& Executive Summary Tivventuty is at itemized catalog af lists of J tangible goods oF property ar tite itutangible aitributes or qualities, Here we diseuss inventory mancygement in this report, which means the overseeing, and controlling of the ordevieg, storage and ise of components that a company will use in the production of terns, tewiTl seit fay well as the overseeing and controlling the quantities of finished goods prodivcts. In this report we dicen importance of iervensors, importance of inventory imanagement , types af lnveatary, inventary costs , inventory tienover ratios and tiferens sizes of tnventory level just like reonter poimt, maximum quantity, BOG, EPO ete.& Jnventory Inventory isthe physical stock of goods maintained x an organization for its smooth running, in accomting language it may mean stock of finished gonds and. In a manufactaring concern, it may ineloale mw materials, work-bo-prowess etc. ie the form of material oF supplies 9 be consumed in ébe production process om tte rendering of services The saw materials, work-tn-process goods and campletely fished goods that are considered the portion of a busiess’s assets that is eeady av will be ready for-sale. Iwemory represen one of she most important asses that most Dusinesces possess because the tmover of aw entory represents one of tke primary sources of revenue eneiation and subsequent earnings jor the company's sharekiokdersdow ners Importance of Inventary Iwentory represents one of the mest important asseés that most business possesses, Because the tumover af inventory represents nne of the primary sources if revewuse generation ava subsequent earnings for the comyrany’s shareholderowners & Inventory Management Activiries employed i maiataniing ge oprinuen member or amowit of each inventory Ttean. The abjecsive ef inventory management is to provide unintermpted production, sales, andlor customer-service levels at the miénhaum cost, Satce For many companies inventory is the largest item in the current assers category, inventory problems cant und ds contribute 1 Fowses or even business foitwres. Abw called invensory ewnsro Possessing a high anaunt ef myentocy for long periods ix nat usually good fora Brsinesy Because ef inventory storage, obsolewennce aad spoilage costs. Haw ever, possessing too hetle trventory isn't good either, because the busieess rans the risk of Taxing v1 on potential sales and porortsal market share as well Inventory management forecasts and strategies, such as a just-in-time inventory austen, can help minimize inventory costs because goods are created or received ax inventory anty when needed Inportance of Inventory Management Managing your inventory ine cost-efficient way helps you aptimice vor profits. This eins with negoniatmy the lowest costy with your suppliers: Rorving ia volume ar committing te suppliers. in long-term relationships our help with this, Managing inventory once you have is is vital as well ff you arder re0 mech inv entory. you karve fa pay mare money for employees to organize it ane manage #. You have more expenses for sroruge areas where you hold i You'aiva risk waste on expired ar raved iteans. Having to fille iaverdory can deel ta stack-outs, which is bad for custorerA marerial or substance used in the primary production or manufacturing of a good. Raw materials are offen naturel resources such as ei, iron eard wood. Work in Progress Maievial that has eniesed rhe production process bur is not vet a finished product. Wook an premeress (WIP) therefore refers te all materials aid partly finished products: that ave ar various stages of the proxtuction process, WIP excludes iaventory of ras materials at the start of the production eyele end finished prroduets biventory at Whe end of the production evel. Finished goods Finished goods are gouds that hare completed the manufacturing preicess but hee nos yet been sold or distributed to the ene user. 4& How companies use their inventories? Anticipated inventory Invenory that results whenever quantity price discoums, slipping costs; setup costs, or similar considerations make it more ecomamical ro purchase or produce in larger ors than are neesled for immtedliate purposes Fluetwation Inventory Invemony that ix carried as a cishion to pratect against farecait ertor. Lot-Size Inventory Inventory thar results whenever quantity price discounts, skipping costs, serup costs, or similar considerations make it more economicat te perchuse.or produce in larger Tats than are ceed for inutediate purposes‘Transportation iaventory Inveriony in movement of location Transit between the mantyfactring plant and the distribution warehouse Specutative inventory Tie term "speculative inveitory” can mec different tgs, dut in generat it refors 1a inventory that a business abtains ave holds in antiepaton of fre demand, rather than (0 nicer current demind. "Spec anventary" is most commuenty a cest-wuving measure, though businesses ale ase it to get alecud of the market. Maintenance, repair and aperations Mamtenanee, repair ant operations (MRO} or meintenance, repair, and overhaul involves fixing any sort of mechantcal, plumbing or electrical device should it become out of order or broken (known as repair, unscheduled, er casualty mapuenance). Halse inches performing rowtine actions which keep the device ve working order (known as scheduled matnrenance) or prevents trouble fram arising (preventive maintenance, & Objectives of Inventory Management The abjcottve of inventory management ix to peovidde desired [evel of customer servive, re allow cost-efficient operations, and ro miaimize the inventory investenent. Customer value Delivering value to customers is important to managers. leaders, and entrepreneurs: alike. To be willing to pay, @ customer must derive value from a market offer. Hassever, what is customer vale? How does a supplier detiver customer vatue? The defruition abeve suggerts thet Jhere are twe aspects te customer vale: desired value ond perceived value, Desired valve refers to what customer's desire in a prostact oF service, Perceived value is the benefit that a customer believes he or she received: fram a pronuct after it was prumchaved Provide desired customer service level: 1 Percentage of ovsters shipped on sohedule. F Perventageef tine wems shipped on scheclule © Percentage of dellar volume shipped om schedade. 3 hile time due to material and component shortages. Provide for cost-efficient operations: > Buffer stock for snoovk production flaw. Maintain a tevet work force. Allowing longer productions ews & qeuantty discavats. Minimize inventory related investments: Inventors samower = Anaaal CGMAvpA Sn (8h Weeks (or days) of mapply = Avg Ince S¥itvg WA Cage ‘erection penton agementPercentage of Orders Shipped on Schedule The percentage of orders shipped at the planned time (Shipped means off the dack, ais erent trite Final destlnations| None tha Whe thie to ship mely be define by te cuatomer or it may be determined by the shipper in order to accommsodate an Or ime Delivery. Good measure if onters have similar vakee. Does nor caprure vabue. if one compairy represents 60% af your business but ealy 5% of your orders, 95% an schedule could represent andy 40% nf value Cateuiasion Number of order shinped on rime ¢ Total number ef orders shinped Percentage of Line Hems Shipped on Sctedute Recagnizes that not all orders are eatual, but does not capture Svatie of orders Mare expensive to measure. OR for finish. Gonds. A. 0% service level mighs mean shipping 225 items ot of the total 250 line tents totaled From 20 anders seheduled Percentage of Dollar Volume Shipped on Schedule ecognices the differences bn ordets ii termes of both tine items and 8 vahie Cost such as scrap cost calibration cost and down time cost associated witht preparing the eguiomen: for the next product being produced daventory levestment Measures Example. The Conch Mover Home Company hay anmuinl isast of gunels sel of $404000,000. The average inventory value at any proistt ia time is $384,615. Calculate inventory turnover and weeksidarys of supply Minimum Inventory tavestment Trverrlony as a conipany’s goods on Fund, which és elem a significant current asset, Inveniory serves ay a buffer between a compors's sales of goods and itx production: or purchase of goods. Companies strive ro find the proper amour of inventory 20 ay oid lost sales, disruptions in prostuction, high holding costs, etc Maaufacturees usually have the following eaegories of tventaries: raw material, wark-reprocess, finished goods, and manufacturing supplies. The amounts of tese categories are usuadty listed in the wotes to its batance sheet Inventory Turnover A company car riteasiere its miniomam iptventory investment dy its iwensory tumover= shat i this, bv the level of customer demand satisfied Jy the supply om hand. We alealate the baventary trio ef heart: as: IF she cust of gourds subd, ot ABC Company $40,000,000 aad averuge inventory in dollars ts $84,615 then Fgoodssokl S100 0 average iventory value S384615 = inventory tuesWeeks/Days af Supply A financial measure of a company’s performance thet sives investors an idea of how Jong it takes company to tun its inventory (including saads shar are werk in progress, if applicable) into. sles. Generaliy, the sower (shorter) the DSE the beer, but it i important to-note that the average BSI varies from one indtstry to another. aerageinventory value SRHOIS avemgeweelly COGS SMO SD ‘Weels of Supply $384,615 $10,000.00 360 Relevant Inventory Casts Hem Cost Cost peritem plas any other direct costs associated with getting the itern to-dhe plant, Holding Costs Holding cost is money spent to keep and maintéin a stack af goods in storage. Holding costs inchede rent for the required space: equipment, materials, and labor to operate the space: insurance; security; mterest om money invested in the inventory and space, and other direct expenses, As inventory increases, so docs the holding cost? ‘Day of Supply = = 10 days Capitat Cost The higher of the cost of capital or the oppartinity cost forthe company: Storaye Cast Storage cost inchides the variable expenses for space, workers, and equipment related 10 the vohone of inventory. Risk Cost Risk cust micdades obsolescence, darnage or deterioration. theft, muerwace, ancl deves associated with the voume of inventory held. These costs vaey based in industey. Ordering Cast Fixed cost associated with citer placing an onder with a sipplier or setup coxt incurred for in-house production. Ordering costs includes the cost of she clesical wark ro paper, release, monitor, and receive onder siand the physical handling of tke goad, Shortage Casts (Penalty Cost) The penalty cast is the cast per unis of ot satisfying che arden shen it is recelved Shertaye cast or stock-ow cost is the doval of all costs associated with shortage units We use penalty cost im inventory planmuane. The penalty cost shold not be something yom puy actually, It can be tke a chance of profit you missed, which is called the oppartunity cost. However, there is a case when youe shold pay a penatty fer the shortage, This Reppens when sous have ct agreement with a customer to setyfy: thedemand by a certain date with the right quantities, or you will pay a penalty for the breach of contract. Ponaity cost ineludes lnss of customer good, biek orier hanatling, aun lost sue Shortage cost incited due ta two reasons Rack Orders Delaying delivery to the customers ua dhe ier becomes available, Lost Sales Occurs when the eustomer is nor willing to wait for delive Three Mathematical Models for Determining Order Quantity Economic Order Quantity (EOQ or Q System) A model cued to find oprimat order ¢ and P ‘Reoeder Poin Part of continue ur review system, wiich iracksonhazd inventory each ime @ withebarwal, (made Economic Production Quantity (EPQ) A adel sae eter For nc renented pric dtivery Quantity Discount Model Mucifies the EO process wo consider eaves wbeze quantity dincwents ave avullable 4 Economie Order Quantity BOQ Assumptions: Deircnid is known & constant «no safety stock is required Leadl-tone iv knowa & constant, No quantity déscountsiare available Ohdoring for very) costs are comstane. Al desman is suttfied fw shortages. # The onder quantity ardves i. single skipment The BOQ madet3 Reorder Point (R) Us the level of inventory, which triggers an action to replenish that particular inventory stack? It ts nermatly caleulated as the forecast usage during the replenishment lead-time plus saferv stock Formula for vearder point Raul Where R= rearder point w= average daily d lead time Example: ‘A computer company has anneal dermand af 1.00%, They wera tatetermine BOL for eirewit Dowerd, winich ave an coma hodding eos (H) of 86 per unit. aad an orcering east (S).af 875. They muni te-euteulate TC and the reorder poou (Rt) ifthe purchasing lead-tnge ix 5 days, R =Daily Demand x Lead Time p= 10.000 OE #5 days = 200 mits ane Economic Order Quantity (EOQ) The Feonomic Order Queunity (EOQ) is the awmber of unity thar a company shunt add to mventory with each ender to menimice ihe total costs of inventory—auch as Jolkling coxts, orer casts, and shortage costs Formula for Econornic Order Quianaty: Where @ = optimal arcer quantity B= anmual demand S= ordering or setup cost HM = holding cast For the atove example, we can eatoulere BOQ as under: [3*10,000"Varary Of Cra Pui Total Annual faventory Coxt with EOQ Madel Fenda for Total laventory Cost: Total annual cost= ammuat ordering cost + annnust holdiseg costs TC = (MQ #8) +(Q2 x H) fatal nina cost (Drs annucil demand 2 = quantity ta be ovlered H = camual holding cast 5 = ondering or setup cost For the aliove evaripe, we can ealcudere EPQ ax under (22822 (226 = 10.000), 5, (300 = 500 TC =51500+81500 =$3000 & Economic Production Quantity (EPO) EEQ Assumptions The E09 model assumes wv entory arnves instantaneously. Jn many cases inventory arrives: gacudvally. The ccomormie production quansity MEPQV mudel assumes invenvary ay being produced at a rue of p units per day, There is a setup cast each time production begins The EPQ model Stume assumptions as the BOQ except: inventory arrives im increments & is trawa down ax . Fe oplananmert o (Qntor quaety 2000 sts Baty domora (an = 100 as uy produto i) 250 it4 Economic Production Quantity (EPQ) Economic production quanity (EPQ) ts the quantity of @ product that should be manwfectioree inc single buch us minimize re sol vost that includes vetup cosss for the nrachines and inventory holdurg costs, Fonda for Economic Production Quantity> EPe= fig} y canal demand i wnt setupor ordering cost annual holding cost average daily demand rate p=daiiy production tate Example: Healy. Plans LID, (HPL prodeces: its premium plan food in 50 - pounil bux. Deowaeud for the product is 100,000 ponds perweek HP openttes 50 weeks per year c& can pradhice 250,060 pounds per week. The setup cost is $200 and the animal holding ost rate iy SU.S5 per hag. Currently, HP produces fs preniiuan pant food in batches (OF 090,090 pounds. H = 55 per $8 rourads B= 75000 = 75000" 12/50 = 18000 p= 24000 pacrawonICON) rn EPQ 70 EPQ = 3795 Total Annual Cosi with EPO Model Formate far wxrl cose Q = quantity ro be ordered H = armual hoidmng cost S'= ondering or serup cost Ina Maxionen Dventory Sedation NinagomenFor the above example, we can calculate total cost as under: Tota! Cost = (849/2 3) + 18,000 x 30” 3795 Total Cast = 142350 + 1422.92 Total Cost = $2846.42 Maximum laventory Maxiniuom level of inventors is maxon quanciry of material, which have to keep in store. We should not keep the stock more then maxiuon level because if we keep tone stock than maxinanan teve it will increase the cast of capital beesture we donot need the stock more than maximum level. Excess stovk than maximum fevei will increase ohe cort of sroring Inventory level Formida for Maxinmon inventory: reef) Where d= average daily demand p= daily production rave For the aboweexanple, calculation of aa vimun taventory is as ner: 18000, 24000" Ing 3795( — 0175) = 949 Ina 949 Isin 3 7OB( = & Quaniity Discount Model Quantity Discount Model Quamiiry discount male! a forma of axe ecomonle order quanctry (OQ) moved that Jakes Ero acenand quantiey discounts, Quantity discourts are price reductions designed to induce large orlers. If quantity discounts are affered, the buyer must weigh the potential benefits ef reduced purchase price and fewer arders against tte > eration ef Operation Manazonent"Uroarty Of Cre Pas 3 increase in carrying costs caused by higher average inventories, Hence, the buyer's goal in this case ix to select the order quantity that witl ine tore comes, where Fotatoost is the som af carrving cost, oeitering vont, and purcheise cost Fanmala for quantity discount moxtel: Where TC = total anniaatenst = annual demand 0 = quanniy 03 be ovilensel HF = armuail holdeag cost $ = ordering or serup cost Ce unit price Four Steps to Analyze Quantity Discount Models 2 JL Caleulite Q* for lowest discount price 2. IP@t Es too smaill to qualify for that price, adjust Q* upward 4. Calewdare tarat east For each O* 4 Select the Q* with the lowest total cost ¢ Example: Rapid Grower, the supplier af plant for Greens in Preiblem #2. has offered the following quantity discounts If the nursery places oniers nf 50 bags or less, the cost per bag is S20. For orders greater than, 50 bags buat éess than 100 bugs, the cast per bag Is $19. For orders of 100) bogs or more, the cost is $18 per bog. Greens extineare its holding cost to be 25 percent wf the wnit price, Determine the most cost effective ondering policy for Greens. Step t Firss, we cafeutate the EOQ at the lowest pree affered, The annual hotdog cost ivy 25% of the unit cast is equal to $4.5. £oQ Shive the onder quantity does not match the unis price used to catculare tke BOQ, this answer ts lafeasible. This meauer if we peice an orcler For 83 bags, we are charged 819 er bag rather than $18 we ased in caicwlating the E00, Step 2 Sluce the first BOQ is infeasible, we ealeulate the BOO fow the net higher price. Make sure to calculate the new annual holding cost, 25% of $= 475, ‘Predation Operation Managment£0Q= SIBags If we place an order for 81 bags, we wilt he charged $19 per bag, which is the price we used ra catcutate the EOQ. Therefoxe,thivis a feasible ander quantity. Step 3 Naw we calculate the rarctann 4 « st fox spp fle DIQ xS}+(Q2 x Hj + CD ISOUNY x10) + 81D TC = 192.504 192.384 2 Shuce the total anual Aff is tess expensive, Greens should arder 100-bags d MH Hargest iter n't ec. rvent ; ta. di om ‘ip:/how bo WOsie.co nvaiisloutehis-bmentori-manog ment ina fig: salon sinevs chron confp-ton- wave manage bventor 1000 han ng Wivavesradsgecko,comy z 3