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Supply Chain Management
(MS 6105)
Module 6
Dr Sudip Dey
NIT Silchar
SCM (ME 486)
LECTURE
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INVENTORY MANAGEMENT
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Key Elements of Inventory
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Basics of Inventory
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Reasons for Inventory
• Improve customer service
• Reduce costs
• Maintenance of operational
capability
• Irregular supply and demand
• Quantity discounts
• Avoiding stockouts (shortages)
Inventory System
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In hospital,
A: 70% financial value with 10% in number (CT Scanner, Ultra-sonography)
B: 20% financial value with 20% in number (ECG m/c, X-ray m/c)
C: 10% financial value with 70% in number (BP Apparatus, Thermometer)
In hospital,
A: 70% financial value with 10% in
number (CT Scanner, Ultra-sonography)
B: 20% financial value with 20% in
number (ECG m/c, X-ray m/c)
C: 10% financial value with 70% in
number (BP Apparatus, Thermometer)
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Combination of ABC and VED
SDE Analysis
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FNSD Analysis
Example- In hospital
F – Medicines, Gloves
N – Blankets
F: Fast-moving items that
are used quickly S – Bedpan
N: Normal-moving items D - Bed
that are used over the
course of a week or month
S: Slow-moving items
that are used infrequently
and over a year or more
D: Dead items that are out
of date and not likely to be
used in the future
Method of Ordering
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Purchase Cost
• It is actual price per unit paid for procurement of
items.
• If C= Price per unit (independent of the size of the
quantity ordered D= Demand per unit time, then
Purchase cost = (Price per unit) × (Demand per unit time)
= C.D
• When price-break (or quantity discounts) are
available on purchase,
Purchase cost = Price per unit when order size is Q
× Demand per unit time
= C(Q).D
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Total Inventory Cost
• If price discounts are offered, the purchase cost per unit
becomes variable, and depends on the quantity
purchased, then Total inventory cost is calculated as
follows:
Total variable inventory cost (TVC)
= Purchase cost + Ordering cost + Carrying cost + Shortage cost
• If price discounts are not offered, the purchase cost per
unit of an item remains constant and is independent of
the quantity purchased, then the total inventory cost is
calculated as follows:
Total inventory cost (TC)
= Ordering cost + Carrying cost + Shortage cost
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Inventory Model Building
• Step 1: Collect the data regarding the pattern of
demand, the replenishment policy, planning period,
relevant inventory costs, etc.
• Step 2: Define an appropriate relationships (i.e.,
mathematical model) among various factors
• Step 3: Derive an optimal inventory policy (i.e.
economic order quantity) by using an appropriate
solution procedure so as to maintain balance amongst
the inventory costs.
• Step 4: Construct / build the inventory model
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ECONOMIC ORDER QUANTITY (E.O.Q)
Model I(a): EOQ Model with Constant
Demand Rate
Assumptions:
• The inventory system involves one type of item or product.
• Demand is known and constant and is resupplied
instantaneously.
• Inventory is replenished in single delivery for each order.
• Replenishment is instantaneous
• Shortages are not allowed.
• Purchase price and reorder costs do not vary with the
quantity ordered.
• Carrying cost per year (as a fraction of product cost) and
ordering cost per order are known and constant.
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Other Formulae
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HML- High Medium, Low (cost per unit)
VED – Vital, Essential, Desired
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Model I(b): EOQ Model with Different Demand Rates
• It operates on the assumptions of Model I(a) except that the
demand is constant and varies from period to period.
• The objective is to determine the order size (or production
quantity) in each reorder cycle (or period) that will minimize the
total inventory cost.
• If the total demand, D is specified over the planning period, T
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Model I(c): Economic Production Quantity Model
When Supply (Replenishment) is Gradual
• This model is similar to that of EOQ Model I, the only
difference being the time to replenish inventory. In this
model it is assumed that the replenishment is gradual.
• Two cases dealt :
(a) The amount ordered is delivered by the vendor in
several shipments over a period of time.
(b) Inflow and consumption of inventory most frequently
overlaps internally on shop floor when the process that
fills the order is located near the operation that will use
the order as inputs.
Assumptions:
(i) Demand is continuous and at a constant rate.
(ii) During the production run, production of the item is
continuous and at a constant rate until production of
quantity (Q) is complete.
(iii) The rate of receipt (p) of replenishment of
inventory (i.e. items received per unit time) is greater
than the usage rate (i.e. items consumed per unit
time).
(iv) Production runs in order to replenish inventory are
made at regular interval.
(v) Production set-up cost is fixed (independent of
quantity produced).
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Model II(a): EOQ Model with Constant Demand
and Variable Order Cycle Time
• This model is based on the assumptions of Model I(a),
except shortages are allowed.
• The cost of a shortage is assumed to be directly
proportional to the average number of units short.
• In case, shortages are allowed then following two types of
situations may occur:
(i)Customers are not ready to wait for their requirement,
causing loss of goodwill and loss of potential sale.
(ii) Customers wait to receive order from the suppliers
and such back-order(s) is filled on stock availability.
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Type 1: EOQ Model with Constant Rate of Demand
Type 2: EOQ Model with Different Rates of Demand
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Type 3: Economic Production Quantity Model
Type 4: EOQ Model with Constant Demand and Variable Order Cycle Time
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JIT: It is a manufacturing system whose goal it is to
optimize process and procedures by continuously
pursuing waste reduction.
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KANBAN: Literally, a ”visual
record;” a method of controlling
materials flow through a JIT
manufacturing systems by using
cards to authorize a work station
to transfer or produce materials.
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End of Module
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