INVENTORY CONTROL

MODELS – EOQ & JIT

BY:
EHSAN UL HAQ
SWATI MEHTA
SAGAR GUPTA
AAKASH GUPTA
 WHAT IS INVENTORY?
• The term inventory originates from the French word
‘Inventaire’ & Latin word ‘Inventariom’, which implies
a list of things found.
• An asset not participating in conversion or not
getting sold
• A physical resource that a firm holds in stock with
the intent of selling it or transforming it into a more
valuable state.
– Raw Materials
– Works-in-Process
– Finished Goods
– Maintenance, Repair and Operating (MRO)
THUS, INVENTORY MANAGEMENT INVOLVES
ADMINISTRATION, POLICIES & PROCEDURES TO
REDUCE IN INVENTORY COST.
 OBJECTIVES OF INVENTORY
MANAGEMENT
• Ensure a continuous supply raw materials & supplies
to facilitate uninterrupted production.
• Maintain sufficient-finished goods for smooth sales
operation & efficient customer service.
• Inventory management helps to reduce material
handling costs.
• Reduce dependencies of one another & enable, the
organizations to schedule its operations independently
of another.
• It helps to utilize people & equipment reasonably.
• It facilitates product display & service to customers
 INVENTORY RELATED
COSTS
• Procurement Costs - management
and staff time, order preparation and
dispatch, follow up, transport from
vendor, receiving, handling storage
• Carrying Costs - capital, opportunity,
space, tax, security, insurance, spoilage
and preservation, obsolescence
• Out of stock costs - emergency
transport, lost sale, lost customer
 TYPE OF INVENTORY
• Location inventory- Inventory at a fixed location
• In transit inventory[pipeline inventory]-Being
transported and or waiting to be transported

• Manufacturing Inventory- Raw material components,

Work-In-Progress, Finished Good, MRO [Maintenance,
repairs and operating supplies]
 METHODS OF INVENTORY
MANAGEMENT
• ABC (Always better control) classification
• VED (Vital, essential & desirable)classification
• HML (High, Medium & low)classification
• FSN (Fast moving, slow moving & not moving)
• EOQ (Economic Order Quantity)
• JIT (Just In Time)
 ABC ANALYSIS
• The most widely technique of controlling
inventory is ABC(Always Better Control)
analysis.
• The objective of ABC control is to vary the
expenses associated with maintaining
appropriate control according to the potential
savings associated with a proper level of such
control.
• ABC analysis divides inventory into 3
categories A, B & C based on their annual
consumption value.
• It is often called the Selective Inventory
Control Method (SIM).
 Procedure For ABC Analysis
1. List each item carried in inventory by number or some other
designation.
2. Determine the annual volume of usage & rupee value of each
item.
3. Multiply each item’s annual volume of usage by its rupee value.
4. Compute each item’s percentage of the total inventory in terms of
annual usage in rupees.
5. Select the top 10 per cent of all items which have the highest
rupee percentages & classify them as ‘A’ items.
6. Select the next 20 per cent of all items with the next highest rupee
percentages & designate them ‘B’ items.
7. The next 70 per cent of all items are ‘C’ items.
 HML ANALYSIS
• It follows the same procedure as ABC analysis.
• Only difference is that HML classification unit
value is the criterion & not the annual
consumption value.
• The items of inventory are to be listed in
descending order of unit value.
• This analysis is useful for keeping control over
consumption at departmental levels, for
deciding frequency of physical verification and
for controlling purchases.
 VED ANALYSIS
• The VED analysis is done to determine the criticality of an
item & its effect on production & other services,
especially in case of spare parts.
• If a part is vital, it is given ‘V’ classification, if it is
essential, then it is given ‘E’ classification & if it is not so
essential, the part is given ‘D’ classification.
• For ‘V’ items, a large stock of inventory is generally
maintained, while for ‘D’ items minimum stock is enough.
 SDE ANALYSIS
• The SDE analysis is based upon the availability of items & is very
useful in the context of scarcity of supply.

• In this analysis, ‘S’ refers to ‘scarce’ items, generally imported, and

those which are in short supply ‘D’ refers to difficult items which are
available indigenously but are difficult items to procure. Items which
have to come from distant places or for which reliable suppliers are
difficult to come by, fall into ‘D’ category. ‘E’ refers to items which are
easy to require & are available in local market.

• This analysis is based on problems faced in procurement, is vital to

lead time analysis & in deciding on purchasing strategies.
 FSN ANALYSIS
• FSN stand for fast moving, slow moving & not moving.
Here, classification is based on pattern of issues from stores
& is useful in controlling obsolescence.
• To carry out FSN analysis, the date of receipt or the last
date of issue, whichever is later, is taken to determine the
number of months which have lapsed since the last
transaction. The items are usually grouped in periods of 12
months.
• FSN analysis is helpful in identifying active items which
need to be reviewed regularly & surplus items which have
to be examined further. Non-moving items may be
examined further & their disposal can be considered.
 EOQ MODEL
 What should be the size of the order?
 Small orders result in:
– low inventory levels & carrying costs
– frequent orders & higher ordering costs

 Large orders result in:

– higher inventory levels & carrying costs
– infrequent orders & lower ordering costs

 EOQ is the technique which solves the problem

of the manager. EOQ or Opt Q is the order
quantity at which the total cost , comprising
ordering cost plus carrying cost is the least.
 Assumptions of Wilson’s Lot size
formula or Classical EOQ model
1. Demand is at a known constant rate and
uniform throughout the period
2. Lead time is known and constant
3. Demand is fully satisfied, no shortages are
allowed
4. All costs are time invariant(no back orders are
allowed)
5. Quantity discounts are not considered.
6. Price per unit of product is constant.
7. No constraints are imposed on quantities
ordered, storage capacity, budget etc.
 Inventory Cycle
• The assumptions of the EOQ model yield the
saw-toothed inventory pattern.
• The vertical lines at the 0, T1 & T2 points in time
represent the instantaneous replenishment of
the item by the amount of the order quantity, Q,
and the negatively sloped lines between the
replenishment points represent the use of the
item.
• Because the inventory level varies between 0
and the order quantity, average inventory is
equal to one-half of the order quantity, or Q/2.
 Inventory Cycle

AVERAGE INVENTORY=
Q/2

0 T1 T2
 GRAPHIC SOLUTION

TOTAL
COST
CARRYING
COST (Q/2) Ch
Cost

ORDERIN
G COST
EOQ D/Q Co

Order Quantity Size Q

 GRAPHIC SOLUTION
• An examination of the 2 curves reveals that the
carrying cost curve is linear i.e., the more the inventory
held in any period, greater will be the cost of holding it.
• Ordering cost curve, on the hand, is different. Ordering
in small quantities means more acquisition & higher
ordering costs. The ordering costs decrease with
increase in order sizes.
• A point where the carrying cost curve & the ordering
cost curve meet represent the least total cost which
incidentally is Economic Order Quantity or optimum
quantity.
 ALGEBRAIC SOLUTION
• We know,
Total Annual cost = Annual Purchase cost + Annual Ordering cost + Annual Holding cost
TC = DC + D/Q Co + Q/2 Ch

Where, TC= TOTAL COST D= ANNUAL DEMAND C= PURCHASE COST / UNIT

Q= QUANTITY TO BE ORDERED (Q optimum = EOQ)
Co = ORDERING/SETUP COSTS
Ch = COST OF HOLDING ONE UNIT OF INVENTORY

• For the cost to be minimum, cost of ordering is equal to the cost of carrying, or
D/Q Co = Q/2 Ch
Which in turn is solved as,
D Co = Q² / 2 Ch or 2 D Co = Q² Ch or Q² = 2 D Co / Ch
Thus,
Q (optimum) or EOQ = 2 D Co / Ch
 ALGEBRAIC SOLUTION
• Thus, algebraic form of EOQ or Optimal Quantity
can be defined as:

• Q= 2DCo/Ch

D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of inventory
EXAMPLE: An auto industry purchases spark plugs at
the rate of Rs. 25 per piece. The annual consumption of
spark plug is 18,000 units. If the ordering cost is Rs.
250 per order and carrying cost is 25% p. a. What
would
SOL: be the EOQ?
Calculation of EOQ:
Annual demand (D) = 18000 units
Unit price (P) = Rs.25
Ordering cost per order (C0) = Rs.250
Carrying charges in % = 25% p. a.
Carrying charges per unit (Ch) = Rs 25 * .25
= Rs 6.25

EOQ = 2 *D *C0
Ch

= 2*18000*250
6.25
= 1200 units.
LIMITATIONS
 JUST IN TIME
• Just-In-Time(JIT) is defined in “ a philosophy of manufacturing based on
planned elimination of all waste and on continuous improvement of
productivity”
• It also has been described as an approach with the objective of producing
the right part in the right place at the right time (in other words, “Just In
Time”)
• JIT seeks to increase an organization’s ability to compete with others and
remain competitive over the long run.
• Increasing efficiency within the production process. Efficiency is obtained
through the increase of productivity and decrease of cost.
• Reducing wasted materials, time and effort. It can help to reduce the
costs.
 HISTORY OF JIT
• The technique was first used by the Ford Motor company during 1920s.
• But the technique was subsequently adopted and publicized by Toyota
Motor Corporation of Japan as part of its Toyota production System(TPS).
• In 1954 Japanese giant Toyota implemented this concept in order to reduce
wasteful overstocking in car production.
• It was developed and perfected by Taiichi Ohno of Toyota, who is now
referred to as the father of JIT.
• Taiichi Ohno developed this philosophy as a means of meeting customer
demands with minimum delays.
 KEY ELEMENTS OF JIT
• Uniform Plant loading
• Reduce or eliminate setup times
• Reduce lot sizes (manufacturing and purchase)
• Reduce lead time (production and delivery)
• Preventive maintenance
• Flexible work force
• Require supplier quality assurance and implement a zero defects
quality program
• Small-lot (single unit)
 GOALS OF JIT
1. Estimation of non-value added activities

2. Zero inventory

3. Batch size of one

4. A 100% on time delivery service.

 BENEFITS OF JIT
1. Reduced set up times
2. Improved flows of goods
3. Employees who possess multi-skills are utilized more efficiently.
4. Better consistency of scheduling and consistency of employee work
hours.
5. Increased emphasis on supplier relationships.
6. Supplies continue around the clock keeping workers productive and
businesses focused on turnover.
The main benefit of JIT is that it can improve production efficiency
and therefore competitiveness.
 DRAWBACKS FOR JIT IN
INDIA
Drawbacks

Cultural differences Other problems Loss of autonomy

Production level/employee skills

Implem- Traditional
Benefits may
Individual Team Method
entation approach vary
COMPANIES THAT HAVE
IMPLEMENTED JIT
CONCLUSION