Inventory Management

Objective:

To have the right material / products at the right time to meet production / customer demand while optimizing the overall inventory investment.

It aims at:

• Minimizing average inventory level
• Maximizing utilization of stores / warehouse capacity
• Reduce lead time
• Increase production efficiency
• Improve customer satisfaction

Main functions of Inventory Management:

• Inventory analysis.
• ABC - based on consumption and value
• XYZ - based on stock value of item
• VED - (Vital Essential Desirable) based on criticality

· Determine ordering policy

• Determine stock parameters like safely stock, Re-order point, Economic order quantity, minimum stock, Review Period.

· Stock accounting

• Inventory maintenance and stock valuation

· Physical stock verification

Inventory classification according to material group:

· Raw material

· Semi-finished good

· Sub-contracted items

· Bought-out parts

· Consumables

· Tools & gauges

· Jigs & fixtures

· Machine spares

Stock parameters used for controlling inventory:

· Lead time of procurement

· Safety stock or minimum stock to handle unexpected demand, changed rejection rate, to avoid stock out condition

· Re-order point

· Maximum stock

· Economic order quantity (EOQ)

· Average consumption for the period

· Review period

· ABC, XYZ, VED classification

Different stores where material is stored:

• Inward store
• Raw material store
• Semi-finished stock store
• Finished parts store
• Finished goods store
• Rejection store
• Scrap store
• Maintenance store
• Tools store
• Jigs, fixtures, patterns etc store

Inventory Transactions:

Material receipts:

• Goods Receipt Report (GRR)
• Goods Receipt & Inspection Report (GRIR)
• Supplementary GRR
• Customer’s Material return note
• Material return note from Production (MRN) against excess or wrong material issue
• Delivery note from Production (DN)
• Transfer Note from other store location (TN)
• Material Rejection Note
• Positive Stock Adjustment update store record after physical counting

Material Issues:

• Material issues note to part production (MIN)
• Material transfer note to other stores
• Assembly issue note to assembly production
• Dispatch challan to sub-contractor for returnable material
• Dispatch challan to customer for Finished Goods /Spares
• Material rejection challan for sending rejected material to supplier
• Negative Stock Adjustment

Reference documents for Inventory transactions:

• Purchase Order (PO)
• Sales Order (SO)
• Material Requisition Note
• Production Work Order
• Goods Receipt Report

Need of Lot Traceability / Serial Tracking:

• Inventory stored by Lot/ Serial Number on receipt and also issued
• Inventory can also be stored by Grade, Potency, etc.
• Keep track on inventory w.r.t. Shelf life, Sell-by Date, Display until Date, Best before Date
• Used for forward / backward traceability w.r.t. Quantity, Rejection, etc.

Stock control systems:

Different methods for stock control

• Re-order level system
• Two bin system
• Review system of replenishment

Re-order Level System (ROL):

• Item is replenished as soon as stock of item falls to or below ROL
• ROL = min. stock + (LT * Average Consumption)
• Quantity ordered is EOQ which might be modified due to constraints like lot size, discount on Qty.
• Max Level = Stock-on-hand + EOQ

Two bin System (Kanban):

• Physically entire stock is segregated into two bins.
• First the stock is been consumed from Bin-I
• The empty Bin-I indicates that stock has reached ROL
• Bin-II contains stock equivalent to ROL
• The quantity ordered is divided into both the bins

Review system of Replenishment:

• Stock is reviewed at a pre-fixed period
• Ordered quantity varies as per the stock at the time of review.
• Computation of Economic Review Period so as to minimize Total Procurement & Inventory carrying cost.

Economic Order Quantity (EOQ):

It is the quantity where inventory carrying cost equals cost of procurement

Inventory carrying cost = Cost of procurement

• Inventory carrying cost includes
• Investment cost (Interest on capital)
• Storage cost (Storage, Insurance Handling, Obsolescence, Loss due to deterioration)

· Inventory procurement cost includes

• Cost of processing Purchase Order (PO) or Work Order (WO)
• Cost of handling

Calculation of EOQ:

EOQ = SQRT (2 * R * S / K * C)

Where:

R = Annual requirement or Consumption

S = Set-up cost in production or Procurement cost

K = Carrying cost as a % of average inventory cost

C = Unit cost of Item

EOQ is modified due to following constraints:

• Suppliers minimum order quantity conditions
• Lead time
• Seasonal availability
• Packing restrictions
• Risk of obsolescence or deterioration
• Price discount
• Market condition
• Government restrictions

A-B-C Analysis:

Classification is based on consumption value

• A-class items
• Usually 5-10% items accounts for 70-75% of money spent on material
• These items require detailed & rigid control
• Need to be stocked in smaller quantities
• B-class items
• Usually 10-15% items accounts for 10-15% of money spent on material
• These items do not need detailed & rigid control
• Normally stock are reviewed once in 1 or 2 months
• C-class items
• Usually 70-80% items accounts for 5-10% of money spent on material
• Do not require close control
• These items need to be procured infrequently in bulk to get quantity discount
• Application of A-B-C Analysis:
• Degree of control
• Stock records
• Safety stock level
• Price discounts
• Value engineering