The possible consequences of material stock outs when demand arises from the basis of VED analysis and the cost of shortage depends upon the seriousness of the situation. Items are grouped as V (Vital), E (Essential) and D (Desirable).
Remarks: Most critical high opportunity cost of shortage. Must be available in stock whenever demanded.
Strategy: Percentage of risk should be quite small. High level of service is called for.
Remarks: Quite critical. Substantial opportunity cost of shortage should be available in stock by and large.
Strategy: Can take a relatively higher risk of shortage
Remarks: No serious consequences of non-availability. Can be stocked.
Strategy: Risk that can be taken is even higher.
May be, C class items are Vital, and A class items are Desirable, Cross classification is therefore needed giving us distinct groups: first A – V, A – E, A – D, then B – V , B – E, B – D, and last C – V, C – E and C – D. For these groups, we can determine the service level and plan inventories accordingly.
In an industry the components can be put into, three categories. The first category consists of vital but not critical components. The buyer can leverage large volumes for lower costs using strategies like centralized purchasing. The second category consists of critical components. Here, a few vendors supply these components. The bargaining power of the buyer is, therefore, weak. Mostly negotiations are carried out for a long term deal to obtain lower prices. The third category consists of commoditized inputs. Here there is little to choose by way of price or quality. It is, therefore, necessary to reduce the transaction costs. It is necessary to identify which raw materials are vital, critical and commoditized. We can design the strategies to deal with them accordingly.
All items are not required with the same frequency – some are required regularly, some occasionally and some once in a while. FSN Analysis places the items in three categories: Fast Moving (F), Slow Moving (S) and Non-Moving (N). Inventory policies and models for these three groups are different.
Theoretical models have validity for F items with regular consumption. Spare are slow moving (S), and require special management. Disposal policies are designed to control dead stock.
This classification runs like this:
S= Scarce Items
D= Difficult (to procure) Items
E= Easy (not difficult to get) Items
This analysis is based on the cost of the item.
H= High Cost Items
M= Medium Cost Items
L= Low cost Items
According to Production handbook Inventory Control refers to the process whereby the investment in materials and parts carried in stock is regulated within predetermined limits set in accordance with the inventory policy established by management.
This definition focuses on the following aspects of inventory control:
Inventory control is concerned with the raw materials and purchased parts
1) It regulates the investments in inventories
2) The investments are decided on the basis of predetermined limits, and
3) These limits are prescribed by the inventory policy followed by the management.
Reasons for inventory carrying:
For the most of the manufacturing organizations, it is prohibitively expensive and time consuming to follow hand to mouth purchase policy for raw materials and purchased parts. It is found convenient and advantageous to order for larger quantities in advance of their use and stock them in the meanwhile. The main reasons for such stock carrying are as under:
1) Daily purchase of raw materials and parts are not considered worthwhile even if they are available ,locally due to:
i) Daily consumption is too little, to initiate any purchases or ii) It increases the, frequency of purchase procedure which involves some costs and time.
2) Procurement of materials involve some lead time (i.e. the time gap between order placing and materials receiving). The stock carrying is decided on the lead time expressed in days and the average daily consumption.
3) Large order placing avails certain economies like cost of order placing, quantity discount, economies in transportation and other favorable conditions.
4) Inventory carrying ensures safety against certain contingencies like strikes at supplier’s plant, transport bottlenecks etc.
5) It is also advantageous to hold inventories when price rise is anticipated. This generally happens in case of agro based seasonal, raw materials.
6) Some of the raw materials need pre-operation seasoning which would necessitate procurement min advance.
7) The business customers require to keep the finished goods in ready stock. The inventory carrying helps in replacing these finished goods at faster speed once they are sold.
8) Production and control can be made more effectively of the inventories are available in the stockroom.
9) The imported raw materials are generally purchased through a single order and they are stocked till their use.
10) The cost of stock outs is relatively high as it results into production stoppages. Inventory carrying eliminates the risk of stock outs.