Additional Inventory Model

Topics of the session
• ABC Analysis
• Economic Ordering Quantity
• Order Point Problem
• Two Bin Technique
• VED Classification
• HML Classification
• MRP(Material Requirement Planning)
• FSN Classification
• Order Cycling System
• Just In Time
• DSI
• Vendor Relationship management

Learning Outcomes
By the end of this session you will be able to understand
• Different tools/techniques of Inventory Management
• Vendor relationship management

TOOLS & TECHNIQUES OF
INVENTORY MANAGEMENT/
CONTROL
• ABC Analysis- (Always Better Control)
• Economic Ordering Quantity (EOQ)
• Order Point Problem
• Two Bin Technique
• VED Classification (Vital Essential Desirable)
• HML Classification (High Medium Low)
• MRP(Material Requirement Planning)
• FSN Classification (Fast Slow Non moving)
• Order Cycling System
• Just In Time (JIT)
• DSI (Daily sales of Inventory)

ABC Analysis- (Always Better
Control)
• ABC analysis is an inventory classification strategy that
categorizes the stocks into three categories, A, B, and C, based
on their revenue.

ABC Analysis- (Always Better
Control)
• Segment A: Products included in category A are the most
essential goods with the highest value. 20% of the total
products with 80% of revenue
• Segment B: Products included in category B have a slightly
higher value than segment B. It approximately regulates 30% of
goods with 15% revenue generation.
• Segment C: Products included in category C are more in
numbers but least valuable. 50% of the stock, generating just
5% revenue.

Economic Ordering Quantity (EOQ)
• Economic order quantity (EOQ) is a calculation companies
perform that represents their ideal order size, allowing them to
meet demand without overspending.
• Inventory managers calculate EOQ to minimize holding costs
and excess inventory.

Order Point Problem
• A reorder point (ROP) is a specific level at which your stock
needs to be replenished.
• In other words, it tells you when to place an order so you won't
run out of stock.

Two Bin Technique
• The two-bin system (sometimes called the min-max
system) involves the use of two bins, either physically or on
paper.
• The first bin is intended for supplying current demand and
• The second for satisfying demand during the replenishment
period.

VED Classification
• VED analysis is an inventory management system that
segregates the stock based on its functional importance for a
business. It bifurcates the inventory into three parts,
•Vital Items: its shortage can hamper the whole production
process.
•Essential Items: its shortage cause a temporary loss in case of
shortage.
•Desirable Items: This category entails optional goods not
necessary to run business operations.

HML Classification
• HML inventory analysis is a system for classifying inventory
based on its usage or consumption rate.
• Items that are used more often are classified as H (high) items,
followed by M (medium) items, then L (low) items.
• The goal of HML inventory analysis is to ensure that the most
popular items are always in stock.

MRP
• Material requirements planning (MRP) is a system for
calculating the materials and components needed to
manufacture a product.
• It consists of three primary steps:
1. taking inventory of the materials and components on hand,
2. identifying which additional ones are needed and
3. then scheduling their production or purchase.

FSN Classification
• FSN analysis is an inventory management technique. It is an
important aspect in logistics.
• The items are classified according to their rate of consumption.
• The items are classified broadly into three groups:
F – means Fast moving,
S – means Slow moving,
N – means Non-moving.

Order Cycling System
• Order Cycle is the number of days required for a seller to use up
a vendor’s supply to meet the supplier’s target order
requirement.
• It also tells the seller how much stock is used and needed before
placing a replenishment request. It is the entire process
• The order cycle takes into consideration the order, reorder and
economic order quantity so that sellers have a clear idea about
how much inventory they should stock for products and when
they should restock.

Just In Time
• Just-in-time, or JIT, is an inventory management method in
which goods are received from suppliers only as they are
needed.
• The main objective of this method is to reduce inventory
holding costs and increase inventory turnover.

DSI (Daily Sales of Inventory)
• DSI is also known as the average age of inventory, days
inventory outstanding (DIO), days in inventory (DII), days
sales in inventory, or days inventory and is interpreted in
multiple ways.
• DSI is a measurement of the average number of days or time
required for a business to convert its inventory into sales.
• In addition, goods that are considered as “work in progress”
(WIP) are included in the inventory for calculation purposes.

Vendor relationship management
• Vendor relationship management as a "discipline that enables
organizations to control costs, drive service excellence and
mitigate risks to gain increased value from their vendors
throughout the deal lifecycle.
• Establishing and maintaining solid vendor relationships is
crucial to customer service, cost efficiency, quality, and market
development.
• The main goal of vendor management is building, maintaining,
and strengthening mutually-beneficial supplier relationships
that drive company success.

Summary
• There are several tools and techniques used for the inventory
management of the organization.
• These tools and techniques are helpful in identifying the needs
to reorder the stock and minimize the holding & carrying cost.
• Vendor relationship management is a process that enables your
company to control costs, mitigate risks, and improve service.

Self- Assessment Questions
Q1. In ABC analysis which segment produce 80% revenue
a. Segment A
b. Segment B
c. Segment C

Self- Assessment Questions
Q2. Which system is used for classifying inventory based on its
usage or consumption rate.
a. Two bin system
b. VED system
c. HML
d. DSI

Self- Assessment Answer
A1. Segment A
A2. HML

References
• Healthcare Operations management by Daniel B. McLaughlin
Julie M. Hays