Seminar on Seminar on inventory managementinventory management

Seminar on Seminar on inventory managementinventory management

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By: Mr. Kailash V. Vilegave M. Pharm

INVENTORY MANAGEMENT

It may be defined as a Scientific method of finding out how much stock

should be maintained in order to meet the production demands and be able

to provide right type of materials at right time, in right quantities and at

competitive prices.

It is actually money which is available in the shape of materials (raw materials and finished products), equipment, storage space, work time etc. it also includes intrest on money invested.

input inventory outputinput inventory output material (money) production material (money) production

deptdept management - goods in storesmanagement - goods in stores -work in progress-work in progress - finished products- finished products - equipment etc.- equipment etc. 2

INVENTORY CONTROL

It can be defined as “ systematic control and regulation of purchase,

storage and usage of materials in such a way that so as to maintain an

even flow of production, at the same time avoiding excessive investment

in inventories. Efficient inventory control cuts out losses and wastes of

materials.

AIMS OF INVENTORY CONTROLAIMS OF INVENTORY CONTROLNever run out of stock of any material .

Never build up very large inventory .

Never send out too many small orders for more as such small order turn out to be very costly.

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Objectives of inventory control

Utilising capital and investment judiciously.

Keeping the production on as on going basis.

Preventing the idleness of men , machine and morale.

Avoiding risk of loss of life.

Proper quality.

Economy in purchasing.

Minimum wastage.

No-understocking and No-overstocking.

Inducing confidence in customers and to create trust and faith. 4

Advantages of Inventory Control

1. To ensure continuous production by supplying material .

2. It helps the concerned to secure many economics through bulk purchase such as low freight, higher discount, lower price, better use of available resource etc.

3. It ensures timely and continuous supply of goods to customers by maintaining sufficient stock of finished goods.

5. It eliminates overstocking of the inventories and maintain minimum investment .

6. It helps in optimum utilization of men, money, material, equipments, time and thereby reduce the total cost of the production. 5

INVENTORY CATEGORIES

1] Production Inventories : - materials used are chemicals such as active ingredients and

excipients needed to manufacture finished products, i.e, dosage forms.

eg: equipment containers, labels, caps and shippers needed for pkg of dosage forms.

2] MRO Inventories ( Maintenance, Repair, and Operating ) : - parts or sub assemblies needed for final assembly of the end

product. eg: packing of bulk tablets such as strip packing and blister

packing.

3] WIP Inventories (Work In Process) : - items on which work is to be done further. They are semi

finished goods. eg: granules waiting for compression and tablets waiting for

coating.

4] Finished good inventories : eg: dosage forms, bulk drugs, Physician’s samples etc.

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FACTORS INFLUENCING INVENTORY

Manufacture process requires relatively long process cycle-time.

Procurement of materials has long lead time.

Demand for finished products is some time seasonal and prone to fluctuations.

Material costs are affected by fluctuations in demand and subsequently by fluctuations in manufacturing.

These conditions are managed by maintaining reserve stock or safety stock.

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SELECTIVE INVENTORY CONTROLSelective inventory control is defined as process of classifying items into different categories and thereby directing appropriate attention to the materials.

It is based on the principle of ‘Vital few and trivial many’ made by Pareto.

CLASSIFICATION

1. A-B-C technique

2. V-E-D classification

3. H-M-L ’’

4. F-S-N ’’

5. S-D-E ’’

6. S-O-S ’’

7. G-O-L-F ’’

8. X-Y-Z ’’

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A-B-C Classification(Always Better Control)

In this technique materials are analyzed according to their value so that costly and more valuable materials are given greater attention and care.

They are classified acc. to their high, medium, and low, which are known as A, B and C items respectively.

1. A-items : - Costly items

- Constitute not more than 10% of the total items, but these consume about 70% of the total budget of inventory.

- Require proper storage and handling

- Overstocking is avoided.

2. B-items : - Neither costly nor cheap.

- Constitute 20% of the total items and consume about 20% of the total inventory budget.

- Need moderate control.9

3.3. C-items :C-items : - cheaper

- constitute 70% of the total items and consume about 10% of total inventory budget on them.

- do not need any control and are given least attention.

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V-E-D Classification (Vital, Essential and Desirable)

V-Vital : items without which the activities will come to halt.

eg: adrenaline injection, steroid preparations .

E-Essential : items which are likely to coz disruption of the normal activity.

eg: life supporting items such as transfusion fluids.

D-Desirable : in the absence of which the hospital work does not get

hampered.

eg: aspirin, other analgesics, vitamins, enzymes.

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H-M-L Classification(High, Medium, Low)

It is based on the unit value (in rupees) of items. The items should be listed in decreasing order of unit value and management may fix limits for deciding the three categories.

F-S-N ClassificationF-S-N Classification

(Fast, Slow and Non moving(Fast, Slow and Non moving))

It takes into account the distribution and handling patterns of items from stores.

Used when obsolescence is to be controlled.

May be a change in technology or an item is no longer in use. At such time information must ne given to managers so that they can act on it.

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S-D-E ClassificationIts based on lead time analysis and availability.

S- Scarce : longer lead- time (imported).

D- Difficult : long lead -time (indigenous).

E-Easy : reasonable lead- time.

S-O-S ClassificationS-O-S ClassificationItems which are seasonal in nature and hence require special purchasing and stocking categories.

G-O-L-F ClassificationG-O-L-F ClassificationIt stands for Government, Ordinary, Local, Foreign.

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X-Y-Z Classification

It is based on value of inventory stored. If the values are high, special efforts should be made to reduce them. It is done once in a year.

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Lead times, Stockouts, Safety stocksMaximum quantity : upper limit of inventory in the stores.

Minimum quantity : lower limit of the inventory in the stores.

Standard order : it is the difference between maximum and minimum

quantities.

Reorder point : it is the time to initiate a purchase order. If it is not done,

inventory may exhaust and even the reserve stock will be

utilized before the arrival of new items.

Stock holding : it is the buffer stock that should be available to avoid break

down of production schedule.15

LEAD TIMEIt is the time lapse between placement of an order and receipt of items including their approval by Q.C dept.

It may be calculated on the basis of past experience.

Reasons for the lead time may be explained as internal-external-internal.

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Lea

d tim

e

•Raising of purchase requisition.•Inquiries.•Tenders.•Scrutiny and approval.•Placement of orders to suppliers.

•Suppliers makes goods ready.•Transportation and clearing.

Receiving of goods at stores.Taking the stock.Inspection for quantity and quality.Ready for issue to production.

Internal

External

Internal

STOCK-OUTSMeans running out of stocks which leads to back orders.Limits of the stock outs should not be more than 2%.

CAUSES FOR STOCK-OUTS CAUSES FOR STOCK-OUTS

1] INTERNAL1] INTERNAL 2] EXTERNAL2] EXTERNAL - Faulty planning. - Labour problems

- Poor control - Poor selection of transportation

- Improper records - Change in market situations and demand

- Shortage of funds - Floods, Strikes and Fire etc.

- Poor follow-up

- Strikes etc.17

IMPLICATIONS OF STOCK-OUTS

Loss of sales and customers.

Loss of good will and image.

Decreased use of machine and decreased productivity.

Inter-departmental conflict.

Loss of morale.

Emergency purchases at high costs.

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In order to maintain inventory control, it is imp to decide upon various levels of materials. These are:

Maximum stock level: It’s the upper limit beyond which the qty of any item is not allowed to rise.The max stock level is fixed after considering several points.

1. Rate of consumption of material.

2. Amt of capital needed and available.

3. Nature of material.

4. Market trend.

5. Fashion habits.

6. Govt restrictions.

7. Risk involved due to fire, obsolescence and deterioration.

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Minimum stock level/safety stock: its the lower limit below which the stock of any item should not normally be allowed to fall.

The main purpose of determination of this limit is to protect against the possibility of particular item going out of stock and there is further danger of stoppage of its production and supplies.

The level is fixed taking into consideration:

1. Avg rate of consumption.

2. Lead-time.

Re-order level:Re-order level: its fixed between the minimum and maximum stock level. when the stock of inventory reaches at this point, the process for the purchase material should be started. Re-order level is slightly more than min stock level to guard against:

1. Abnormal use of item.

2. Abnormal delay in supply.20

Danger level: this is generally below the minimum stock level. If it reaches this level, urgent action must be taken to prevent the stock-out.

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SAFETY-STOCKSSafety stock or buffer stock is an ideal quantity of materials that has been always maintained and is drawn only in emergency condition.It is considered as tied-up capital. Hence efforts must be made to keep them at he lowest level.

ADVANTAGES1] Allow continuation of the production to certain extent even after the lead

time lapses.2] Uncertain consumption and fluctuating demands can be absorbed.3] Back orders can be kept to a minimum.4] Best level of customer service can be achieved.

For A-items : 15 days Vital items : more in quantity B-items : 30 days Scarce items : ’’ C-items : 60 days Fast moving items : ’’

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REORDER QUANTITY METHODS

Reorder quantity:Reorder quantity: is qty of items to be ordered so as to continue production without any interruptions in the future.

Fixed quantity systemFixed quantity system The reorder qty is a fixed one and therefore the time for

ordering varies. When the stock level drops to a predetermined pt known as

reorder level, then order is placed. Its calculated using EOQ. Its also calculated as:

Reorder level qty = safety stock + (usage rate x Reorder level qty = safety stock + (usage rate x lead time)lead time)

This eqn. is used to calculate each item independently.

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Open access bin systemOpen access bin system The bin is filled with items to the max level as and when

required. These items are used without making a record. Restricted usually to C-items.

Two bin systemTwo bin system Consists of two bins. When the first bin is exhausted, it indicates time for

reorder. The second bin is the reserve stock & used during the lead time period.

After receiving the items, items are distributed equally into the two so as to reach the initial level.

Applicable to hospitals and community pharmacies.

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ECONOMIC LOT SIZE (EOQ) FORMULA

How much of items to buy or order at a time?When should the items be made available for production?

It is defined as the quantity of the material to be ordered at one time .

This quantity is fixed in such a manner as to minimize the cost of ordering and carrying the stock so that only correct quantity of the material is to be purchased .

EOQ EQUATIONEOQ EQUATION Q = Q = 2AS2AS IUIU

Q= economic lot size. A= annual usage units. S= ordering cost associated with one order, Rs. I= annual inventory carrying costs expressed

as decimal per unit. U= Cost of one unit, Rs.

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A & I must be expressed in comparative terms of units writ time and qty.

APPLICATIONS OF EOQGood tech for calculating the economical lot size for ordering.EOQ relationship shows, a general way, how much inventories should be increased, if the sales of product is increased by 20%.Acc. to EOQ formula, the max inventory would be square root of 20.

LIMITATIONSSometimes, EOQ quantities may not balance with the quantities of all items needed for a lot size.Not a time phased procedure. May not be applicable when demands are irregular and when there is possibility of price rise.Inventory holding cost & the ordering cost cannot be identified properly and calculated accurately.Proper maintenance of stock records.Set up cost is also an imp factor. In such cases, a tech called LIMIT( Lot Size Inventory Management Tech) can be used. 26

max inventory level

30 A A A’A’ inventory consumption

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20

reorder quantity

15 BB CC B’B’

DD 10

minimum inventory level

B’B’ C’C’ D’D’ safety stock

0

R-P 30

L

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Inven

tory

in

1

00

0

u

nit

s

Time in weeks

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Total inventory cost = procurement cost + carrying costTotal inventory cost = procurement cost + carrying cost

COSTS INVOLVED IN EOQ

PROCUREMENT COST:PROCUREMENT COST: consists of expenditure connected with following,

Receiving quotations Processing purchase requisition Receiving and inspecting the items Processing vendor’s invoice Procurement cost decreases as order qty increases, bcoz fewer

orders are possible

CARRYING COST:CARRYING COST: contains of expenditure connected with the following.

Interest on capital investment Cost of storage facility, up-keep of material, record keeping etc. Cost involving deterioration Cost of insurance, property tax etc. Carrying cost varies with the qty ordered. If smaller is the order,

carrying cost is reduced. In such cases, number of orders increases.

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Relationship between cost and quantity.

C

ost

per

peri

od

30

100 200 300 400 500

10

20

30

40

50

Total

cost

Carrying cost

Procuring costs

Mincost

Order quantity

EOQ

REORDER TIME METHODS

They are based on past experience on fixed lead times. Some of these are:

1. Intuitive methodMaintenance of a want book.Applicable to small pharmacies.

2. Systematic want-book systemWant-books are maintained for each product and each major wholesaler.Attachment of a card to a product.Small pharmacies.

3. Fixed interval systemItems are ordered at regular intervals.

4. S & S methodMax stock and reorder levels are predetermined.

5. Single order and scheduled part deliveryAnnual requirements are included in single contract.Specified quantities are delivered in scheduled times.Ideal for items which are used in small quantities, but at regular rate of usage. 31

MODERN INVENTORY SYSTEMS

1. Material Requirement Planning (MRP)1. Material Requirement Planning (MRP) It’s a computational tech that converts the master-schedule

of production into a detailed schedule for materials and components used in production.

MRP determines the qty of materials and the date on which these are needed for each phase of production.

Its based on the principles if independent and dependent demand.

ADVANTAGESADVANTAGES1] Useful when there is sudden change in

demand(mkt/qty/date).

2] Minimises unnecessary inventory investment.

3] Machines and material utilizaton can be planned in a better manner and greater productivity can be achieved.

4] Sophisticated and nature approach of inventory control.

5] Improved customer services. 32

DISADVANTAGESDISADVANTAGES

1] High procurement costs bcoz each item is processed seperately.

2] Close monitoring of the material stocks is essential.

METHODMETHOD

In MRP systems, 3 sources (files) are required as an input data for computations.

a) Master production schedule

b) Bill of material file

c) Inventory record file

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1. MASTER PRODUCTION SCHEDULE FILE

It is a statement of time phased plan for the total production activities .

It is translated to the specific products .

For the product , the components and the quantities are listed .

The production cycle and the production schedule are generated in stages and includes products likely to go in the shipment .

Material requirement can be broken in terms of weeks and days .

Smaller the time period, the more effective the material plan will be.

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2. BILLS-OF MATERIALS FILE

It represents the actual flow of production in terms of the quantities to be packed .

It determines the quantity of the packing component and the bulk drugs that are needed and is known as the parts list .

The stages and the proper sequence through which the product is made is determined .

The production and planning department uses BOM to calculate no of components.

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3.INVENTORY RECORD FILE

Ordering of items at one time is not correct as different substances have different lead times . The computers are thus used for this purpose .

The lead time are obtained as follows .

1. Ordering lead times is obtained from the purchase records .

2. Manufacture route time is obtained from the process route sheets.

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Inventory transaction

Customerorder

Service partsrequirement

Sales forecast

MasterProduction

Schedule file

Bills of Materials

file

Outputreports

InventoryRecord file

MRPprocessor

Engineering

changes

2.MANUFACTURING RESOURCE PLANNING(MRP-II)

It refers to the strategic financial planning as well as production planning through the use of the simulation capabilities.

It is originally developed for the material orders .

Planning and production are integrated with MRP.

It is a totally company system in which functional group interact and make joint decisions

It includes monitoring inventory level , work force levels .

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3. JUST IN TIME(JIT)

It is the process of receiving the material, transforming them into parts, converting the material into sub assemblies, assemblies and the finished products for sale.

Product supply is matched with the market demand.

It is an attempt to reduce the working capital to the minimum.

ADVANTAGESADVANTAGES

Employees are motivated and better quality of the goods are produced.

Inventory levels are reduced and buffer stocks are also reduced .

Additional stock buying is not required 39

NEEDS OF JIT

The main need of the JIT is the motivation factor . Motivation is for the following types

1. Motivation for control.

2. Motivation for the involvement .

3. Motivation for improvement .

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COSTS AND SAVINGS IN INVENTORY

1] ORDERING COSTS:1] ORDERING COSTS:

Stationary

Clerical and processing, salaries/ rentals

Postage

Processing of bills

Receiving/inspection/documentation

2] HOLDING/ CARRYING COSTS:2] HOLDING/ CARRYING COSTS:

Storage space

Property tax on warehousing

Insurance

Deterioration/obsolescence

Material handling and maintenance, equipments.

Q.C

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3] STOCK OUT COSTS3] STOCK OUT COSTS

Loss of business/profit/market/advice.

Additional expenditure due to urgency of purchase.

Telephone charges.

Loss of labour hours.

Air transport charges.

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SAVINGS

Savings are affected by various means:

1. Material substitution

2. Reduction in inventory levels.

3. Variety reduction.

4. Standardization.

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REFERENCES

Pharmaceutical Production and Management by CVS Subramanyam. Page:292-320.

Drug Store and Business Management by R.M. Mehta. Page:80-93.

The Theory and Practice of Industrial Pharmacy by Leon Lachman.

Internet source.

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