prognosiss for each distribution Centre. 2. Requires prognosiss for each distribution Centre and SKU every bit good as equal lead clip to let merchandise motion. 3. The mistakes in prognosis may be because of anticipation of demand at incorrect location

Distribution Centre 1

Inventory- 50 units

Daily use- 10 units

Plant Warehouse: Inventory-600 units

Distribution Centre 3

Inventory- 75 units

Daily use- 15 units

Distribution Centre 2

Inventory- 100 units

Daily use- 50 units

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