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Module IV Lec1

The document outlines the concepts of inventory, its functions, categories, and related costs, including procurement, holding, and shortage costs. It discusses inventory control methods, emphasizing selective control and ABC analysis for effective management based on value and usage. The ABC analysis classifies inventory into three categories (A, B, C) based on their contribution to overall value, aiding in prioritizing inventory management efforts.

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Irshad Adil
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4 views17 pages

Module IV Lec1

The document outlines the concepts of inventory, its functions, categories, and related costs, including procurement, holding, and shortage costs. It discusses inventory control methods, emphasizing selective control and ABC analysis for effective management based on value and usage. The ABC analysis classifies inventory into three categories (A, B, C) based on their contribution to overall value, aiding in prioritizing inventory management efforts.

Uploaded by

Irshad Adil
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Module IV

Inventory and Quality Systems


What is Inventory?
• Inventory are idle resources maintained in
different forms
➢ Raw materials
➢ Purchased and manufactured parts
➢ Subassemblies
➢ Finished products
Function of Inventories
• Bullwhip effect

❖ Demand information is distorted as it moves away from the


end-use customer.

❖ Higher safety stock inventoried are stored to compensate.

• Seasonal demand

• Independence from vendors

• Continuous production

• Take advantage of price discounts


Category of stocks
1. Pipeline Stocks

2. Cycle Stocks
a. Economics of scale

b. Technological requirements

3. Seasonal Stocks

4. Safety Stocks
a. Supply and demand uncertainties

b. lead time

5. Stocks held for other reason


a. decoupling stages of production

b. Price, quantity of discounts

c. Speculations
Inventory Related Costs
• Procurement cost.
• Cost associated with existence of inventories.
• Cost associated with stock out.
Procurement Costs
1. Cost of goods
2. Ordering cost
I. Administrative component
II. Handling costs
III. Transportation
[Link] of arrivals

Note:
Procurement cost is independent of order quantity
Inventory Holding Cost
• Cost associated with existence of Inventories.
(Cost/unit/unit time)
➢ Storage and Handling Costs
➢ Interest on tied up capital
➢ Property taxes
➢ Insurance
➢ Spoilage
➢ Obsolescence
➢ Pilferage

Inventory carrying cost rate(i) x Cost/unit/unit time= Holding Cost


Shortage Cost
Cost associated with stock out
• Loss
• Backorder
❑ Additional Cost
❑ Back order
❑ Loss of customer will
❑ Loss of sales
Inventory Control
• What to order?
• When to order?
• How much to order?
• How much to stock?

Cost of buying is optimum to cost of stock with


continuous manufacturing.
Selective Control of Inventory
• It refers to the variation in method of control from item
to item on selective basis.

• Items are categorized in various groups depending on


value, usage, frequency and consumption.

• It helps the organization for scientific inventory


control.
ABC analysis
Classification on the basis of cost and volume.

Class A
5-15 % of units
70-80% of value

Class B
30% of units
15-20% of value

Class C
50-60 % of units
5-10% of value
Example of ABC analysis
Step 1: Annual usage= annual no. of items sold x
Costs per unit
Step 2: Arrange the annual usage value in descending
order
Step 3: Sum up the annual usage value and annual
number of items sold
Step 4: Find percentage of annual units sols and
percentage of annual consumption value
Step 5: Identify and Arrange the items in ABC category

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