chap.4 _ inventory management edited.pdf

8/16/2019 chap.4 _ Inventory Management edited.pdf

1/60

Chapter 4Chapter 4

ManagementManagement


2/60

IntroductionIntroduction

MaterialsMaterials ManagementManagement maymay be be thoughtthought of of asas anan

inte ratedinte rated functioninfunctionin of of thethe differentdifferent sectionssections of of aa

companycompany dealingdealing withwith thethe supplysupply of of materialsmaterials andand

other other relatedrelated activitiesactivities soso asas toto obtainobtain maximummaximum coco--

ordinationordination andand optimumoptimum expenditureexpenditure onon materialsmaterials

etcetc..


3/60

OBJECTIVES OF MATERIALSOBJECTIVES OF MATERIALS

MANAGEMENT MANAGEMENT

The main objectives of materialThe main objectives of material

management are:management are:

ToTo minimizeminimize materialsmaterials costcost..

ToTo procureprocure andand provideprovide materialsmaterials of of

desireddesired qualityquality whenwhen requiredrequired ,at,at thethelowestlowest possiblepossible overalloverall costcost of of thetheconcernconcern..


4/60

4.1 Inventor control 4.1 Inventor control


5/60

Lecture OutlineLecture Outline

Elements of Inventory Management

Inventory Control Systems conom c r er uan y o e s

Quantity Discounts

Reorder Point Order Quantity for a Periodic Inventory

System


6/60

What Is Inventory?What Is Inventory?

Stock of items kept to meet futuredemand

Purpose of inventory management

how many units to order

when to order


7/60

Types of InventoryTypes of Inventory

Raw materials

Purchased parts and supplies

Work-in-process (partially completed)products (WIP)

Items being transported Spare parts, Tools, and equipment


8/60

Two Forms of DemandTwo Forms of Demand

IndependentIndependent Demand for items used by externalDemand for items used by external

customerscustomers

Cars, appliances, computers, andhouses are examples of independentdemand inventory

DependentDependent Demand for items used to produceDemand for items used to produce

final productsfinal products

Tires stored at a plant are an exampleof a dependent demand item


9/60

Inventory and Quality

Management

Customers usually perceive qualityservice as availability of goods they want

Inventory must be sufficient to providehigh-quality customer service in TQM


10/60

Inventory CostsInventory Costs

Carrying costCarrying cost

cost of holding an item in inventorycost of holding an item in inventory

r er ng cosr er ng cos

cost of replenishing inventorycost of replenishing inventory

Shortage costShortage cost temporary or permanent loss of salestemporary or permanent loss of sales

when demand cannot be metwhen demand cannot be met


11/60


12/60

MultiperiodMultiperiod InventoryInventory

SystemsSystems ThereThere areare twotwo generalgeneral typestypes of of multiperiodmultiperiod inventoryinventory

systemssystems:: FixedFixed– –order order quantityquantity models(alsomodels(also calledcalled thethe economiceconomic

order order quantity,quantity, EOQ,EOQ, andand QQ--model)model) andand

FixedFixed– –timetime periodperiod models(alsomodels(also referredreferred toto variouslyvariously asas

thethe periodicsystemperiodicsystem,, periodicperiodic reviewsystemreviewsystem,, fixedfixed order order

intervalsystemintervalsystem,, andand PP--model)model)..


13/60

Multi Period Inventory ControlMulti Period Inventory Control

SystemsSystems Continuous system (fixedContinuous system (fixed--

order order--quantity)quantity) constant amount orderedconstant amount ordered

when inventor declines towhen inventor declines topredetermined levelpredetermined level

Periodic system (fixedPeriodic system (fixed--timetime--period)period)

order placed for variableorder placed for variableamount after fixed passage ofamount after fixed passage oftimetime


14/60

Economic Order Quantity (EOQ)

,Fixed Order Quantity Models

EOQ

optimal order quantity that will

Basic EOQ model

Production quantity model


15/60

Assumptions of BasicAssumptions of Basic

EOQ ModelEOQ Model

Demand is known with certainty andDemand is known with certainty and

is constant over timeis constant over time No shortages are allowedNo shortages are allowed

Lead time (time from ordering toLead time (time from ordering toreceipt) for the receipt of orders isreceipt) for the receipt of orders isconstantconstant

Order quantity is received all at onceOrder quantity is received all at once


16/60

Inventory Order CycleInventory Order Cycle

DemandDemandraterate

n t

o r y

L e v e l

n t

o r y

L e v e l

Order quantity,Order quantity, Q Q

TimeTimeLeadLeadtimetime

LeadLeadtimetime

OrderOrderplacedplaced

OrderOrderplacedplaced

OrderOrderreceiptreceipt

OrderOrderreceiptreceipt

I n v

I n v

Reorder point,Reorder point, R R

00


17/60

EOQ Cost ModelEOQ Cost Model

A A -- cost of placing order cost of placing order DD -- annual demandannual demand

C C -- annual per annual per--unit carrying costunit carrying cost QQ -- order quantityorder quantity

Annual ordering cost = Annual ordering cost =

AD AD

QQ

Annual carrying cost = Annual carrying cost =CQCQ

22

Total cost = +Total cost = +

AD AD

QQ

CQCQ

22


18/60

EOQ Cost ModelEOQ Cost Model

TC = + AD

Q

CQ

2

Deriving Q opt Proving equality ofcosts at optimal point

= AD CQ

= - + AD

Q 2C

2

TC

Q

0 = - + AD

Q 2C

2

Q opt =2 AD

C

Q 2

Q 2 =2 AD

C

Q opt =2 AD

C


19/60

EOQ Cost Model (cont.)EOQ Cost Model (cont.)

Annual Annualcost ($)cost ($) Total CostTotal Cost

Carrying Cost =Carrying Cost =

CQCQ

22

Slope = 0Slope = 0

MinimumMinimum

Order Quantity,Order Quantity, QQ

o a coso a cos

Optimal order Optimal order QQoptopt

Ordering Cost =Ordering Cost =

AD AD

QQ


20/60

EOQ ExampleEOQ Example

C C = $0.75 per yard= $0.75 per yard A A = $150= $150 DD = 10,000 yards= 10,000 yards

QQoptopt ==22C C ooDD

C C cc

TC TC minmin = += + AD AD

QQ

CQCQ

22

QQoptopt ==2(150)(10,000)2(150)(10,000)

(0.75)(0.75)

QQoptopt = 2,000 yards= 2,000 yards

TC TC minmin = += +(150)(10,000)(150)(10,000)

2,0002,000

(0.75)(2,000)(0.75)(2,000)

22

TC TC minmin = $750 + $750 = $1,500= $750 + $750 = $1,500

Orders per year =Orders per year = DD//QQoptopt== 10,000/2,00010,000/2,000

== 5 orders/year 5 orders/year

Order cycle time =Order cycle time = 311 days/(311 days/(DD//QQoptopt))

== 311/5311/5

== 62.2 store days62.2 store days


21/60

Reorder PointReorder Point

Level of inventory at which a new orderLevel of inventory at which a new order

is placedis placed

wherewhere

d d = demand rate per period= demand rate per periodLL = lead time= lead time


22/60

Reorder Point: ExampleReorder Point: Example

Demand = 10,000 yards/year Demand = 10,000 yards/year

Store open 311 days/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154Daily demand = 10,000 / 311 = 32.154yards/dayyards/day

Lead time = L = 10 daysLead time = L = 10 days

R = dL = (32.154)(10) = 321.54 yardsR = dL = (32.154)(10) = 321.54 yards


23/60

Production QuantityModel

An inventory system in which an order isreceived gradually, as inventory is

Non-instantaneous receipt model

assumption that Q is received all at once is relaxed

p - daily rate at which an order is received overtime, production rate

d - daily rate at which inventory is demanded


24/60

Production Quantity ModelProduction Quantity Model(cont.)(cont.)

QQ(1(1--d/pd/p))

InventoryInventorylevellevel

MaximumMaximuminventoryinventory

(1(1--d/pd/p))QQ

2 2

TimeTime00

Order Order receipt periodreceipt period

BeginBeginorder order

receiptreceipt

EndEndorder order

receiptreceipt

Average Averageinventoryinventorylevellevel


25/60

Production Quantity ModelProduction Quantity Model(cont.)(cont.)

p p = production rate= production rate d d = demand rate= demand rate

Maximum inventory level =Maximum inventory level = Q Q -- d d Q Q

== Q Q 11 -- d d p p

Average inventory level =Average inventory level = 11 --

Q Q

22

d d

p p

TC TC = + 1= + 1 -- d d

p p

AD AD

Q Q

CQ CQ

22

Q Q optopt ==

22 AD AD

C C 11 -- d d

p p


26/60

Production Quantity Model:Production Quantity Model:ExampleExample

C C = $0.75 per yard= $0.75 per yard A A = $150= $150 DD = 10,000 yards= 10,000 yards

d d = 10,000/311 = 32.2 yards per day= 10,000/311 = 32.2 yards per day p p = 150 yards per day= 150 yards per day

22 AD AD 2(150)(10,000)2(150)(10,000)

optopt , ., .C C 11 -- d d

p p0.75 10.75 1 --

32.232.2150150

TC TC = + 1= + 1 -- = $1,329= $1,329d d

p p

AD AD

Q Q

CQ CQ

22

Production run = = = 15.05 days per order Production run = = = 15.05 days per order QQ

p p

2,256.82,256.8

150150


27/60

Production Quantity Model:Production Quantity Model:Example (cont.)Example (cont.)

Number of roduction runs = = = 4.43 runs/ ear D 10,000 , .

Maximum inventory level = Q 1 - = 2,256.8 1 -

= 1,772 yards

d

p32.2150


28/60

3. Quantity Discounts Model3. Quantity Discounts Model

Price per unit decreases as orderPrice per unit decreases as orderquantity increasesquantity increases

TC TC = + += + + PDPD AD AD

QQ

CQCQ

22

wherewhereP P = per unit price of the item= per unit price of the item

DD = annual demand= annual demand


29/60

Cont…Cont…

The goal : is to reduce price (P) for an item when it is purchased inThe goal : is to reduce price (P) for an item when it is purchased in

larger quantitieslarger quantities

Discount Number Discount Quantity Discount (%) Discount Price (P)

1 0 to 999 no discount $5.00

2 1,000 to 1,999 4 $4.80

3 2,000 and over 5 $4.75

Total Cost = Setup cost(order cost) + Holding cost + Product costTotal Cost = Setup cost(order cost) + Holding cost + Product cost

TC = DS/Q + QH/2 + PDTC = DS/Q + QH/2 + PD

Q : Quantity orderedQ : Quantity ordered

D : Annual demand in unitsD : Annual demand in units

S : Ordering or setup cost per order per setupS : Ordering or setup cost per order per setup

P : Price per unitP : Price per unit

H : Holding cost per unit per year H : Holding cost per unit per year


30/60

The Steps to determine Optimum Quantity order :The Steps to determine Optimum Quantity order :

1.1. Calculate value of optimum order for each discount Q* = 2DS/IP,Calculate value of optimum order for each discount Q* = 2DS/IP,Holding cost (I) as percentage of unit price (P)Holding cost (I) as percentage of unit price (P)

2.2. If order quantity is too low, adjust the orderIf order quantity is too low, adjust the order qtyqty upward to the lowestupward to the lowestqtyqty that will qualify for the discountthat will qualify for the discount

3.3. Compute Total cost for eachCompute Total cost for each

4.4. Select Q* with the lowest total costSelect Q* with the lowest total cost

Example : The store stocks toy race cars. Recently, the store hasExample : The store stocks toy race cars. Recently, the store has

..cost for the race car is $5.00. For orders between 1,000 and 1,999cost for the race car is $5.00. For orders between 1,000 and 1,999units, the unit cost drops to $4.80; for orders 2,000 or more units, theunits, the unit cost drops to $4.80; for orders 2,000 or more units, theunit cost is only$4.75. Furthermore, ordering cost is $49.00 per order,unit cost is only$4.75. Furthermore, ordering cost is $49.00 per order,annual demand is 5,000 race cars and inventory carrying charge as aannual demand is 5,000 race cars and inventory carrying charge as a

percent of cost is 20%. What order quantity will minimize the totalpercent of cost is 20%. What order quantity will minimize the totalinventory cost?inventory cost?

1.1. Q1* = 2DS/IP = 2(5,000)(49)/(20%)(5.00) = 700 cars order Q1* = 2DS/IP = 2(5,000)(49)/(20%)(5.00) = 700 cars order

Q2* = 2DS/IP = 2(5,000)(49)/(20%)(4.80) = 714 cars order Q2* = 2DS/IP = 2(5,000)(49)/(20%)(4.80) = 714 cars order

Q3* = 2DS/IP = 2(5,000)(49)/(20%)(4.75) = 718 cars order Q3* = 2DS/IP = 2(5,000)(49)/(20%)(4.75) = 718 cars order


31/60

2.2.

Q1* = 700Q1* = 700

Q2* = 1,000 adjustedQ2* = 1,000 adjusted

Q3* = 2,000 adjustedQ3* = 2,000 adjusted

3. Calculate Total Cost each discount3. Calculate Total Cost each discount

TC = DS/Q + QH/2 + PDTC = DS/Q + QH/2 + PDDiscount Annual Product Annual Annual Total

Annual Product Cost = PD Annual Product Cost = PD

Annual ordering cost = DS/Q Annual ordering cost = DS/Q

Annual Holding cost = QH/2 = QIP/2 Annual Holding cost = QH/2 = QIP/2

4. Select Order Quantity at the lowest cost 1,000 units4. Select Order Quantity at the lowest cost 1,000 units

1 $5.00 700 $25,000.00 $350 $350 $25,700

2 $4.80 1,000 $24,000.00 $245 $480 $24,725

3 $4.75 2,000 $23,750.00 $122,5 $950 $24,823


32/60

Safety StocksSafety Stocks

Safety stockSafety stock

buffer added to on hand inventory during leadbuffer added to on hand inventory during lead

timetime StockoutStockout

an inventory shortagean inventory shortage

Service levelService level

probability that the inventory available duringprobability that the inventory available duringlead time will meet demandlead time will meet demand


33/60

Reorder Point withReorder Point witha Safety Stock a Safety Stock

r

y

l e v e l

r

y

l e v e l

Reorder Reorder point,point, R R

LTLT

TimeTime

LTLT

I n v e n t

I n v e n t

00

Safety Stock


34/60

Reorder Point WithReorder Point WithVariable DemandVariable Demand

R R == dLdL ++ z z d d LL

wherewhere

d d == average daily demandaverage daily demand

LL == lead timelead time

d d == the standard deviation of daily demandthe standard deviation of daily demand

z z == number of standard deviationsnumber of standard deviationscorresponding to the service levelcorresponding to the service level

probabilityprobability (service factor)(service factor)

z z d d LL == safety stocksafety stock


35/60

Reorder Point forReorder Point fora Service Levela Service Level

Probability ofProbability of

meeting demand duringmeeting demand during

lead time = service levellead time = service level

Probability ofProbability of

aa stockoutstockout

RR

Safety stockSafety stock

d d LLDemandDemand

z z d d LL


36/60

Service factor values for CSLService factor values for CSL


37/60

Reorder Point forReorder Point forVariable DemandVariable Demand

The carpet store wants a reorder point with a 95%The carpet store wants a reorder point with a 95%service level and a 5% stockout probabilityservice level and a 5% stockout probability

d d = 30= 30 mm per dayper day LL = 10 days= 10 days

d d = 5= 5 mm per dayper day

For a 95% service level,For a 95% service level, z z = 1.6= 1.644

R R == dLdL ++ z z d d LL

= 30(10) + (1.6= 30(10) + (1.644)(5)( 10))(5)( 10)

= 32= 325.95.9 mm

Safety stockSafety stock == z z d d LL

= (1.6= (1.644)(5)( 10))(5)( 10)

= 2= 255..99 mm


38/60

•• InventoryInventory levellevel (on(on hand)hand) isis countedcounted atat specificspecific timetimeintervalsintervals

•• An An order order placedplaced thatthat bringsbrings inventoryinventory upup toto aa specifiedspecified

Periodic Inventory SystemsPeriodic Inventory Systems

•• LessLess costlycostly toto tracktrack of of inventoryinventory levellevel

•• RequiresRequires aa newnew order order quantityquantity eacheach timetime anan order order isis

placedplaced


39/60

Periodic Review Order QuantityPeriodic Review Order Quantity

Assumptions Assumptions Inventory position is reviewed at constant intervals.Inventory position is reviewed at constant intervals.

Demand during review period plus lead time periodDemand during review period plus lead time periodis normally distributed with meanis normally distributed with mean µµ and standardand standard

.. Service level is defined in terms of the probability ofService level is defined in terms of the probability of

nono stockoutsstockouts during a review period plus lead timeduring a review period plus lead timeperiod and is reflected inperiod and is reflected in z z ..

OnOn--hand inventory at ordering time:hand inventory at ordering time: H H Shortages are not backordered.Shortages are not backordered.

Lead time is less than the review period length.Lead time is less than the review period length.

O d Q tit f V i bl D dO d Q tit f V i bl D d


40/60

•• For normally distributed variable daily demand:For normally distributed variable daily demand:

:where

)( I Lbt

d Z L

bt d Q

Order Quantity for Variable DemandOrder Quantity for Variable Demand

stock ininventory

stock safety

demandof deviationstandard timelead

orders betweentimefixedthe

ratedemandaverage

I

Lbt

d Z d

Lbt

d

Order Quantity for Variable Demand ExampleOrder Quantity for Variable Demand Example


41/60

bottles1.2

day per bottles6

d

d

•• Corner Drug Store with periodic inventory system.Corner Drug Store with periodic inventory system.•• Order size to maintain 95% service level:Order size to maintain 95% service level:

Order Quantity for Variable Demand ExampleOrder Quantity for Variable Demand Example

bottles398

8560)(1.65)(1.25)(6)(60

)(

levelservice95%for1.65 bottles8

days5

I Lbt d Z Lbt d Q

Z I

Lb


42/60

Example: Ace BrushExample: Ace Brush

JoeJoe WalshWalsh isis aa salesmansalesman for for thethe Ace Ace BrushBrushCompanyCompany.. EveryEvery threethree weeksweeks hehe contactscontacts Dollar Dollar DepartmentDepartment StoreStore soso thatthat theythey maymay placeplace anan order order totoreplenishreplenish their their stockstock.. WeeklyWeekly demanddemand for for Ace Ace

distributiondistribution withwith aa meanmean of of 6060 brushesbrushes andand aastandardstandard deviationdeviation of of 99 brushesbrushes..

OnceOnce JoeJoe submitssubmits anan order,order, thethe leadlead timetime untiluntil Dollar Dollar receivesreceives thethe brushesbrushes isis oneone weekweek.. Dollar Dollar wouldwould likelike

atat mostmost aa 22%% chancechance of of runningrunning outout of of stockstock duringduringanyany replenishmentreplenishment periodperiod.. If If Dollar Dollar hashas 7575 brushesbrushes ininstockstock whenwhen JoeJoe contactscontacts them,them, howhow manymany shouldshouldtheythey order?order?


43/60

Example: Ace BrushExample: Ace Brush

The review period plus the lead time totals 4 weeksThe review period plus the lead time totals 4 weeks

This is the amount of time that will elapse before theThis is the amount of time that will elapse before thenext shipment of brushes will arrivenext shipment of brushes will arrive

ee y eman s norma y str ute w t :ee y eman s norma y str ute w t :Mean weekly demand,Mean weekly demand, µµ = 60= 60Weekly standard deviation,Weekly standard deviation, = 9= 9Weekly variance,Weekly variance, 22 = 81= 81

Demand for 4 weeks is normally distributed with:Demand for 4 weeks is normally distributed with:Mean demand over 4 weeks,Mean demand over 4 weeks, µµ = 4 x 60 = 240= 4 x 60 = 240

Variance of demand over 4 weeks,Variance of demand over 4 weeks, 22 = 4 x 81= 324= 4 x 81= 324

Standard deviation over 4 weeks,Standard deviation over 4 weeks, = (324)= (324)1/21/2 = 18= 18

SingleSingle Period Order QuantityPeriod Order Quantity


44/60

SingleSingle--Period Order QuantityPeriod Order Quantity A A singlesingle--period order quantity modelperiod order quantity model

(sometimes called the newsboy problem)(sometimes called the newsboy problem)deals with a situation in which only one orderdeals with a situation in which only one orderis placed for the item and the demand isis placed for the item and the demand isprobabilistic.probabilistic.

If the period's demand exceeds the orderIf the period's demand exceeds the orderquantity, the demand is not backordered andquantity, the demand is not backordered andrevenue (profit) will be lost.revenue (profit) will be lost.

If demand is less than the order quantity, theIf demand is less than the order quantity, thesurplus stock is sold at the end of the periodsurplus stock is sold at the end of the period(usually for less than the original purchase(usually for less than the original purchaseprice).price).


45/60

SingleSingle--Period Order QuantityPeriod Order Quantity

Assumptions Assumptions Period demand follows a known probabilityPeriod demand follows a known probability

distribution:distribution:

normal: mean isnormal: mean is standard deviation isstandard deviation is uniform: minimum isuniform: minimum is aa, maximum is, maximum is bb

Cost of overestimating demand: $Cost of overestimating demand: $c c oo Cost of underestimating demand: $Cost of underestimating demand: $c c

uu Shortages are not backordered.Shortages are not backordered.

PeriodPeriod--end stock is sold for salvage (notend stock is sold for salvage (notheld in inventory).held in inventory).


46/60

FormulasFormulasOptimal probability of no shortage:Optimal probability of no shortage:

P(demandP(demand P(demand > QQ *) = 1*) = 1 -- c c uu/(/(c c uu++c c oo))

Optimal order quantity, based on demandOptimal order quantity, based on demanddistribution:distribution:

normal:normal: QQ * =* = µµ ++ z z

uniform:uniform: QQ * =* = aa + P(demand+ P(demand


47/60

pp

McHardee Fashion produces a jacket andMcHardee Fashion produces a jacket and

wishes to determine how many units towishes to determine how many units tomanufacture. There is a fixed cost of $5,000manufacture. There is a fixed cost of $5,000to produce the item and the incrementalto produce the item and the incremental

can be sold at salvage at a $.55 loss. Salescan be sold at salvage at a $.55 loss. Salesfor this item are estimated to be normallyfor this item are estimated to be normally

distributed. The most likely sales volume isdistributed. The most likely sales volume is12,000 units and they believe there is a 5%12,000 units and they believe there is a 5%chance that sales will exceed 20,000. Howchance that sales will exceed 20,000. Howmany units should be printed?many units should be printed?

SolutionSolution


48/60

SolutionSolution µµ = 12,000= 12,000

To findTo find , , note thatnote that z z = 1.65 corresponds to a 5%= 1.65 corresponds to a 5%tail probabilitytail probability

Therefore, (20,000Therefore, (20,000 -- 12,000) = 1.6512,000) = 1.65 oror = 4848= 4848

C C =.55 and=.55 and C C =.45=.45 C C // C C ++C C =.45/ .45+.55 =.45=.45/ .45+.55 =.45

FindFind QQ * such that P(* such that P(DD


49/60

If any unsold copies can be sold at salvage at aIf any unsold copies can be sold at salvage at a

$.65 loss, how many units should be produced?$.65 loss, how many units should be produced? C C oo=.65, (=.65, (C C uu/(/(C C uu++C C oo))=.45/(.45+.65) = .4091))=.45/(.45+.65) = .4091

FindFind QQ * such that P(* such that P(DD


50/60

ABC ClassificationABC Classification

TheThe itemsitems onon handhand areare classifiedclassified intointo A, A, B,B, andand CC typestypesonon thethe basisbasis of of thethe valuevalue inin termsterms of of capitalcapital or or annualannualdollar dollar usageusage (i(i..ee..,, dollar dollar valuevalue per per unitunit multipliedmultiplied byby

,,accordinglyaccordingly..

Thus,Thus, thethe itemsitems withwith highhigh valuevalue and and low low volumevolume areare kept kept inin A A--typetype,, itemsitems withwith low low valuevalue and and highhigh volumevolume areare kept kept

inin C C--typetype,, and and thethe itemsitems withwith moderatemoderate valuevalue and and moderatemoderate volumesvolumes belong belong toto thethe BB--typetype..

A A ---- ---- very very important,important, B B ---- ---- moderately moderately

important,important, and and C C-- -- least least important important

The actual number of categories varies fromThe actual number of categories varies from


51/60

Class AClass A 55 – – 15 % of units15 % of units

7070 – – 80 % of value80 % of value

The actual number of categories varies fromThe actual number of categories varies fromorganization to organization, depending on the extentorganization to organization, depending on the extentto which a firm wants to differentiate the control efforts.to which a firm wants to differentiate the control efforts.

30 % of units30 % of units

15 % of value15 % of value

Class CClass C

5050 – – 60 % of units60 % of units

55 – – 10 % of value10 % of value


52/60

ABC Classification: ExampleABC Classification: Example

11 $ 60$ 60 909022 350350 404033 3030 130130

PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGE

44 8080 606055 3030 10010066 2020 18018077 1010 170170

88 320320 505099 510510 6060

1010 2020 120120


53/60

ABC Classification:ABC Classification:


54/60

ABC Classification:ABC Classification:Example (cont.)Example (cont.)

11 $ 60$ 60 909022 350350 4040

PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTAL

PART VALUE VALUE QUANTITY % CUMMULATIVE

9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.0

A A

Example 10.1Example 10.1

44 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060

1010 2020 120120

1 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0

10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0

$85,400

BB

C C

% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY

A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0


55/60

4.2 Purchasing 4.2 Purchasing

Purchasing is an important function ofPurchasing is an important function of

..

In any industry purchase means buyingIn any industry purchase means buying

of equipments, materials, tools, parts etc.of equipments, materials, tools, parts etc.required for industry.required for industry.


56/60

Objectives of PurchasingObjectives of Purchasing

TheThe basicbasic objectiveobjective of of thethe purchasingpurchasing

of of rawraw materials,materials, subsub--contractedcontracted itemsitems

andand sparespare partsparts andand toto reducereduce thetheultimateultimate costcost of of thethe finishedfinished goodsgoods..

f h if h i


57/60

Parameters of PurchasingParameters of Purchasing

TheThe successsuccess of of anyany manufacturingmanufacturing activityactivity isis

largelylargely dependentdependent onon thethe procurementprocurement of of rawraw

materialsmaterials of of rightright quality,quality, inin thethe rightright quantities,quantities,

fromfrom rightright source,source, atat thethe rightright timetime andand atat rightright

priceprice popularlypopularly knownknown asas tenten ‘R’s’‘R’s’ of of thethe artart of of

efficientefficient purchasingpurchasing..

P hP h


58/60

Purchase parametersPurchase parameters

RIGHT PRICERIGHT PRICE

RIGHT QUALITYRIGHT QUALITY

RIGHT TIMERIGHT TIME

RIGHT CONTRACTRIGHT CONTRACT

RIGHT MATERIALRIGHT MATERIAL

RIGHT SOURCERIGHT SOURCE

RIGHT QUANTITYRIGHT QUANTITY

RIGHT ATTITUDERIGHT ATTITUDE

RIGHT PLACE OFRIGHT PLACE OFDELIVERYDELIVERY

P h i P dP h i P d


59/60

Purchasing ProcedurePurchasing Procedure

RECOGNITION OF THE NEEDRECOGNITION OF THE NEED

THE SELECTION OF THE SUPPLIERTHE SELECTION OF THE SUPPLIER

PLACING THEORDERPLACING THEORDER FOLLOWFOLLOW--UP OF THEORDERUP OF THEORDER

RECEIVING AND INSPECTION OF THE MATERIALSRECEIVING AND INSPECTION OF THE MATERIALS

PAYMENT OF THEINVOICEPAYMENT OF THEINVOICE

MAINTENANCE OF THE RECORDSMAINTENANCE OF THE RECORDS MAINTENANCE OF VENDORRELATIONSMAINTENANCE OF VENDORRELATIONS

E iE i


60/60

ExerciseExercise

TheThe XYZXYZ LtdLtd.. carriescarries aa widewide assortmentassortment of of itemsitems for for itsits customerscustomers..

OneOne of of itsits popular popular itemsitems hashas annualannual demanddemand of of 80008000 unitsunits..

r er ngr er ng coscos per per or er or er ss ounoun oo ee ss.. .. .. ee carry ngcarry ng coscos

of of averageaverage inventoryinventory isis 2020%% per per year year andand thethe costcost per per unitunit isis RsRs..

11..0000.. DetermineDetermine thethe optimaloptimal economiceconomic quantityquantity andand makemake your your

recommendationsrecommendations..

chap.4 _ inventory management edited.pdf

Documents