Effective Inventory Management Strategies and Techniques

Posted on May 3, 2024 in Economy

TRADITIONAL MANAGEMENT OF INVENTORIES:

1 – INTRODUCTION

2 – CONCEPT OF INVENTORY

• CAUSES FOR THE EXISTING INVENTORY.
• EVOLUTION OF AN INVENTORY.
• Inventory costs.
• THE FORMULA OF THE ECONOMIC ORDER QUANTITY (EOQ).
• Importance of good inventory management.
• CAUSES FOR AN EXISTING HIGH INVENTORY:
  • • IRREGULARITIES IN THE COMPLAINT.
    • POOR FORECAST FOR THE SAME.
    • CONTROL OF STOCKS: ongoing review and periodic review. ABC CLASSIFICATION.
    • VERY HIGH DELIVERY.

1 – INTRODUCTION:

When Luis, director of materials out of the office of vice president, could be seen clearly upset. A month ago, the vice president complained that the secretaries’ wasting time filling orders for ordering supplies. “He also mentioned the possibility of a shortage of inventory due to a strike at its largest supplier.

On hearing these comments, Luis thought a solution for both subjects was to ask the supplies in large quantities, and less frequently. Thus, the number of orders will be reduced (less work for secretaries) and there would be a protection in the event that happens the strike of the supplier. This strategy had the added advantage of allowing the wing to get the supplier company discounts for large orders.

Yesterday came the report of operating costs last month, and the cost of maintaining the inventory was located in a record high. Luis was called by Vice-President, where he said that the additional cost of inventory, due to their grandespedidos, caused a serious liquidity problem the company.

Luis concluded that the simple solution that he had taken had not been successful.

2 – CONCEPT OF INVENTORY.

SETS OF ARTICLES ARE THOSE THAT REMAIN TO

AFTER WAITING FOR USE AS RAW MATERIALS, PRODUCTS

ONGOING, other supplies or finished products.

3 – CAUSES FOR EXISTING INVENTORIES:

– The nature of the raw materials. Such inventories are those arising from the seasonality of certain agricultural products. The companies have manufacturing in short periods of time to meet demand over long periods. The high stock is produced during the campaign, to be reduced to the next.

An example of this type of inventory is found in the fruit canning companies.

– For production needs: Season the finished product.

It occurs when the production in short periods of time is due to finished product demand in short periods of time. Inventories are at their maximum level before the high demand, to end at almost zero at the end of your dates. One example of such industries are the manufacturers of frosting for Christmas campaigns or ice-cream companies.

– By reducing production costs for finished products.

The long production runs are a cost reduction changes from one product to another and startups of production (the machines as people do not pick at the start of production work rate) etc, etc. The saving of these costs will cause inventories to rise.

– For procurement savings.

The large volume of purchases usually account for a decrease in unit price and an increase in the stock of this product.

– On the rising prices, speculative and other causes.

We left for the final, which is probably the main reason for the inventory stock in a company: safety stocks.

– SECURITY STOCKS: in both raw materials and

FINISHED PRODUCT. To prevent DEN SITUATIONS

WHICH CAN NOT COVER THE CLAIM.

4 – ANALYSIS OF THE EVOLUTION OF AN INVENTORY

An item is stored in a warehouse, storage or other storage area. This is an inventory stock. The size of this inventory is called the level of inventory.

• Demand and depletion

The inventory is depleted as it happens in demand. Assuming that we start with an inventory of 100 units, as shown in the figure above as time passes, the inventory level decreases due to the demand of the item in stock. The demand rate determines the rate of depletion and the level of inventory. If the demand ratio is high, inventory is reduced more quickly. The demand ratio can be constant (for example, five units per day), or may fluctuate (for example, three units the first day and seven the second.) A constant demand reduces the inventory level equal steps. Graphically this is shown as a ladder (see cycle 1 in Figure 7.1). The constant changes in demand can be approximated to a straight line. Fluctuating demand (variable) is shown by uneven steps, as in cycle 2 of Figure 7.1 and can be approximated by a curve.

• Ordering Guidelines

To reconstruct an inventory item is replenished periodically. When inventory is reduced to a certain level called point of order is an order of replenishment (see Figure 1). The time between the launch of the new order and receipt of the cargo is called time of supply.

Figure 1

• Replenishment, shortage and excess

In some basic models of inventory is assumed that the new order is placed so that the replenishment arrives exactly when the inventory level becomes zero. One can assume that if demand is constant (as shown in cycle 1 of Figure 1). However, if demand fluctuates and / or provisioning time varies, the shipment may arrive before or after the stock is completely exhausted, ie the depletion and replenishment did not match. In such cases happen to an excess or shortage. If the order comes after the exhaustion, the demand can not be served and there will be a stock shortage or breakage. This is seen in the second cycle of Figure 1.

Safety stock

The shortage can be eliminated or reduced by establishing a security stock. The average inventory

With the aim of taking decisions in inventory using the concept of average inventory. To illustrate, suppose that for a period of five days the levels of inventories are:

The average stock is then:

= 8 units

This trend can be seen in the chart below:

If demand is constant, the average inventory can be calculated by adding the inventory at the beginning of the cycle (16 in this example) the inventory at the end of the cycle (0 in this case) and dividing by 2. If the inventory at the end of the cycle is 0 (as in this example), the average inventory is exactly equal to half the initial (or maximum).

5 – COST OF INVENTORY:

This part of the topic, it is extremely important because it let’s define the costs that are associated with inventories, which are costs that will be analyzed to reduce possible without compromising the level of service adopted.

We must bear in mind that the cost of maintaining an inventory item will depend, among other things of value. The unit value of an item in inventory is maintained in the case of an article the price paid for the item to your provider depending on the size of the order.

If instead it is an item that has undergone a transformation in the company, as is the case in progress or finished products, the value is more difficult to determine and depends on the system we use to determine costs.

However, despite the various cost accounting systems rarely take into account the higher costs from the point of view of stock management, which are none other than the opportunity costs: WHERE IS EMPLOYEE MAY HAVE THE BEST CAPITAL, WHICH IN THE FIXED representing an inventory?.

Consequently, the major costs associated with inventory management system can be grouped into:

1 – Costs of storage, possession or maintenance of inventories.

2 – launch costs of the order.

3 – Cost of out of stock or unsatisfied demand.

Let’s move on to more carefully analyze each of these costs:

5.1-storage costs, (Ca):

With this name we refer to the costs to the level of stock of each of the products in inventory.

In making the decision to store some products pose an inventory was made about facilities and personnel expenses.

Another important factor is also involved in this type of cost is the time factor, as the stock level of each product varies with him.

The concepts of cost are affected by the level of stock are:

Capital invested in stock or opportunity cost of capital: cost incurred to maintain the capital tied up in inventory concerned, rather than invested. These economic resources can be valued in different ways, from treating them as a rate similar to that of the financial burden that the company supports or as the rate of return that the company could obtain an alternative investment. We use the weighted average cost of capital.

Variable cost of storage: Maintaining inventories implies the need for stores, with appropriate personnel, material handling equipment, rental of storage space … .

Risk of obsolescence: Changes in consumer or technological developments may lead to an item held in inventory, have no place on the market: a typical situation is that of the products subject to very short-lived fashions, like clothing or major technological changes such as IT.

Risk of damage, theft or damage: The maintenance for a certain time a certain quantity of an item in inventory involves the loss of these items as a result of inappropriate environmental conditions, accidental damage, loss, theft … , Which obviously affect the value of product sales.

Insurance, taxes …: Other costs that vary with the level of stock, such as are insurance policies, taxes levied …

As a general rule and to simplify the calculations can be taken that the total allocated costs for all items can be about 25%. Of course, this depends on each company and will be a function of your organization, type of products that manage and way of functioning.

Assuming this simplification the cost of storage (Ca), as follows:

Ca = 1.25 * Cu * Sm * Ti

1.25 Since 25% of the above costs.

Cu = unit cost of acquisition or purchase.

Sm = the average stock or volume of items stored.

Ti = The interest rate or cost of capital of the company.

5.2-launch costs orders.

We understand cost of launching the total cost that arises every time you place an order for an item. We distinguish between emission cost is the cost of supplies to order that requires administrative work of correspondence, telephone calls, preparation of bills … and a receipt of product inspection and deposit in appropriate storage areas.

The sum of all is the casting cost of the lot (CL).

The characteristics of the casting cost of the lots can be very variable. Your cost may be the same regardless of the number of units that constitute the batch. O kept constant at a certain level while the number of units in the lot, are among certain limits, experiencing an increase if the lot size exceeds the margins (you may have to pay overtime).

5.3-costs out of stock or unsatisfied demand.

It is the cost that is incurred when you can not meet demand because when it is presented, there is no inventory in the warehouse, called the situation out of stock.

We can distinguish two cases of unmet demand:

Deferred unmet demand: that occurs when the customer orders arrived in a time when no stocks are overdue for treatment for the first time they have stocks. The cost associated with this demand as “cost of deprivation and is very difficult to determine. Thus, the cost associated with bad customer service is not easily quantifiable, and neither is the cost of loss of image.

The unmet demand lost: that occurs when the customer orders arriving at a time when no stock is permanently lost, the cost associated with this application is called cost of breakage, they define as the cost of not attending to demand and therefore lose. The determination of the cost of failure is having difficulty, the most important intangible and difficult to quantify the customer to go to competition, with the consequent loss of future sales and loss of image.

6 – THE FORMULA OF THE ECONOMIC ORDER QUANTITY (EOQ).

Its objective is to determine the optimal amount to ask. Answers the following questions:

1 How much should be ordered each time?

2 When should ask?

3 What is the total cost?

4 What is the average inventory level?

5 What will be the maximum inventory level?

Assumptions

E1 EOQ model makes the following assumptions:

– Demand for the paper is constant in time (for example, two units per day).

– Within the range of numbers to call, the storage cost per unit and cost of order are independent of the quantity ordered.

E1 replenishment is so that shipments are arriving just when the inventory level is zero. Therefore there will never be scarcity or excess.

– Since we only considered an article, orders for different items are independent of others.

E1 behavior of inventory level is shown in the figure below.

An examination of Figure 7.4 shows that all cycles are equal, that orders arrive exactly when the inventory level is zero, the order quantity Q is equal at all levels and that the maximum inventory level is also Q.

Example

The Department of Management 1200 used photocopy paper packages each year. The department is trying to determine how many packets in a single request. The information considered is:

Annual demand, D = 1200 packets

Ordering cost, K = 5 pts per order

Storage cost, H = 1.2 Pts per package per year.

The problem is finding the quantity to order, Q.

The figure shows three possible policies for orders: yearly, quarterly and monthly.

1. Annual Policy: To request once a year. ® Therefore, Q = 1200 packets.

• Quarterly Policy: Ask once per quarter ® Four per year.

® Q = 1,200 / 4 = 300 packs ever

• Monthly Policy: To request a monthly ® 12 a year.

® Q = 1200/12 = 100 packets each time.

Solution using a trial and error.

One way to solve this problem would be to calculate the total incremental annual cost of inventory for each of the policies suggested. The policy with the lowest total cost is the best. The total cost is given by Eq.

TC = T _o + T _h

annual inventory cost = annual ordering cost + annual maintenance cost

Step 1. Find the total annual cost of ordering, T _o. The total annual cost of ordering is given as the number of times you place an order, N, multiplied by the cost of ordering, K. This is expressed in the equation:

T _o = N * K

But the number of times an order is placed for a year is given by the total annual demand, D, divided by the quantity ordered, Q.

N = D / Q

Therefore, the equation for To is

T _o = N * K = (D / Q) * K

The value of T _or the three proposed policy is:

Yearly: N = 1, K = 5, T _o = 1 * 5 = 5 Pts

Quarterly: N = 4, K = 5, T _o = 4 * 5 = 20 Pts

Monthly: N = 12, K = 5, To = 12 * 5 = 60 Pts

These values are expressed in Figure 7.6, with the points “a” (for the annual policy), “b” (for the quarter), and “c” (for monthly). The points “a”, “b” and “c” can bind, resulting in a cost curve of annual total order. The curve shows as as the quantity ordered, Q, increases, the total annual cost of ordering decreases . The reason for this is that the larger the size of the order, the lower the number of orders per year.

Step 2. Find the total annual storage cost, Th EI total cost of storage is calculated by multiplying the cost of storage (measured in pesetas per item per year), H, by the number of units held in inventory. The problem is that the inventory level changes from day to day. To resolve this problem using the average inventory. When demand is constant, the average inventory is the midpoint between the highest and the lowest level of inventory. Since the assumptions require that the lowest level of inventory is zero, the average inventory is exactly half the maximum inventory. However, the maximum inventory EOQ method is equal to the quantity ordered, Q. Therefore, the average inventory is equal to half of Q.

Average inventory = Q / 2

Therefore, the cost of total inventory holding annual

T _h, is: T _h = H * Q / 2

The total annual inventory cost for the three policies of orders is:

Annual: Q = 1.200, T _h = 1.2 * (1200 / 2) = 720 Pts

Quarterly: Q = 300, T _h = 1.2 * (300 / 2) = 180 Pts

Monthly: Q = 100, T _h = 1.2 * (100 / 2) = 60 Pts

It is clear that the value of Q will be in direct proportion to the value of T _h. This information is shown graphically in Figure

Step 3. Calculate the annual total inventory cost, T _c. Using the above equation, the total annual cost (Tc, or sometimes T _c (Q)) for the proposed policy is:

Comparing the three alternatives, the best policy is the monthly orders as it has the lowest total cost, 120 Pts Check all policy options would include a lot of work calculation, since these calculations must be made and continually updated to all articles stock. Therefore, a more efficient method is given by the formula for economic order quantity (EOQ).

The EOQ formula

It has been shown previously that the total cost, T _c, can be expressed as:

TC = T _o + T _h =

where D is the annual demand, K is the cost per order, H is the cost of storage, and Q is the quantity to be ordered.

The problem is to find Q for which TC is minimal.

Analytical solution. The following equation equals the order cost and maintenance cost, because this characterizes the minimum total cost occurs at the intersection of the two costs.

(H * Q / 2) = (K * D / Q)

Manipulating this equation is possible to calculate the optimal value of Q to be known as EOQ.

or

where K is the cost of order (ESP), D is the annual demand (units) and H is the cost of storage (in pesetas per unit per year).

Figure 0-2

Solution of the example.

= 100 packets

The optimal solution says that the order size must be 100 packets each time. For an annual demand of 1,200 packages, this means 12 orders per year, or once a month.

Additional information supplied by the EOQ

In addition to the size of the order to carry out, the EOQ can be used to obtain the following information:

a. Number of orders to make in a year. It will:

12 times

b. Maximum inventory and average inventory. The maximum inventory is equal to Q *, or 100 in the example. The average inventory is half of Q *, which is 50 in the example.

c. The number of days of supply. Calculation of EOQ also helps to get the number of “days supply”, d. This information provides management with the length of each inventory cycle. Is given by the equation

d = 365 / N

In the example:

d = 365 / N = 365/12 = 30.4 days

d. ESP value of the order and inventory optimal environment.

Sometimes it is useful to know the monetary value of the EOQ. This is obtained by multiplying Q by the unit cost. It is assumed in the example that the cost of a ream of paper is 10 pts. Therefore, Q in ESP is 100 * 10 = 1000 pts That is, the department asks Pts equivalent to 1,000 in supplies at a time. Similarly, the ESP value of average inventory is:

(100 / 2) * 10 = 500 Pts

e. E1 total annual cost. Using the appropriate equation, the total annual cost (excluding the cost of the goods themselves) can now be calculated.

pts.

It is noted that the two components of total cost, the cost of ordering and storage costs should be the same if we use the optimal Q (60 pts each in the example).

7 – THE IMPORTANCE OF STOCKS MANAGEMENT:

The right course of inventory is one of the most important functions of management. Investigating several bankruptcies of companies has been one of the most important contributions to the bankruptcy was an excessive stock.

Another example would be companies that have a marginal benefit of only 1% of sales, therefore, save 2,000,000 in inventory costs is equivalent to an increase in sales of 200 million Pts

Excessive inventories are costly to store, but they are insufficient

may result in loss of market for customer dissatisfaction,

loss of sales or inactive employee downtime.

The task of inventory control is a part of the leadership role

known address is material and everything related to the acquisition,

storage and management of materials and components within the organization.

This management is usually subsumed in the logistics department within a company.

8 – CAUSES FOR WHICH THERE IS HIGH INVENTORY:

Among many reasons, mainly the causes are:

8. 1 – IRREGULARITIES IN DEMAND: Sales are not constant over time, for periods of a significant increase of the same and the fear of being unable to meet them or not know at that time tends to increase the stock. Generally, no easy solution and as stocks are increased based on logical criteria, but as far “out of step.”

How would you address these SITUATIONS?

Featuring reliable, real-time sales.

The bilateral communication between the departments concerned.

Increased stock of raw materials, combined with production flexibility.

Flexibility in the procurement process, decrease supplier delivery time, several suppliers.

8.2-POOR FORECAST FOR SALES: A sales forecast is not too good always better than nothing.

• Sales history and analysis of the same tools. View seasonality, promotions, dates of celebration of a year in relation to another ………..

8.3-CONTROL OF STOCKS: To keep track of stocks, it is necessary to have information about the items we stock and the number of each. We have basically two methods for them:

• Ongoing review: It is known at every moment the actual number of a series of articles in stock.
• Regular review: Sometimes it is not necessary or is not possible to know at every moment the level of stocks, so we just make an inventory count every certain period of time. This method has the advantage of its greater simplicity and lower administrative costs and how inconvenient that counts in the period between the stock is unknown.

As a useful example of the periodic review is for purchases by large volumes to get a good price or items listed as class “C”. It has stock for a long period of time, so for most of that period, no need to recount to know how much there is. Just know that “enough.”

As to whether we should decide on an exclusive for a review or the other, the answer is no. We must focus our efforts on the control of those items that are most important in the total value of the stock. To do this, use the commands we ABC classification of our stock items based on their total value in our stock.

If this arrangement is represented graphically for a particular company, would take about the same as the chart below:

The horizontal axis shows the percentage of products in inventory from 0 to 100. The vertical axis shows the percentage of total investments in inventory, also from 0 to 100. The distribution of the inventory reveals a typical pattern: a small percentage of the proceeds of inventory is a large proportion of the total investment of the company, in figure 20% of the articles represented 75% of the value of the investment, which will help define the area A of the graph. Then, the zone B is defined by items with an average value in the graph corresponds to 30% of items with 20% of total investment. Finally, Area C, more numerous articles, represents a very low portion of the value of inventories.

The commonly accepted criteria for classification and approximate ABC is:

About 20% of articles account for 80% of the total.

About 30% of articles account for 15% of the total.

50% of the items representing 5% of total value.

The construction of the ABC figure, it is possible to extend it to other areas of activity of the company and clients, …, it is useful to classify the articles of the company, in order to differentiate the policies in each case. Greater attention will be devoted to products of group A than in group C, which is the case. The following table sets out the calculations required for the construction of a particular ABC chart, and the classification into three classes of items considered.

First we arrange the items according to their annual use in monetary terms, and are then grouped into categories, so that classes A, B and C represent approximately 75-80, 15-20 and 5 percent of annual total employment .

ABC RESULT OF THE CLASSIFICATION:

% ARTICLES% STOCK CLASSIFICATION

A = N, R 20 73.2

B = M, P, T 30 21.9

C = 50 4.9 REST

100 100

8.4 LONG DELIVERY BY THE PROVIDER:

In some cases we have no solution to give a good level of service to increase our stock, if for certain reasons (few suppliers, special raw materials, long distances from the supplier delivery times ……) our vendor are long.

We try to find other solutions to try to reduce them without compromising the service.

As a basic principle of any organization is trying to have at least two suppliers for items of type “A” and “B”. A company can not get caught in any decision or unforeseen sole supplier (higher prices, production stop, strikes, fire ……..). Being able to work with at least two providers allows us to welcome the best delivery time of one cycle depending on the manufacturing of our product.

Another way to reduce lead times is to provide estimates of our needs, even approximate our supplier. This allows you to “fit” our items in production. This forecast provided can be adjusted with the following provisions, so that the excesses and defects can be compensated for and not cumulative.

Have dealers (not manufacturers) alternative: Dealers are companies engaged in buying in large volume manufacturers, supporting them in stock. Because of the large volume of purchases get a saving and loading margins market these products to customers. The price paid by purchasing from a dealer is higher than if purchased directly from the manufacturer, but in certain situations of high delivery and lacking stock available, can be very helpful. This option should be used in exceptional cases and not as a rule of action.