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Inventory Management — Transcript

by jehangir khan · 15,649 words · 2,263 segments · language en · Watch on YouTube

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0:02[sighs] Yeah. Hello everyone. I hope you
0:05all doing well.
0:08So today we have a new session for the
0:11business logistic course. As we started
0:15this last week uh and we have one CM and
0:19one TD sessions in the previous week. uh
0:22in the CM session we discuss about
0:24supply chain management, supply chain
0:26activities, logistic logistic
0:29activities, transportation and then mode
0:32of transportations and then in the TD
0:35session we use uh a case study of 711 uh
0:39which you completed in the group and
0:41then you submitted at the end of the
0:43session. Uh today's session will be
0:45about uh inventory management. Uh where
0:48we will discuss about economic order
0:51quantity uh and then safety stocks and
0:54then ABC classification like all of this
0:57is how to better manage the inventory
1:01because one of the important operation
1:04in the whole supply chain or logistic
1:06activities is inventory management. So
1:10let's start our today's session. So I
1:13hope so you will like it. There will be
1:16some mathematical calculations as well.
1:19So let's start it together.
1:24Okay. So this is the content for today's
1:28session. Uh as I mentioned we will have
1:31some discussion about inventory about
1:33the types of inventory the role of
1:36inventory and then economic order
1:38quantity models which is also called
1:41EOQ. Then safety stock. What is safety
1:44stock and how it benefit in the business
1:48operations?
1:49Then we will have like ABC methodology.
1:53What is the advantage of using ABC
1:56method in inventory management policies?
1:59How to use it? Where to use it? And then
2:02we will have some mathematical or some
2:05exercises using ABC method and EOQ
2:09model.
2:12Okay. So here we have a a brief
2:16explanation about what is inventory
2:19about inventory management. Inventory
2:22management refer to the process of
2:24ordering, storing, using and selling a
2:27company's inventory. [snorts]
2:30So as we mentioned that in the logistic
2:32and supply chain activities like in
2:35supply chain operation we have different
2:36activities. We have a suppliers, we have
2:38a manufacturer, distributor, retailers.
2:41Okay. So most of this inventory usually
2:44when the raw material is supplied to the
2:46production unit. So they have to manage
2:49this inventory is a raw material. And
2:52once the production house or the
2:54production department they just
2:57completed their operations and the
2:59product or the raw material has been
3:01transformed to some finished product. So
3:04then you have to store this finished
3:06product in the final product warehouses.
3:10So you have a warehouse where you have
3:13the the raw material and after
3:16production operations you have the
3:18warehouse where you have the finished
3:21product. Okay. So how to manage them?
3:24When to order? Order can be like uh
3:28order of the raw material or order can
3:30be how to fulfill the customer order
3:33when you receive about the final
3:35product. Okay. So this management of the
3:38warehouse what is stored there is called
3:41an inventory management. So this include
3:45the management of raw material
3:49components. components can be like
3:52usually you don't
3:54buy the product like let's suppose if
3:58you uh you have a company of IKEA okay
4:01so the raw material you use is wood okay
4:05so wood mostly it comes from like you
4:08know you cut some trees or some
4:10deforestation you receive the wood as a
4:13raw material but let's suppose you have
4:15a production of like some
4:19motorbike bikes or some like car
4:21industry. So in car industry usually
4:24they have many different spare parts.
4:26Okay. And they just import or they just
4:30buy different parts from different
4:32companies or in different components. So
4:35those components become like the
4:37inventory for this car industry and then
4:40they go for assembling of those
4:42components and then they sell their
4:45product or in the same way it can be the
4:48raw material different components of the
4:50raw material as well and then the
4:53finished product. So as I mentioned that
4:55once you do your production operations
4:58the product has been the raw material
5:00has been transferred to the final
5:03product. So now you have to keep this
5:07product in your final product warehouse.
5:11So you have to manage that inventory as
5:14well. So this whole operation or this
5:18whole process of managing the raw
5:20material or the components or the
5:23finished product in your warehouses is
5:26basically the inventory management.
5:33So here uh you can see we have different
5:37type of inventory as I mentioned before
5:40as well. We have like the raw material
5:43uh raw material when the product is in
5:46its raw form or there is no value
5:51addition to that product at that stage.
5:53Okay. You can see the woods it is just a
5:57cutting of trees. So you have the raw
5:59material. Then you have another type of
6:02inventory which is called WIP work in
6:05process. Work in process mean that you
6:08started doing production. Okay, the
6:11product has been not fully prepared or
6:14fully manufactured. Let's suppose as you
6:17see the chair, okay, so the chair is
6:20almost like 50 to 60% completed but
6:24there still some work is remaining in
6:27order to a product to be become like a
6:30finished product. So it's not fully
6:32finished but it is still on the
6:34production line and it is there like as
6:37a WIP work in process. Then you have the
6:42finished product. Once all the
6:44production operation has been finished
6:47and the product become as a finished
6:49product then you transfer it as a
6:52finished product warehouses. Okay. So
6:55for each inventory you have a different
6:59departments to manage them raw material.
7:03So you have the warehouse for the raw
7:05material management. WIP mostly in the
7:08production line or the assembly line. So
7:10they usually manage there. And for the
7:13finished product you have a different
7:15warehouse as a finished product
7:17warehouse where you manage those kind of
7:21products. And then you have another
7:23inventory which is called MRO. So MRO is
7:27maintenance, repair and operations. So
7:30you have different tools and the
7:32objective of keeping this MRO inventory
7:35is that the production or the machines
7:38okay like the machines or like different
7:41manufacturing operations should work
7:44continuously. So they should not stop.
7:46So if there is any defects or any
7:48problem or there is any uh requirement
7:51of a maintenance of a machine. So these
7:55tools or these uh inventory is used in
7:59order to make the production process
8:02like continuous and in order to prevent
8:05the production process from stopping.
8:08Okay. So as we discussed we have a
8:11different types of inventory. We have
8:13the raw material inventory. So in this
8:16raw material inventory the goal is to
8:20eliminate supply uncertaintity [snorts]
8:23because the supply chain management is
8:26basically a dynamic process. Okay. It
8:29changes with time to time. Okay. So you
8:33need to adopt yourself for those
8:36changes. For example, what happened
8:38during COVID 19? It was a complete
8:41disruption. Okay. So such things can
8:44happen. Okay. you order for some raw
8:46material and you didn't receive the raw
8:49material on time. So there is always an
8:51uncertainity.
8:53So you have to deal or eliminate those
8:56supply chain uncertaintities in the raw
8:59material inventory. Then you have WIP
9:03work in process as we mentioned that the
9:05component or raw material that have
9:08undergone some change. So we use the
9:12example of chair that you see that 50 to
9:1560% has work has been done on that chair
9:18but this but it's still not fully
9:21completed. Okay. So the objective or the
9:25goal in WIP inventory is to protect
9:28against machine breakdown like if there
9:31is some breakdown in machine or
9:33stoppages of the process. So we need to
9:36prevent those kind of stoppages and
9:39speed up the production process. So this
9:41WIP can be converted into a finished
9:45product as soon as possible. Then we
9:48have MRO maintenance, repair and
9:51operations inventory. So in this type of
9:54inventory the goal is necessary to keep
9:57machinery and process productive. So as
10:01uh we just see the different tools that
10:04are used in MRO inventory and those tool
10:08basically help you like if there is some
10:12uh default or there is some issues or
10:14there is some problem or there is some
10:16breakdown in the machines. So those
10:18tools can help you in order to bring the
10:22production process bring like bring it
10:25back to the normal uh state. Okay. So if
10:28there is some issues so you can deal
10:30with them and also there are different
10:32tools which can be used for the
10:34maintenance and repairing of the uh
10:38machines. Okay. So the objective is to
10:41keep the machinery and process
10:44productive. So for that we need to keep
10:47MRO inventory. Then finally we have a
10:51finished goods inventory. So in this
10:55type of inventory the goal is to
10:57minimize overstocking and stockout. So
11:01overstocking is that when you produce
11:04too much of finished product and you
11:07keep all this finished product in your
11:09final product warehouse. So you have too
11:12much inventory and having too much
11:15inventory you have different type of
11:18cost associated with those kind of
11:20product in your warehouses. Okay, we
11:23will discuss about those cost when the
11:25product are in your warehouse. We have
11:29like holding cost, we have like ordering
11:31cost. So we have different type of cost.
11:34So we don't want to be overstock because
11:37it will increase the holding cost and we
11:42don't want to stock out as well.
11:44Stockout is like when someone order for
11:47a product and you fail to fulfill the
11:51customer demand because you don't have
11:54anything in your warehouse. So there are
11:57different cost associated with that as
12:00well like if you fail to fulfill the
12:02customer demand. So it will generate
12:04like you know back order effect or you
12:07have different like you will lose your
12:10customer he will not buy your product
12:13again. So there are different cost
12:15associated with stockout and different
12:18cost associated with overstocking. So we
12:21need to focus on those different type of
12:25cost associated with each type of
12:28inventory.
12:37Okay. Uh so here we discuss why
12:42inventory management. So as we mentioned
12:45having too much inventory can [snorts]
12:48lead you to overstocking.
12:51So overstocking become very costly and
12:56if you don't have enough inventory so
12:59you will go with like you know stockout.
13:02Stockout mean loss of sales and again it
13:06will be costly for the organizations.
13:10So inventory management the goal of
13:12inventory management is to strike a
13:15balance between inventory investment and
13:18customer service. So the goal is to have
13:24a balance between managing the
13:26inventory. So it is not very costly for
13:30the organization.
13:32At the same time they effectively meet
13:36the customer requirement give them the
13:39best service. For example, if they want
13:42to have too much inventory so they can
13:46give the best service to their customer
13:49but again having too much inventory is
13:52costly which they don't want to do that.
13:55Okay. So they need to find out some
13:58balance or some tradeoff like where they
14:02should keep more inventory, which type
14:04of inventory they should keep it more,
14:06which type of inventory they should keep
14:08it less in order to have to in order to
14:12decrease the cost for the organization
14:15or for the company. Okay? But it
14:18shouldn't be at the cost of giving
14:21services. Okay? So you need to provide
14:24the best services but at the same time
14:27you need to decrease your own cost of
14:30inventory as well. So for that we need
14:33to have inventory management.
14:36So to protect against uncertaintities
14:39such as demand fluctuations. So as I
14:42mentioned that supply chain is a dynamic
14:45process. Okay. Things change very
14:49quickly.
14:51So in order to have an effective
14:53inventory management if you fail to do a
14:57proper inventory management so you will
15:00have to face a lot of troubles a lot of
15:02issues. So the reason for having
15:05effective inventory management
15:08department who provide some policies
15:11some planning that how to manage the
15:13inventory is to deal with demand
15:17fluctuations
15:18delivery time uncertaintity. Say for
15:20example if something happened with the
15:23supplier and he failed to deliver on
15:25time. So what should be the alternative?
15:28Okay. So for that you need to have a
15:31proper inventory management policies.
15:33Then supply uncertaintities. So always
15:36there can be there there is always some
15:39uh probabilities of like any issues can
15:42happen any man-made disaster or any
15:45natural disaster can happen [snorts] in
15:47which uh the supplier fail to deliver
15:51the product on time. So if they fail to
15:54deliver on time so what should be the
15:57policies what should be the planning of
16:00the organization or the firms to do
16:03because they don't want to lose their
16:06customers. So how to do how to manage
16:09the inventory during such crisis
16:12situation. So for that you need to have
16:15a proper inventory management policies.
16:23So to protect against lead time related
16:27variability time needed to make or
16:30deliver the product. So lead time is
16:33basically the time for example if you
16:36order today and you receive the product
16:38like tomorrow. So there is a lead time
16:42of like for example 6:00 p.m. today you
16:45order it and you receive the product at
16:496:00 p.m. tomorrow. So the lead time is
16:52basically 24 hours. Okay. So lead time
16:55is defined as the time difference the
16:58difference in time between when you
17:00order it and when you receive it. Okay.
17:03So this is basically the lead time. So
17:06why we have need to have a proper
17:08inventory management policies. So in
17:11order to protect against lead time
17:13related variability. So there should not
17:16be too much variations or in order to
17:19better manage this lead time. So we need
17:23to have a proper inventory management
17:26policies.
17:30So inventory value uh inventory or
17:33inventorying is one of the part of the
17:35logistic chain. So as we discuss in like
17:40in supply chain and logistic that what
17:42is supply chain and what is logistic.
17:45Logistic is like transportation,
17:48warehousing, storing, loading,
17:50unloading, packaging. So all these
17:52operations include in logistics. So
17:55inventory management is a part of
17:57logistic chain with the highest co cost.
18:01So it is one of the highest cost
18:04operations. For example, transportation
18:06is one of the highest in logistic
18:08activity and inventory management is
18:11also one of the highest operation in the
18:13logistic chain. Okay. So inventory is
18:17basically a part of logistic chain. The
18:20cost associated with the stocks the
18:23stocks is basically the inventory are
18:25different kinds. So the cost are like
18:29ordering cost, we have the holding cost
18:33and then we have the stockout cost.
18:42Okay. So what is ordering cost? So
18:46ordering cost is basically the cost of
18:48purchasing the raw material, finished
18:51goods, production, manufacturing
18:54expenses, transportation cost or
18:56storage. Placing a purchasing order or
19:00issuing a production order has a cost.
19:03Cost of an external order generally
19:06calculated on the order line. One
19:08reference, quantity, price, deadline.
19:11Anyhow, so the ordering cost is
19:13basically the purchase order processing.
19:16Okay. So for example,
19:20you just start preparing to issue the
19:22order if you need something. So you need
19:25to have some preparation like for
19:26example preparation of invoices, how to
19:29send the document and to whom to send
19:32the document. your communication with
19:34the suppliers for example contacting the
19:37suppliers getting the quotations and
19:39negotiations and some administrative
19:42cost as well like for example some
19:44paperworks approvals invoice processing.
19:48So these are different type of ordering
19:51cost like when you are ordering
19:53something. So these are the activities
19:55which cost you. Okay. For example,
19:59setting up the m machine and preparing
20:01for productions. Okay. Transportation
20:04cost like arranging a delivery like you
20:07have to communicate with some logistic
20:10operations department that how to
20:12deliver, how to transport the material,
20:15uh goods to store them. receiving like
20:18when you receive it inspection checking
20:21the quantity or the quality of delivery
20:23goods. So these are different type of
20:27ordering cost like when you are order so
20:30it is not that you just directly call
20:32someone and he order it. There is a
20:34complete systematic chain or systematic
20:37process which you should follow one
20:40department to another department another
20:42to another because you have a complete
20:44procurement department and they are
20:46involved in this ordering of the um
20:52different ordering of the raw material
20:54uh and then receiving them inspecting
20:57them. So it cost you. Okay. So these are
21:01the ordering cost and then you have
21:04another type of cost which is the
21:06holding cost. So holding cost is
21:08basically cost of owning the stock must
21:13take into account like when you own the
21:16stock when you have it in your warehouse
21:19for example cost of stock reception
21:22structure like rent. Okay you have the
21:24warehouse where you keep the the the
21:28inventory. So you are paying different
21:31rents for that uh warehouse. You are
21:33paying for the maintenance. You are
21:35paying for the electricity and you are
21:37paying for the handling even you are
21:39paying for the security as well. Okay.
21:43And also you have like cost of locked in
21:46money or capital cost because you
21:48already invested money on those product
21:52which are not sold which is in your
21:55warehouse. Okay. So you have a capital
21:58which is locked in in those products. So
22:01you cannot receive or take out that
22:04money unless and until those product are
22:07sold. So these are different capital
22:11cost or the opportunity cost because if
22:14you didn't uh invest on this product
22:18which is now as a holding product or
22:21holding cost in your warehouse you could
22:24uh like spend that amount somewhere else
22:26as well. So you lose the opportunity. So
22:29okay so now you have the opportunity
22:32cost as well like when your product is
22:34in warehouse and is not sold. Okay. Then
22:37inventory management course like for
22:38example tracking, auditing, security and
22:42then cost of deterioration like for
22:44example or obsolence you have different
22:46type of product like let's suppose
22:48perishable products perishable products
22:51if you didn't properly manage them let's
22:53suppose pharmaceutical or like some
22:56dairy product ice cream or like you know
22:58yogurt or like you know these kind of
23:00products. So if you don't manage them or
23:03if you fail to manage them properly so
23:06they will expire okay deteriorate like
23:08you know completely expired or of no use
23:12okay so those type of cost exists as
23:15well okay or maybe epsilence like for
23:19example you have some product or some
23:22technology in your warehouse and it is
23:25not sold it is like inside your
23:28warehouse but the technology techology
23:31sense some something new or advanced
23:33technology comes in the market. Okay. So
23:36now the previous technology that you
23:38have in your warehouse is like of no
23:41use. Okay. Because now you have a better
23:43product in the market.
23:45So these type of cost also exist when
23:48the product is in your inventory
23:51warehouse and is not sold. Okay. Then
23:54overhead cost or inventory management
23:57cost like for example the salaries that
23:59you are giving for the people who are
24:01managing it or like for the security
24:03person that you are giving it all these
24:05are your overhead cost
24:09and like you have these are different
24:10type of cost you have the cost of owning
24:13inventory is usually 25% to 40% of it
24:17total value every year. So every year
24:19the holding cost is very increasing like
24:23you know the 25 to 40% of the total cost
24:27of the inventory basically comes from
24:30the holding cost. So it is important to
24:34manage them effectively like properly
24:37efficiently like in order to have a
24:39better policies to manage. Okay. So then
24:43the third cost which is associated with
24:46the inventory management is stockout
24:49cost. So stockout cost is the lake of an
24:53item or like the product or the finished
24:56product come at a cost. So if you don't
25:00have the product in your warehouse and
25:03the customer order for that product and
25:05you [snorts] fail to fulfill the
25:07customer demand or the customer
25:09requirement. So you will lose your
25:12customer and that is what a stockout
25:15cost is. So with stockout cost like you
25:18can have like product delay or penalties
25:22like for example if you are stockout so
25:25there will be delay in fulfilling
25:27customer demand and different
25:29organization they give some penalties in
25:32case of some delays in the delivery.
25:35[snorts] Then missed sale. Missed sale
25:38is like you know if you fail to have the
25:41product in your inventory. So you fail
25:44to generate the revenue or selling the
25:47product. Okay. So you missed the
25:50opportunity to like generate some
25:54additional revenue by selling your
25:57product or you missed the sale of the
26:00product. Lost customer. So you can lose
26:03the loyaltity. You can lose the loyality
26:06of the customer or you can lose the
26:07customer and they will not buy your
26:09product again for the next time or lost
26:12credibility therefore lost customers.
26:18So here we will uh show you I will show
26:21you the graphical representations of the
26:24different cost that we discuss. Okay.
26:28[snorts] So the first graph let me take
26:31one marker. Let's suppose I have a
26:34purple marker here. So here you can see
26:38like this purple circle that I just draw
26:40is annual cost on the y-axis
26:44and then on the x-axis you can see I
26:47just mark this purple circle which is
26:49called the order quantity. Okay. So on
26:53the x-axis if you go on the right side
26:56the order quantity increased like if you
27:00go in this direction it means that you
27:03are increasing the order quantity and on
27:07the annual cost if you go on the y-axis
27:10like in this direction it means that
27:12your annual cost value increase. Okay.
27:16[snorts]
27:17So now the this graph that you see the
27:22the green or blue like this line which
27:25is set up coast. So if you have this
27:29point let's suppose on this graph we
27:32take this point. Okay we take two
27:35different points and we take this
27:37another second point here. Okay. So we
27:40take two points in order to explain this
27:42graph. So this first point basically
27:45mean here if you drag it down it means
27:48that you have the order quantity
27:50something some value here okay and it's
27:54annual cost is here okay so and the
27:58second point when you drag it on the
28:00x-axis here and when you drag it on the
28:03y-axis here so what it shows that at
28:06this point at this point one okay so
28:11your order quantity
28:13was low. Okay. And the annual cost was
28:18higher. So it mean that if your quantity
28:21of the order is small so the annual cost
28:26will increase. Okay. And at point two
28:29when your quantity of the order size is
28:32higher so the annual cost decrease. So
28:36how to imagine it in the real world
28:38scenario? So for example
28:41at point one you need like let's suppose
28:45100 items your demand is 100 okay so now
28:50you have different options you can have
28:52like the order quantity of 10 units okay
28:56so if you are ordering the quantity the
28:59quantity size of your order is 10 units
29:02and your total demand is 100. So how
29:05many orders you have to like you know
29:08you have to order in order to complete
29:10your demand like each order is 10 units
29:13and your total demand is 100. So you
29:16need to have 10 orders in order to
29:18finish or in order to fulfill your
29:21demand of 100 units. Okay. And then at
29:24the same time if you increase the size
29:27of your order. Instead of ordering 10
29:30units per order, you say okay I need 50
29:34units in per order. So in that case you
29:37will need only to have two orders. Okay.
29:41So you see like having 10 orders when
29:44your quantity or like the order quantity
29:47is small and when you increase the order
29:50quantity the number of orders decrease
29:53and number of order decrease it mean
29:56that the number of annual costs due to
29:58ordering like we have different ordering
30:00cost that we discuss we have the
30:02invoices we have the communication with
30:05the supplier like the generation of
30:07different contracts and different
30:08payment methods. So these are different
30:11cost which are associated with the
30:14ordering cost. Okay. So if you decrease
30:17the number of orders so you need to
30:20increase the number of items in each
30:22order. Okay. So if you decrease the
30:25number of items in each order. So it
30:28means that you have to increase the
30:30number of orders. Okay. That we just
30:32mentioned about if you need 100 units.
30:35Okay. So in order to achieve the demand
30:38of 100 units, you can go by different
30:41way. You can order 10 times of uh 10
30:45units each or you can order two orders
30:50and each order should be 50 units. So 50
30:52mult*ly by two is 100 units. So you see
30:55that number of order decreased. So your
30:57quantity or the size of order increased.
30:59Okay. So this graph basically show the
31:02ordering cost. Okay. So the line you see
31:06that as the order quantity increase
31:09your annual cost or annual ordering cost
31:13decrease. Okay. Now let's go to the
31:16second which is annual holding cost. So
31:20you see the line again on the x-axis
31:23here you see like order quantity on the
31:27y-axis here you have like the annual
31:30cost. So we take two points again. One
31:33point we take here and another point we
31:36take here. Okay. So we just drag it on
31:40the x-axis here and then here and then
31:44we drag it on x and then we drag this on
31:48yaxis. Okay. So we see that at point A
31:53let's suppose this is point A
31:56and this is point B.
32:00Okay, let's take it point B. So at A
32:05your order quantity was here. Okay, and
32:09annual cost was here. But as you
32:12increase the order quantity here, your
32:15holding cost also increased. So in the
32:20real world also like when you have more
32:23number of items in your warehouse the
32:26ordering cost like for example the
32:28maintenance of those items each item
32:30need to have its own maintenance cost.
32:32Okay. So these type of cost increase
32:36which is a part of holding cost. Okay.
32:39So
32:40these two graphs. So from the first
32:42graph we conclude that as you increase
32:45the order cost your like as you increase
32:49the order quantity your ordering cost
32:52decrease. In the second graph we say
32:55that as you increase the order quantity
32:57your holding cost increased. Okay. So
33:01you see that you have to manage these
33:03both cost. Okay. And this the third one
33:08is basically the total cost. So the
33:11total cost is basically the sum of
33:14ordering cost and the holding cost.
33:19Okay. So you can see that both the lines
33:22we have like on one graph the first one
33:25like the greenish type it is the
33:27ordering cost. We took it from the first
33:30graph. The second the blue line straight
33:32line is for the holding cost.
33:35And the total cost line is the red color
33:38is basically draw after having because
33:42the total cost is equal to we have the
33:46total cost is equal to we have the
33:49ordering cost
33:52we have the ordering cost plus
33:56the holding
33:58cost. Okay. So when we sum both of them
34:02so we have a new line which is a red
34:05color you can see this is the total
34:09cost. So you see that first the order
34:12the total costs decrease okay until this
34:17point okay and then the total cost start
34:21increasing okay and here you can see the
34:24intersection point as well like you see
34:26this intersection
34:29this intersection points okay so you see
34:32that
34:34from here the ordering cost decrease and
34:38Here the holding cost increase and here
34:41they intersect.
34:44Okay. And at intersection you see the
34:47total cost is minimum as well because
34:51behind this you have here and then it
34:54started increasing. So this is the rock
34:58bottom. We call it a rock bottom. Okay.
35:01And after this you see the cost
35:05increased again. And then here you have
35:08the holding cost. This you have the
35:12ordinary cost. So this point
35:15intersection point is basically the
35:18optimal order quantity. Okay. So EOQ or
35:23we call it like economic order quantity
35:26as well like we need to find out here.
35:28This point is basically when you have
35:33the minimum cost. Okay. So we need to
35:38identify it like how much uh we should
35:41order. Okay. Because if you order less
35:45than that. Okay. So you can see that
35:48still your annual cost is high behind
35:51this. Like for example at this side the
35:54annual cost is high because you have
35:56like holding cost you have like ordering
35:59cost and if you go on the this side of
36:03uh this uh EOQ point you see that again
36:08your annual cost is higher. So this is
36:12the rock bottom where the total cost is
36:16minimum and we must order this quantity.
36:21This quantity we must identify this
36:23quantity that how much we should order
36:25in order to balance both the ordering
36:28cost and the uh the the holding cost.
36:33Okay. So we will find out this point.
36:42Okay. So we have EOQ model which is
36:46economic order, quantity model and
36:49inventory policy. And inventory policy
36:52determine when to order and how much to
36:55order. So how much to order?
36:58We find out about how much based on what
37:02we discuss like making a balance between
37:06holding cost and ordering cost and we
37:09find the rock bottom which was like
37:12economic order quantity or optimal order
37:15quantity which was Q star. Okay. And
37:19when to order is basically reorder
37:22point. Okay. So we will discuss about
37:24these two terminologies here.
37:28So, EOQ
37:31EOQ is economic order quantity model is
37:35a simple yet fundamental model that
37:38illustrate the tradeoff between ordering
37:41and holding cost and it concerns one
37:45product. So as we mentioned in the
37:47previous graphs, you have to make a
37:51balance between the ordering cost and
37:53the holding cost in order to find out
37:57the optimal quantity which was Q star
38:01that how much we should order. [snorts]
38:04But before that in order to find out
38:06that Qstar in the graph there are some
38:11assumptions that we have to make like
38:14you know in mathematics when we have
38:17some calculation or some derivation of
38:19equations we put some consideration or
38:23some constraint. Okay. [snorts] So in
38:25order to have like identify the EOQ
38:30model equation we have some assumption.
38:34The first is demand is constant and
38:37known D per period. So you will identify
38:40like what is D period like D like demand
38:43per day or demand per week. We will just
38:47mention it like as I mentioned in the
38:49previous example like if you have a uh
38:52the demand of 100 units. So each order
38:56we order like 10 units per day. So we
38:59need to have at least 10 orders. Okay.
39:03So small D here is basically demand
39:06period. It can be demand per day, it can
39:09be demand per week and the assumption is
39:13that it is constant. So we will just see
39:16with some graphs in the next slide that
39:18what is constant mean. So, EOQ model
39:22applies to mature product with stable
39:25demand. Okay. For example, here. So,
39:28these are different type of product. But
39:30before this, I will show you this graph.
39:33So, every product that comes to the
39:35market in order to be sold or start
39:38doing business. So, there are different
39:40stages for the market. Okay. For the
39:42product,
39:44the first stage is introduction. Okay.
39:48For example, I will just make a point
39:50here. This this is introduction and the
39:55graph is like initially
39:57like the time initial time like in the
40:01beginning it is like an introduction
40:03phase. It just enter to the market and
40:06its sale is low. Okay. But it sales is
40:10like you know showing you an increasing
40:14trend that it will increase. Okay. Then
40:17in enter it enters to the growth phase.
40:20Okay. Where it started growing rapidly.
40:24You see it sales started increasing.
40:27Then it is a point is called maturity.
40:30Maturity is like it become like a mature
40:34like now it's demand is almost known.
40:38For example, here the previous slide,
40:42if we just have it in the previous
40:47Okay. So, okay. Anyhow, in the previous
40:49slide, we have this water bottles, we
40:52have like the Colgate or like let's
40:54suppose a simple product of salt or
40:57sugar or those daily usage items. Okay.
41:01And it can be any kind of product which
41:04is like in the maturity phase and its
41:07demand is known like you know people
41:09know about that like how much people
41:11will buy it next week or next month.
41:15Okay. So mostly EOQ is implemented here
41:18when the demand is almost known in the
41:21maturity phase and then the time comes
41:23when the product goes to the decline. It
41:26can be because of many reasons. They
41:29didn't adopt themsel with the new
41:31technologies or they didn't upgrade
41:34themselves. So this can be many issues
41:36or some new competitors uh with a better
41:40product they just entered the market and
41:42the previous product just declined.
41:44Okay. So these are different stages of
41:48each product. Okay. it introduction
41:51started growing then maturity and then
41:54it's started to decline.
41:59So for uh EOQ we mostly go with the
42:03product in the maturity or the mature
42:08uh stage. Okay.
42:12So here are the assumptions your key
42:14model is applicable for the product with
42:17steady demand. Typically the mature
42:20product exhibit such behavior okay
42:23having a steady demand like a very
42:25well-known demand and usually the mature
42:28product have this kind of properties.
42:31So assumption is the company know the
42:33demand express as D unit period and it
42:38is constant. The company uniformly
42:42orders Q. So you see that Q is a capital
42:47Q which is the total demand and this is
42:50the demand period. Okay. So we will
42:54[clears throat] just explain like you
42:56will understand like in the problems
42:57that we just solve that what is small D
43:00and what is Q. So uniform order Q units
43:03every time they orders. This order
43:07quantity level is also known as batch
43:10size or load size that how much size
43:13they order.
43:16The supplier lead time of delivery is
43:18assumed to be zero. Okay. So the lead
43:21time that we mentioned that lead time is
43:24that when you order and then when you
43:27receive it. So the time difference
43:28between the ordering point or the
43:31ordering time and the time you receive
43:34the product is the lead time. So here
43:37they assume that the lead time is zero.
43:40It means that the moment you order you
43:43directly receive the product. Okay. So
43:46this is one of the assumption that the
43:49lead time of delivery is zero. So
43:52therefore as soon as the company place
43:56an order of a batch size which is Q
43:59which we mention it here Q units it is
44:02delivered by the upstream partner.
44:04Upstream is basically your suppliers.
44:07Okay. So your suppliers supply the
44:09material instantly to the production
44:13units. Okay.
44:15The product is not perishable. Okay. So
44:20we mention like some of the cost
44:22associated with the stockout and the
44:25holding cost is like obsolence or like
44:28deterioration like you know when the
44:31product become expired. Okay. So we
44:34assume that the products are not
44:36perishable. Okay. So they will not
44:38expire with time. Therefore the company
44:41can sell all of the Q units. So we
44:44assume here that the Q unit that we
44:46order the company sell them completely.
44:50Okay. So there is no like it's such
44:53things that the product has been expired
44:56or the product some damage has been
44:58happened to the product. The fifth
45:01assumption is that the company satisfy
45:04the annual demand and does not back
45:06order. So the fifth assumption is that
45:10the company fulfill the demand the
45:13annual demand from the customer side and
45:16does not back order. Back order is when
45:20you have the order or you have the
45:22demand from the customer and you fail to
45:26fulfill that demand. Okay. So the back
45:29order is basically zero. Okay. based on
45:32the fifth assumption for in order to
45:36identify the EOQ model equation. Okay.
45:40So finally note for the purpose of
45:42simplicity we also consider D and Q to
45:45be continuous in nature. So for
45:48simplicity we just consider as a
45:50continuous. So continuous in nature
45:53mean like we treat them as a decre
45:56discrete. Okay we don't say that 2.1 or
46:002.2 two or like these kind of numbers we
46:04consider it like a continuous in nature
46:07and we will treat the case of discrete
46:09type D and Q at the end of the sation
46:13okay so we consider it a continuous in
46:16nature it can be any value
46:21so for example here you see it like EOQ
46:25demonstration so the demand for a
46:28product D this small D as we mentioned
46:32that it is a D demand per unit. So here
46:36you have demand
46:38per day is 100 units. The retailer order
46:44in lot is Q is the total order which is
46:471,000 units. Okay.
46:50So here in this graph you see that you
46:53have a total stock level
46:56is 1,000 which is Q is equal to 1,000
46:59unit at 0.1 and then demand per day is
47:031,000. So after day one so the remaining
47:07demand here like the demanding units
47:09here you have like here which is 900.
47:12Okay. After day two you have because you
47:16have a demand per day is 100 units. So
47:18the total units left with you is 800.
47:21Okay. After 2 days and then after 10
47:26days after 10 days your product
47:30is here like the total inventory you
47:33have this total stock you have or the
47:37inventory you have become
47:39zero. Okay.
47:42But as we mentioned like one of our
47:45assumption was that the lead time is
47:49zero. So it means that the moment you
47:51order for the raw mater for the
47:53inventory. So your supplier directly
47:56supply the material to you. Okay. So EOQ
48:00model help us to determine when to
48:02reorder and how much to order in the
48:04following way. So when to order order
48:08when the stock level is zero. How much
48:12to order? Or order quantity or order Q
48:16units. Okay. So here we order another Q
48:20in order to fulfill our inventory. Okay.
48:23So you see after multiple orders the
48:27stocking level. So the stock we have
48:29like here the stocking level for the
48:32product looks as follow. Okay. So day 1,
48:36day two, day three and after day 10 here
48:39you order and as the lead time is zero
48:42so completely again your quantity in the
48:45inventory comes
48:48here to,000 units and again after 10
48:52days here you again stock level zero and
48:56stock level zero again you order
48:58thousands units and then again after 10
49:01days you are stock zero and then you
49:03order. So this cycles repeat. Okay. So
49:07this goes like this. So each time the
49:10retailer orders it pays a fixed cost to
49:15cover for the order preparation. So as
49:18we mentioned that every time you order
49:21something there is a cost associated
49:23with that. For example, the preparation
49:25of orders, the release of order, the
49:28monitoring of orders, the receipts of
49:31order like different invoices and then
49:33physical handling of the good as well.
49:36So this all is basically the ordering
49:39cost. Okay. And after receiving the
49:42orders,
49:44the retailer also incurs cost for
49:48holding inventory such as insurance on
49:51inventories and maintenance cost. This
49:54cost is known as inventory holding cost
49:56or inventory carrying cost. Okay. So you
50:00will see that sometime inventory holding
50:02cost or inventory carrying cost. Okay.
50:04It's the same thing. Okay. So maybe in
50:06the equations you see like C C. So CC
50:11mean that cost of carrying. Okay. Or if
50:15CH or holding. So these can be used
50:17interchangeably.
50:19Inventory holding cost and inventory
50:22carrying cost. Okay. Okay. Okay. So,
50:24inventory carrying cost is incurred on
50:27average onhand inventory or cycle
50:31inventory like how much inventory you
50:34have on hand during the process
50:37basically cost you which is called like
50:40inventory holding cost or inventory
50:42carrying cost.
50:46Okay. So here we have uh EOQ model cycle
50:50inventory. So calculation of average
50:53inventory on hand or cycle inventory
50:55because as we mentioned then the
50:58inventory start decreasing with the
51:01demand per unit. Okay. So one day you
51:04will have like in the previous example
51:06we have like a Q which is 1,000 units
51:09and then demand is 100 per day. So
51:12second day you have like the inventory
51:14of 900 units and 800 units. So is every
51:18day your demand or or your inventory
51:22decrease. Okay. So how to find out how
51:26much inventory we should use for finding
51:29out the cost or the average inventory
51:32cost. Okay. So you see that we have
51:351,000 unit in day one and then at day 10
51:38we have zero units in our inventory.
51:42Okay. So we have every time an order is
51:45placed the beginning inventory level is
51:48equal to order quantity Q is equal
51:52to,000 units. Okay. So it is the
51:54beginning inventory which is Q or order
51:58quantity
52:00and then here the second you can see
52:03here every time just before placing in
52:06the order the ending inventory level is
52:09zero. So just before here just before
52:12placing a new order so the inventory is
52:16zero. Okay here. So the cycle inventory
52:22is basically the average. Okay. So we
52:24have the beginning inventory plus ending
52:27inventory. So the beginning inventory is
52:29Q. The order quantity that we order the
52:32final inventory is 0 divided by two. we
52:36find out the average which is used as a
52:39cycle inventory Q / 2. Okay. So Q
52:43divided by 2. So in the previous example
52:46the Q value was 1,000. So for that
52:49example we have the cycle inventory is
52:53500. Okay. So it doesn't mean that the
52:55cycle inventory will always be 500. It
52:58is just for the previous example where
53:00the Q was 1,000. Okay. So in the
53:05previous example the Q was 1,000. Okay
53:09it's difficult to write it here but
53:11anyhow so the Q was 1,000. So that's why
53:16we have here the cycle inventory is 500.
53:21Okay. So you see the cycle inventory at
53:24any point you know this black dotted
53:27line is our cycle inventory which we
53:30will use for finding out the holiday
53:33cost. Okay. So sometime your inventory
53:37might be here and sometime you might be
53:40here to in order to find out the balance
53:44point the middle point that can be used
53:46for the calculation we find out the
53:49average cycle inventory is holding cost.
53:53Okay. So now moving forward.
53:57So demand for the product is D equal to
54:01100 units per day. So it's the same
54:04example. Okay, we are just using the EOQ
54:08model for the same example. So the D
54:11used is
54:14100 unit per day. So in one year the
54:19firms operate for 360 days. So in one
54:22year how many days the company is
54:24working is 360 days. So if per day each
54:28day demand is 100 units and the company
54:30is working or for 360 days. So how much
54:34is the annual demand? The annual demand
54:37of the product is 100 per day demand
54:40multiply by 360 which is like 36,000
54:44units is the demand or the annual
54:47demand. Okay.
54:50The firm unit ordering cost. So for each
54:55order when you order it as I mentioned
54:58that we have different cost associated
55:00with ordering. So for each order the it
55:04cost the firm like $10 per dollar uh per
55:08order. Okay. So $10 per order cost.
55:12Okay. Then the firm unit inventory
55:16carrying cost. So inventory carrying
55:19cost is the same like carrying is
55:21holding. So carrying or holding is the
55:24same term here you use. Okay. So so
55:28inventory carrying cost is $050
55:32per unit per year. So for each unit okay
55:37to be in your inventory as a carrying or
55:40holding cost is 050.
55:45Okay.
55:47So now let us consider following two
55:50cases. So in order to like evaluate or
55:54validate to some formulations
55:58we consider two different cases. Case
56:00one in case one we say that order
56:03quantity Q is 1,000. In case two we say
56:08that the order quantity Q is 3600.
56:14So now we will evaluate the cost. Okay.
56:18So when the quantity is 1,000 like for
56:22example Q is basically how much quantity
56:25you order when you are struck out. Okay.
56:29And KS2 the Q is 3600. So we need to
56:33identify that with which quantity how
56:37much it cost us like you know either uh
56:40it is the total cost is higher when we
56:44order 1,000 unit order size or quant
56:48order quantity or when we order 3600
56:52order quantity cost us higher. So which
56:56of both cost us higher? Okay. So we need
56:59to find out that.
57:03Okay. So here we will go first with the
57:07case one. So the case one where we have
57:10the order quantity Q is 1,000. Okay. So
57:14you find out in the graphs the Q is
57:17basically how much quantity you order
57:20when you are stock out. Okay. So we
57:25first say that okay let's suppose having
57:27the order quantity Q is 1,000. So if the
57:31order quantity Q is 1,000
57:35so in that case here you see that in 1
57:39year the firm must place 36,000 divided
57:44by 1,000. So what is 36,000? 36,000. In
57:48the previous slide, we find out that the
57:50annual cost is the the annual the annual
57:54demand is basically 36,000.
57:57Okay, the annual demand is 36,000. So if
58:01each order is 1,000, so each year the
58:06company must place 36 orders to fulfill
58:10their annual demand of 36,000. Okay. To
58:14fulfill the annual demand. Okay. So
58:17annual ordering cost. So if the total
58:20annual cost is 36, so the annual
58:22ordering cost will be worth. So it will
58:25be the number of orders and ordering
58:28cost like how much it cost each order.
58:31So the total number of order is 36.
58:34Okay. And each cost each order cost is
58:38$10. So the annual ordering cost is here
58:42which is $360.
58:45Okay.
58:47Now the cycle inventory which is the
58:50holding cost as well. So we find out
58:53that for the cycle inventory the formula
58:56was Q divided by 2. And here in this
59:00example we say that Q is 1,000. Okay. So
59:04if Q is 1,000, so we say that the
59:08carrying cost or holding cost for each
59:11we should take 500 units. Okay, it means
59:16that at every point we have 500 units as
59:20an inventory that we should use to find
59:23out the annual carrying cost. Okay. So
59:27annual inventory carrying cost is equal
59:30to cycle inventory multiply by inventory
59:35carrying cost. So cycle inventory we
59:38have 500 units and for each inventory we
59:42have 050
59:46inventory carrying cost. So the total
59:49holding cost, okay, is $250
59:56or total carrying cost is $250 or total
59:59carrying cost is $250. Okay, so now the
1:00:03total cost is basically you have the
1:00:05ordering cost and the total inventory
1:00:08carrying cost. Okay, so again don't be
1:00:11confused with the total carrying cost.
1:00:13It is the same like the holding cost
1:00:15that we use in the graphs. So you can
1:00:18use it as a holding or you can use it as
1:00:21a carrying. So it is the same. So I use
1:00:23different terms here because just to
1:00:25make sure to you that don't be confused
1:00:28if there is something regarding like
1:00:30carrying cost. Okay. So the sum of
1:00:32ordering cost and the carrying cost. So
1:00:35you have 360 and you have 250 the total
1:00:39is 610. So what is 610 means
1:00:45that when you start ordering the
1:00:47quantity order size is 1,000. Okay. So
1:00:51the total cost you have is $610.
1:00:58Okay. So now we will go with the case
1:01:02two. In the case two we will see if we
1:01:06increase this quantity. So did the total
1:01:10cost change or not? Okay. So by this we
1:01:13will find out that there is some
1:01:15relation of order quantity with the
1:01:17total cost. Okay.
1:01:20So the next we have it is
1:01:30okay. So then the next we have is like
1:01:35we change the order quantity. we
1:01:38increase the order quantity. For
1:01:40example, in the previous it was Q =
1:01:441,000 but now we just say okay let's
1:01:47increase the quantity size Q = to 3600.
1:01:52Okay. So when the order is like you know
1:01:55when the inventory is stock out okay so
1:01:58at that point we should order directly
1:02:013600 unit in order to fill our inventory
1:02:05and then we should repeat the same cycle
1:02:07that we discussed in the previous slide.
1:02:09So if our order quantity is 3600 so in
1:02:13that case year 1 the firm must order
1:02:1836,000 divided by 3600. So 3600 is the
1:02:21size of each order. 36,000 is the total
1:02:25annual demand.
1:02:28So we need to have 10 orders. Okay. In
1:02:32order to fulfill this demand of 36,000.
1:02:36So the annual ordering cost here will be
1:02:40number of orders multiply by number of
1:02:43ordering cost. So the number of orders
1:02:46that we found if the size is 3600 is 10
1:02:51and the ordering cost is $10. Okay. So
1:02:55the total ordering cost will be $100
1:03:00if the quantity of each order is $3600.
1:03:04Okay. Now we will have we need to find
1:03:07out the inventory holding or the
1:03:10carrying cost. Okay. So before finding
1:03:14carrying cost we need to find out cycle
1:03:18inventory similar to what we found in
1:03:21the previous case. Okay. So cycle
1:03:24inventory is Q divided by 2. So Q here
1:03:28which is the order quantity is 3600. So
1:03:323600 divided by 2 is 1,800. So now you
1:03:36have the cycle inventory is 1,800. Okay.
1:03:40So the annual inventory carrying cost is
1:03:43equal to we have the same formula which
1:03:46is cycle inventory multiply by inventory
1:03:50carrying cost. So cycle inventory is
1:03:521,800 that we find out here. Okay. And
1:03:57each cost of like inventory holding cost
1:04:00of each unit is 0.25 that we that that
1:04:04was given in the problem. So if you
1:04:08multiply them, so you have $900. So now
1:04:12the total cost is equal to like the
1:04:15total ordering cost plus the total
1:04:19inventory carrying cost. So you have 100
1:04:22+ 900. So it is like $1,000.
1:04:26Okay. So now you compare it with the
1:04:30previous case, you see that the total
1:04:34cost change. Okay. It shows that the Q
1:04:38how much you order directly affect the
1:04:43total cost. Okay. So the reason for E or
1:04:48Q model is basically to find out that
1:04:53what should be the Q. Okay,
1:04:56the Q that decreases our total cost. So
1:05:01if you remember those three different
1:05:03graphs, we have different lines and we
1:05:06find out this is the rock bottom point
1:05:09for the total cost which is the third
1:05:11graph on that slide. So you see that the
1:05:14rock bottom point is basically the Q
1:05:19which you should order to minim to
1:05:23decrease or to minimize this total cost.
1:05:26So the how to identify that Q is
1:05:30basically the objective of economic
1:05:33order quantity model. Okay. So now
1:05:44so from the previous analysis of two
1:05:47cases we can summarize that as the order
1:05:51quantity increase the number of order
1:05:56decrease. Okay. So if we increase the
1:06:00order quantity as we see that in the
1:06:02second case we have 3600 in the first
1:06:05case we have 1,000. So you see that the
1:06:08number of orders change from 36 to 10.
1:06:11Okay. So as you increase the order
1:06:14quantity the number of order decrease
1:06:17and thus the total ordering cost
1:06:20decrease. Okay. So if you have less
1:06:22number of orders it mean that you have
1:06:25less ordering cost. But at the same time
1:06:30as the order quantity increase the cycle
1:06:34inventory or cycle level or like the
1:06:38cycle inventory level increase. Okay. Or
1:06:41the holding cost or the carrying cost
1:06:43increase. Okay. So does the total
1:06:46inventory carrying cost increase? So,
1:06:49EOQ model basically seek to balance
1:06:53these two cost by judicially deciding an
1:06:57order quantity that decreases the total
1:06:59cost. So, the EOQ is basically required
1:07:03to find out like a compromise solution
1:07:07you know to balance both like ordering
1:07:10cost and then the carrying or the
1:07:14holding cost. Okay, that what should be
1:07:16the size of the queue in order to
1:07:20decrease or in order to minimize this
1:07:23ordering or this total cost. Okay.
1:07:28So here for this purpose we define these
1:07:33cost term formally as follow. Okay. So
1:07:36we just find out some equation. Okay. So
1:07:40the total annual ordering cost. Okay.
1:07:43annual ordering cost or total cost. So
1:07:45we have this equation. How to understand
1:07:47this equation? Okay. So equation you
1:07:50have the annual demand. Okay. The annual
1:07:54demand divided by the lot size. Lot size
1:07:57is like how much quantity in each lot
1:08:00that you order. Annual demand is like
1:08:03the total demand per year multiply.
1:08:08So this will basically give you the
1:08:10total number of orders. annual demand
1:08:12divided by load size multiply it with
1:08:15ordering cost per order. So this will
1:08:18give you the total number of orders and
1:08:20this will give you the order per cost.
1:08:23So by this you will find out the
1:08:24ordering cost. So this we just change it
1:08:27into some equation form. Okay. The
1:08:30second equation. Okay. This is the same.
1:08:33We have the total annual ordering cost.
1:08:35So we have D the capital D which is the
1:08:38total demand. Q is the order quantity
1:08:41per uh load size and C is cost and with
1:08:45O is ordering cost. Okay.
1:08:49Now the second formula we have is the
1:08:52total or the annual inventory carrying
1:08:56cost. Okay. So for this we have the
1:08:58formula which is lot size. So load size
1:09:02again you can see in the ordering cost
1:09:04the load size is in denominator and in
1:09:07the annual carrying cost the load size
1:09:09in nominator. So load size is basically
1:09:12the capital Q the order quantity okay
1:09:15divided by two okay multiply by carrying
1:09:20cost per unit per year. Okay. So this is
1:09:23the same process that we implemented in
1:09:27the previous example but now we just
1:09:30transform them into some equation form.
1:09:32Okay. So you see that the annual holding
1:09:35cost is Q divided by 2 multiply by C C.
1:09:39So C mean the small C mean carrying okay
1:09:42carrying cost or you can call it holding
1:09:45cost as well.
1:09:47And then the total cost is basically
1:09:49like your annual cost total uh annual
1:09:53ordering cost which is dq d / q * c of
1:09:59cost of ordering plus the holding cost
1:10:02which is q / 2 * c which is carrying
1:10:05cost. So the total cost is your ordering
1:10:08cost plus the carrying cost. Okay. So
1:10:13this is the formula we have total cost D
1:10:15/ Q * C cost of ordering plus Q / 2 *
1:10:22cost of carrying. Okay. So this is the
1:10:25same graphs that we uh explained
1:10:28previously. Okay. Annual uh like we have
1:10:32the order cost, we have the annual
1:10:34holding cost and then we have the total
1:10:38cost. Okay. So now the objective is to
1:10:40find out this this point okay this where
1:10:45we have like the economic order quantity
1:10:49okay or the optimal order quantity.
1:10:53So you see that here this point
1:10:56basically achieve
1:10:59on this. Okay. When you see that at this
1:11:04point you are holding
1:11:09this is your basically the line this
1:11:11line is your for the holding cost and
1:11:14this line is for your ordering cost.
1:11:16Okay. And this intersection point your
1:11:19holding cost is equal to your ordering
1:11:23cost. Okay. And this intersection point
1:11:27is basically your total lower cost as
1:11:29well. Okay. So if you need to find out
1:11:32this lower point, so you have to find
1:11:35out this point where both of ordering
1:11:37and your carrying cost or the holding
1:11:40cost and the ordering cost meet
1:11:42together. Okay.
1:11:45So the optimal order quantity Q balances
1:11:48annual holding cost and the annual
1:11:52ordering cost. So they balance it you
1:11:54know when one is minimized the other is
1:11:58maximize. So at the Q optimal order
1:12:02quantity point you have the minimum
1:12:05point or the optimal points where you
1:12:08balance both the holding and the annual
1:12:11cost. Okay. So now you see here at the
1:12:14EOQ at this point
1:12:18as I mentioned that your holding cost
1:12:22and your
1:12:23ordering cost is both equal. Okay. So
1:12:27that's why this equation you see here
1:12:30this is basically your ordering cost
1:12:33and this is basically your carrying
1:12:37cost. Okay. So at this point this I just
1:12:41point out both of them are equal. So if
1:12:44you want to find out this optimal
1:12:46quantity point we need to find out this
1:12:49point. Okay. Okay. So if we need if we
1:12:52find out this point so we will find out
1:12:54this point of lower cost. Okay. So for
1:12:59this we consider like the ordering cost
1:13:03is equal to the carrying cost. Okay. So
1:13:07now we have to solve we need to solve
1:13:10this
1:13:12equation. Okay.
1:13:14So once you simplify them like you solve
1:13:17them like you know in some mathematics
1:13:19so you can see like uh d carrying cost.
1:13:23So if this q just go on the other side
1:13:25it will become like q ² okay and this
1:13:28two will come on the left side. So it
1:13:30will be like two with d and then c of
1:13:34ordering and this c will basically
1:13:38divide on both sides. So it will come on
1:13:40this side. So you see this this become
1:13:42in denominator 2dc and Qstar is
1:13:45basically when this Q you bring it on
1:13:48this side. So it is like Q².
1:13:52Okay. So you have like Q² here. So you Q
1:13:56bring here and the rest you should bring
1:13:58it on this side. So
1:14:02the [snorts] denominator you have D and
1:14:04C will remain here. Okay. So you have D
1:14:08and then you have C of ordering cost.
1:14:11Okay. And this two will come on the left
1:14:14side. So you have to multiply it both
1:14:17side. You can just see two here. And
1:14:20this CC of carrying cost it will come
1:14:22down here. Okay. And in order to
1:14:26transfer this like remove this square so
1:14:28you should take under root on both side.
1:14:31So if you take under root on both sides.
1:14:34So this square cancel with under root
1:14:37and then you have this qst star under
1:14:39root 2 d c. So this qstar is basically
1:14:44the point. Okay, you see this qst star
1:14:46here [snorts] is that order quantity
1:14:49that you should order where you should
1:14:52have minimum holding cost and the
1:14:55ordering cost. Okay.
1:14:59So you need to memorize that formula.
1:15:02Okay. So if in the exam if there is some
1:15:07MCQs or there is some questions so you
1:15:10will be given some data and you should
1:15:13use that formula. Okay. So continuing
1:15:17with our previous example. So the annual
1:15:20demand of the product is 36,000 unit.
1:15:24Okay. This is the same example where we
1:15:27implemented the two cases where we
1:15:29change the order quantity Q. Okay. So
1:15:33for this now we will find out that what
1:15:35should be the optimal Q. Okay, we use
1:15:38like 1,000 and we use it for 3600.
1:15:42But now we will find out that what
1:15:44should be the optimal Q where the total
1:15:48cost is minimum. Okay.
1:15:51So 36,000 was the demand per year. Okay.
1:15:55Uh total you have like 360 days. The
1:15:58retailer ordering cost was 10. It was
1:16:01explained in the previous example. The
1:16:03retailer carrying cost is 0.50
1:16:07per year. Okay. So if we want to find
1:16:10out the Q the order optimal order
1:16:13quantity. So we have 2D C of ordering
1:16:17and C of carrying cost. Okay. This is
1:16:19the formula that we just find out in the
1:16:21previous slide. So we will input all the
1:16:25values. Okay. For example, D we have
1:16:28given it is given here. This is the D
1:16:31value. It is 36,000 multiply by 10 which
1:16:34is cost of ordering. It is here. Okay.
1:16:39And then we have cost of uh ordering
1:16:43which is cost of carrying which is in
1:16:46the denominator 0.5. So we find out that
1:16:491,200 is basically the order quantity
1:16:53which can give you a minimum cost. The
1:16:56lowest cost of ordering and holding can
1:17:02be achieved when the order size is
1:17:061,200.
1:17:07So economical order quantity itself like
1:17:13like how much you should order the
1:17:17quantity that is economical for the
1:17:19whole business. So economical order
1:17:21quantity. Okay. So it is 1,200. Okay. So
1:17:26you need to order 1 1200 in order to be
1:17:29more efficient in order to decrease the
1:17:32total cost. Okay.
1:17:35So now we will solve the same example
1:17:38for Q= 1200 in order to see like if we
1:17:42achieve the lower cost or not like you
1:17:45know we will compare it with the
1:17:47previous two cases. So now we say that
1:17:49okay let's suppose Q is 1200 for us. So
1:17:53we can further calculate the following.
1:17:56Okay. So the number of orders if we have
1:17:59Q is 1 1200. So the number of orders
1:18:04again demand D is 36,000 and the Q the
1:18:07new Q value is 1,200.
1:18:10So the total number of orders we need
1:18:12per year to fulfill the demand is 30.
1:18:16Okay. So this is the total number of
1:18:18orders. The cycle inventory is Qstar
1:18:22divided by 2. So Qstar is 1200 divided
1:18:26by 2 is 600. This is our cycle
1:18:28inventory. Okay. So the ordering cost so
1:18:32the ordering cost is we have 30 total
1:18:36number of orders multiply by the cost of
1:18:38each order. Okay. So the cost of each
1:18:41order is 10 and number of order is 30 or
1:18:45like you can just again here they just
1:18:47did the same operation that they did
1:18:49here. Okay. So it will give you 30. 30
1:18:52multiply by 10 is 300. Okay. So the
1:18:56ordering cost is 300.
1:18:58The inventory carrying cost is basically
1:19:01your Q / 2 multiply by carrying cost. So
1:19:042 divided by two this is give you um
1:19:071200 divid by 2 is 600 multiply by 050.
1:19:12Okay. So you see that your carrying cost
1:19:14is 300. So now the total cost is
1:19:17basically
1:19:19your ordering cost. Okay. You can see
1:19:21the total cost is annual ordering cost
1:19:24plus annual inventory carrying cost. So
1:19:26the annual ordering cost is 300 and the
1:19:29carrying cost is 300 and the total cost
1:19:31is 600. Okay. So now if your quantity is
1:19:371,200 instead of 1,000 or instead of
1:19:413600.
1:19:43Okay. So we find out that this is the
1:19:45optimal quantity which can decrease your
1:19:47total. So now you compare it with the
1:19:50previous cases that either our total
1:19:52cost increase or decrease. So it
1:19:55basically mean that if you the 1200 is
1:19:59basically the amount or the quantity
1:20:01which give you the lowest cost. Okay. So
1:20:04if you the order quantity is 1,100 or
1:20:071,150
1:20:09your cost will increase and this cost
1:20:12will increase either because of uh your
1:20:15ordering cost increase or either your
1:20:17carrying cost increase because they are
1:20:20conflicting. Okay. you increase one the
1:20:22other decrease. If you decrease another
1:20:25one and the other increase okay so they
1:20:27are conflicting so you have to make a
1:20:29compromise between them so Qstar 1200
1:20:33so if you decrease like let's suppose
1:20:361150 so you will see that your order
1:20:38total cost changes you can do it
1:20:41manually by yourself okay you can just
1:20:44pause here and you can just manually see
1:20:46it like if Qstar is 1150 and Qstar is
1:20:501250 so you will see that your cost will
1:20:53increase in both cases then the QST star
1:20:57equal to 1200. Okay. So this 1200 is
1:21:00basically your optimal point. So now the
1:21:05time between orders. So
1:21:08how much time you should take like you
1:21:11know in order like to order like how
1:21:14much duration there should be between
1:21:17two orders. Okay. So the time should be
1:21:20number of working days divided by number
1:21:22of orders. For example, number of
1:21:24working days is 360
1:21:27and number of order is 30. Okay. So 360
1:21:31divided by 30 is equal to 12 days. Okay.
1:21:34So this basically mean that if you order
1:21:38today, okay, so the next order you
1:21:42should do is after 12 days. Okay. So
1:21:45this is basically for the case here in
1:21:49this example because we have total
1:21:51working days of 360
1:21:54and the total number of orders we have
1:21:5630. So annually if we complete 30 orders
1:22:02okay 30 orders so we need to have 12
1:22:06days. So you remember that we do we did
1:22:08an assumption assumption was that demand
1:22:11is constant. Okay so demand is constant.
1:22:14So every day you have the same demand.
1:22:16Okay. So because sometime you might say
1:22:19like in few days the demand is very
1:22:21high. The few days the demand is very
1:22:23low. So maybe sometime you order after 3
1:22:27days and sometime you order after 20
1:22:29days. Okay. Because of that assumption
1:22:32we say that no we have the same uh uh
1:22:36demand per day. So you see that 360
1:22:39divided by total number of orders which
1:22:41is 300. So 12 days. So after every 12
1:22:44days you have to order again. So the
1:22:47firm should be placing an order every 12
1:22:50days. Okay.
1:22:54So then we have the reordering point.
1:22:59Okay. So the reordering point is
1:23:02basically tells us when to reorder.
1:23:05Okay. It also basically say that how
1:23:07much safety stroke we should have it as
1:23:09well. So reordering point is equal to
1:23:13demand per day. How much demand every
1:23:16day you have.
1:23:18Okay. And then the lead time for a new
1:23:23order in days. Okay. So we discuss about
1:23:25the lead time is basically when you
1:23:28order and when you receive it, how much
1:23:30time it takes that the order you
1:23:33receive. Okay. So demand per day and the
1:23:38lead time. So for example if your demand
1:23:42per day is 100 okay or let's suppose 10
1:23:45demand per day is 10 units okay and it
1:23:49takes
1:23:51like let's suppose 3 days
1:23:55let's suppose 3 days is the lead time
1:24:00that when you order the new order you
1:24:02receive is like if you order today the
1:24:04next consignment that you will receive
1:24:07will be after three 3 days. So your
1:24:09reorder point is like when you should
1:24:12order
1:24:14reorder point is it is demand tang
1:24:20okay per day and 3 is basically the lead
1:24:24time. So 10 mult*ly by 3 is 30. So when
1:24:28you have 30 units
1:24:30in your inventory when you have 30 units
1:24:33in your inventory you should reorder.
1:24:36You should place an order at that point.
1:24:39Okay. So you can call it as a safety as
1:24:43well. You you have some safety that
1:24:45until and unless you become stock out,
1:24:48you still have some inventory while you
1:24:51are waiting for the new consignment to
1:24:53arrive. Okay. So demand per day can be
1:24:58find out by like you know total demand
1:25:01which is like capital D like annual
1:25:03demand or and divided by number of
1:25:06working days per year for example. So if
1:25:08your annual demand is 36,000
1:25:11okay let's suppose your annual demand is
1:25:1436,000
1:25:16and number of working days you have 360
1:25:19per year. So you can find out like you
1:25:22know like what is what can be your
1:25:25demand per day or like you can just have
1:25:28like the annual demand D and then the
1:25:31total number of working days. So if you
1:25:33just calculate it so you will find out
1:25:34that what is the demand per day you
1:25:38have. Okay. So here you can see
1:25:42graphically reorder point curve. Okay.
1:25:47So you see here like you have at this
1:25:51point you have the quantity Q. Okay. And
1:25:55then when you start using it okay when
1:25:58you start when you go like this this
1:26:00basically shows you like you started
1:26:03your inventory level here you see like
1:26:06on your inventory level start
1:26:08decreasing. Decreasing by what? Okay.
1:26:11Decreasing by units per day like how
1:26:14much unit you consume per day. It
1:26:16started decreasing. Okay.
1:26:18So at this point, this is basically your
1:26:22reorder point. Okay. So this is the
1:26:25point where you should reorder like you
1:26:29know again. Okay. So this is basically
1:26:35the safety stock you have the stock you
1:26:39have you know. So now at this point when
1:26:43you reorder because in the real time
1:26:45situations the lead time is not zero.
1:26:49Okay in the EOQ we basically consider
1:26:51that the lead time is zero. It means
1:26:53that the moment you order you directly
1:26:56receive it. But in the real world it is
1:26:58not zero. It can be like 2 days, it can
1:27:01be 3 days, it can be 4 days or it can be
1:27:03months. Like for example in the previous
1:27:05class we discussed about uh the example
1:27:08of fashion or like traditional fashion
1:27:10or like Zara that how they are managing
1:27:13their lead time. So in the near realtime
1:27:16scenarios the lead time is not zero.
1:27:20Okay. So here at this point the company
1:27:23will reorder. Okay. They will place an
1:27:26order. So unless and until they receive
1:27:29an order they will continue to use the
1:27:33existing inventory they have. Okay. So
1:27:37here once they arrive here when their
1:27:40inventory is zero so based if they
1:27:43calculate it very well if they have a
1:27:45proper policies so they will receive a
1:27:48new consignment here. So here again
1:27:50their quantity will be increased. Okay.
1:27:54So how to find out this reorder point?
1:27:57So you should know about units per day
1:28:00and your lead time. This is the lead
1:28:02time you have like how much time it
1:28:05takes. The time you place an order, the
1:28:08time you receive it. Okay. So this
1:28:10should be your reorder point. So this is
1:28:13your reorder point curve.
1:28:19Okay. So now we will have another
1:28:22important concept which is choice of
1:28:24inventory management policy. Like for
1:28:26example ABC analysis for prioritizing.
1:28:30So this is basically prioritizing uh you
1:28:33can check the example like it's not
1:28:35prioritizing uh prioritizing the
1:28:38products. So how to differentiate the
1:28:41products to inventory. So identify the
1:28:44items to be managed with more attention.
1:28:46So you see that mostly different
1:28:49organization have a very hundred or like
1:28:53you know thousands of different
1:28:55inventory products. So how to manage
1:28:57them? Okay, how to manage them properly?
1:29:01Do like all the products require the
1:29:03same attention or not or there is some
1:29:06product which need uh which need to be
1:29:09handled more carefully compared to
1:29:11others. So usually a product is com a
1:29:15product is basically comprised of
1:29:18different complex small components. Some
1:29:21components might required special
1:29:24attentions compared to the other. Okay.
1:29:27So for that we have different
1:29:29methodologies like how to classify them
1:29:33and how to manage the inventories
1:29:35properly. For example, we have parto
1:29:38charts. We have 2080 rules. Then we have
1:29:41ABC analysis. So in this
1:29:45lecture we will be focused on ABC
1:29:49analysis. Okay. In the same way parto
1:29:52analysis just a small introduction. It
1:29:55was an Italian economist and sociologist
1:29:59invented the law that bear his name.
1:30:01Parto law or the 8020 rule. The chart
1:30:04allows you to visualize what is
1:30:07important and what is less important. So
1:30:11the objective of uh this parto chart was
1:30:15that 80% of effects is produced because
1:30:19of 20% of causes. Okay. So if you
1:30:23control 20% of causes so you can
1:30:26minimize 80% of effects. Okay. Or might
1:30:30be if you consider it in term of cost
1:30:33you say that uh 80% of cost is because
1:30:38of 20% of inventory item. Okay. So you
1:30:41have some of the items which are very
1:30:43important. So in term of value they have
1:30:46a lower value like maybe they are like
1:30:49let's suppose 100 items. So maybe 20
1:30:52items are those which which like when
1:30:57you come calculate their cost. So the
1:30:59total cost of those 20 item is almost
1:31:01the 80% of the total cost of 100 items.
1:31:04Okay. [snorts] So you need to manage
1:31:07those 20% of uh items in order to
1:31:12decrease the 80% cost. In the same way
1:31:14like in parto they say that the 80 20%
1:31:17of causes like basically produce 80% of
1:31:22the effects. Okay. So in the same way
1:31:24like you know usually you have the
1:31:26minimum percentage but its impact is
1:31:29higher. Okay. So this is what the parto
1:31:32chart uh aim and objective was but
1:31:35anyhow we will discuss about the ABC
1:31:37analysis here. ABC analysis is an
1:31:42inventory manager has to do an ABC
1:31:45analysis to prioritize his her inventory
1:31:49management efforts by categorizing items
1:31:52based on their importance. So how
1:31:55important the product in the inventory
1:31:57are based on that you classify them.
1:32:01Okay? because and then once you classify
1:32:03them then you assign different handling
1:32:07policies for each class because as I
1:32:10mentioned that it's not easy to have uh
1:32:14the same handling policies for all the
1:32:17inventory items because sometime you
1:32:19might have okay for the small scale uh
1:32:22industries or small industries it is it
1:32:25is possible that all the items can be
1:32:27handled in the same way but when there
1:32:30are like a big multination industries or
1:32:33firms which has like a very thousands of
1:32:36different products or thousands of
1:32:37different items in the inventory. So
1:32:40they need to classify them into
1:32:42different groups and then for those
1:32:44groups they should develop some
1:32:46policies. Okay, how to manage this
1:32:48group, how to manage group two, how to
1:32:50manage group three. So they just
1:32:52classify them in the groups based on
1:32:54their some properties. Okay. It can be
1:32:58like the cost. It can be like their
1:33:01nature like for example perishable. Some
1:33:03are not perishable. So it depends like
1:33:06what character or what criterias the
1:33:09organization use to classify them. Okay.
1:33:12So in the same way ABC analysis is the
1:33:16classification methodology to classify
1:33:19the items into A, B and C classes. Okay.
1:33:24So example a category items being the
1:33:28most valuable and require most
1:33:31attention. Okay. So category A require
1:33:34higher attention compared to other. This
1:33:38allows for more efficient resource
1:33:40allocation reducing cost and optimizing
1:33:43stocks level. So instead of giving the
1:33:48equal attention to all so you need to
1:33:51classify those item which require a
1:33:53special attention. So you don't need to
1:33:56put extra effort on the items which
1:33:59doesn't need more attention. For
1:34:02example, if you didn't classify them a
1:34:04items and you just consider all of them
1:34:07the same. So there might be an item
1:34:10which doesn't need that much attention
1:34:12but you are putting more effort more
1:34:14resources more cost in order to handle
1:34:18them or like if you didn't like you know
1:34:21put that that much resources that
1:34:24specific item could be handled with much
1:34:26lower cost. Okay. So that's why we need
1:34:29to have classes. So class A all the item
1:34:33which require the same or similar
1:34:36attention. Okay. So this can decrease
1:34:39your total cost and optimize your stock
1:34:41level.
1:34:43So let us consider a retail store uh
1:34:45that stocks 20,000 SKUs. Okay. So SKUs
1:34:51is basically stock keeping units. Okay.
1:34:54[snorts] Maybe it can be used for each
1:34:56inventory items. So you have 20,000
1:34:59different type of items in the
1:35:02inventory. Okay. So each SKUs is item
1:35:06one can be one SKUs item two like stock
1:35:09keeping units.
1:35:12So do all SKUs deserve the same
1:35:15attention. Okay. Let's have an example
1:35:17like for example you have a dairy
1:35:19product ice cream. Okay. And then you
1:35:22have another product. Let's suppose some
1:35:26um [snorts] some pasta. Okay. Let's
1:35:29suppose pasta. So do you think that
1:35:32pasta and ice cream require the same
1:35:34attention, the same policies for
1:35:36handling? No. Maybe the ice cream they
1:35:41have a specific temperature. Okay? And
1:35:44the pasta you can keep it anywhere. Or
1:35:47even if there is no temperature include
1:35:49maybe you have a pasta which is higher
1:35:51quality, better quality, more expensive
1:35:54and you have a pasta which is less
1:35:55expensive, low quality. Still they don't
1:35:58need to have the same attention. policy.
1:36:00Same handling attention policies. For
1:36:02example, the persona of higher quality
1:36:04and higher cost generate you higher
1:36:07inventory or maybe higher profit as
1:36:10well. So you need to like handle that
1:36:13pasta of higher quality in a different
1:36:16way compared to the one with a lower
1:36:18quality lower cost. Okay. So all SKUs
1:36:22deserve the same attention. No, all
1:36:25doesn't deserve the same attention.
1:36:27There should be some different handling
1:36:29policies and different attention
1:36:31policies for each and every SKUs. So SKU
1:36:36specific attention uh specific inventory
1:36:39control method is not practical for big
1:36:41companies. So as I mentioned for small
1:36:44companies uh you it might be possible
1:36:47but as the companies become bigger and
1:36:50bigger and your number of SKUs your
1:36:53number of inventory items started from
1:36:56thousands to like you know like uh from
1:36:58100 to thousands and then thousands to
1:37:01further increase. So it is difficult to
1:37:05have a common policies to handle an
1:37:08inventory items with the same policy.
1:37:12So therefore the companies need to
1:37:14divide the SKUs into different
1:37:17categories. So ABC analysis basically
1:37:20provide you that opportunity to classify
1:37:23the inventory item or the SKUs
1:37:26into three categories based on their
1:37:30importance. Okay. So what does this
1:37:34importance imply? So we can see it here.
1:37:38You can see like you have a clause, B
1:37:40clause and C clause. So
1:37:44the importance
1:37:46can be implied by the several criteria
1:37:49depending on the analysis of the
1:37:50performance. So it is different
1:37:52criterias based on which for example
1:37:55different criteria based on which you
1:37:58can just make this classification.
1:38:00For example, the turnover generated by
1:38:02finished product. Turnover is basically
1:38:05how many times an item's stock is sold
1:38:10use and like you know how frequently
1:38:12this product is sold or like how much it
1:38:15generate the revenue. So the more the
1:38:18product is sold so you can just give him
1:38:21more attention or you know you can
1:38:23classify the items based on how much
1:38:26that item is sold or the turnover. Okay.
1:38:31Or you can say cumulative margin
1:38:33generated by the finished product. How
1:38:35much profit, how much margin this
1:38:37specific item generate. So you can
1:38:39classify the items based on the margin
1:38:42or the profit or the revenue they
1:38:44generate. Then the value of the item in
1:38:46the stock. You can use the criteria of
1:38:48the value like how much it cost you.
1:38:50Maybe one product cost you uh 100 units,
1:38:54$100 and another cost you like $20. So
1:38:58you can make ABC classification based on
1:39:00how much value each item have. Then the
1:39:04volume consumed which which product
1:39:06consumed higher which product consumed
1:39:08lower and then you can say the frequency
1:39:10of use how frequently maybe one product
1:39:13used frequently more like every day you
1:39:15use it. The another product you use it
1:39:17like once in a week or like once in a
1:39:20month and another product you use it
1:39:21once in 6 months. So based on this
1:39:24frequency you can develop or you can
1:39:26design some classes as well. So you can
1:39:29have A B C. So it's not like you always
1:39:34have one criteria for classification
1:39:36into ABC. You can classify the item or
1:39:39the inventory into three different
1:39:41classes of ABC analysis based on what is
1:39:46important for you. important [snorts]
1:39:47for you is the the sales like how
1:39:50frequently you sell the product or like
1:39:52how much you invest on the product like
1:39:55the cost of the cost of the inventory
1:39:57items or the nature or the frequency the
1:40:01value. So it depends you know like what
1:40:04criteria you take for the classification
1:40:06of the inventory item into three
1:40:08different classes. Okay. So you see on
1:40:11the x-axis you have products and the
1:40:15y-axis here they use turnover. Okay the
1:40:18turnover is basically how many time the
1:40:21items is sold. Okay so how many time the
1:40:25item is sold. Okay so you have you see
1:40:27that 20% of product which give you
1:40:31almost close to 80% of turnovers. Okay.
1:40:36So those 20% need to be given special
1:40:40attention and should be in class A.
1:40:43And the second is like maybe the
1:40:46remaining this here is somewhere you
1:40:49know just below 100 this may be like 25%
1:40:54or 20% let's suppose 20 not 25 15%
1:40:59maybe 15% of items in class B. Okay. And
1:41:05then the final C is like so final C you
1:41:10have 5% like you can see here maybe the
1:41:14value or the products are higher okay
1:41:18more number of products maybe like 70%
1:41:21of items in term of numbers how many
1:41:24number of products okay but their
1:41:26commulative turnover is very less okay
1:41:29it is like 5% of like maybe less than
1:41:32five okay so some items They might be
1:41:35lower in numbers but their turnover is
1:41:38much higher. Okay. So this is class B
1:41:41and class C is the product which is
1:41:43higher in numbers
1:41:46but their turnover is very small. Okay.
1:41:50So you just classify them into different
1:41:52groups.
1:41:55So following that we determine that the
1:41:57value volume.
1:42:00So we use the criteria value volume of
1:42:03each SKUs using the following formula.
1:42:06So we use formula here. So V is
1:42:10basically the annual
1:42:12value volume of the item. How much value
1:42:16the item have? So how to find out the
1:42:19annual volume value? So for that we have
1:42:23how much is the demand of the items.
1:42:26Okay.
1:42:27And the cost of the items. So demand and
1:42:30the cost of item basically provide us
1:42:33the value volume how much value this
1:42:36specific item have. Okay. So the
1:42:39categories are generally defined as
1:42:41follow like you have category A
1:42:45which account for 70% of total annual
1:42:48volume. Okay. So which are like more in
1:42:53category A are like higher value. Okay.
1:42:56which are more expensive product. Then
1:42:58category B maybe you have 25%
1:43:03of the total annual value. Category C
1:43:06you have 5% of the total annual value.
1:43:11So value basically like how much you
1:43:14invest like money on that like how much
1:43:16expensive they are you know annually.
1:43:20So how to find it out?
1:43:23So [snorts] here we have a simple
1:43:25example. Okay. So you have a silicone
1:43:28chips makers of a super fast DRAM chips.
1:43:33They want to categorize
1:43:36its 10 major inventory items. So you can
1:43:40see they have 10 major inventory item.
1:43:42One, two, and we go then you have I 10
1:43:45inventory items
1:43:47using ABC analysis. So the annual volume
1:43:51for demand. So here you have the demand
1:43:54is for inventory item one is 1,000 and
1:43:58its cost is 90. Okay. So then the
1:44:03inventory item 2 is demand is 1,550
1:44:08and its unit cost is 17. In the same way
1:44:12I3 is 600. Then you have 350, you have
1:44:162,00 500, 100, 1,00, 1,200, and 250. And
1:44:24in the same way, you have here the cost
1:44:27of each. Okay, unit cost for each
1:44:30inventory item. You can see it here.
1:44:33Okay. So
1:44:37now we need to classify them into A B C.
1:44:42So how to classify them? So we need to
1:44:46find out the annual value we have the
1:44:49formula. Okay, we just say that
1:44:52mentioned in the previous slide. The
1:44:53annual value is the demand which is vi
1:44:57is the annual value is equal to the
1:45:01demand
1:45:02multiply by
1:45:05you have maybe something with the cost.
1:45:09Okay, the unit cost in that in the
1:45:11previous example that we have. So the
1:45:15annual value for each inventory item. So
1:45:17annual value for inventory item one. So
1:45:20you have 1,000 multiply by unit one unit
1:45:25cost $90. So the total value uh volume
1:45:29annual value is 90,000. Okay. So this is
1:45:3490,000. In the same way for I2 you have
1:45:39the volume is or demand is 1550 and the
1:45:42unit cost is 17. So the total annual
1:45:45value is 26,350
1:45:48by just multiplying them. Okay,
1:45:51multiplication here multiplying both
1:45:53here multiply here in the same way you
1:45:56multiply 600 with 12 it is 7200
1:46:00here like 350 * 43 15,50
1:46:05and then you have for inventory item 5
1:46:072,000 mult*ly by 1 so you see that envel
1:46:10here is 2,000 I6 here 500 * 154 it give
1:46:15you 77,000
1:46:17[snorts] 100 * 9900
1:46:20This is 1,000 divided by 13 is 13,000.
1:46:241200 / 1 is 1200. 250 * 1 is 250. So you
1:46:30see that now you have for every
1:46:32inventory item. Okay. I1 this annual
1:46:36value is here 90,000. The same way for
1:46:39I2 is 26,350
1:46:43and I3 is same. Okay. So now you need to
1:46:47find out the percentage. Okay. So we see
1:46:50that in the previous slide that class A
1:46:53is basically contain 70% of the annual
1:46:58value. Okay. So how to find out the 70%
1:47:0125% and 5%. So in order to find out we
1:47:06sum them. Okay. So these are all the
1:47:09total annual values. Okay. Here till
1:47:12here the all the inventory items you
1:47:16have you sum them. So you see that the
1:47:19the total inventory value is basically
1:47:22this. Okay, you sum them. Okay, so now
1:47:26the percentage that how much percentage
1:47:29this inventory item have in the total
1:47:32value. So you need to divide like for
1:47:36example 90,000
1:47:39you need to divide here
1:47:41like the [snorts] 90,000
1:47:44is which is its annual value like you
1:47:48know 1 2
1:47:501 2 3 4 okay 90,000 okay 90,000 is
1:47:56basically the annual value for I1
1:47:59divided by the total value of the
1:48:02inventory which is 23 23 2950. So 23
1:48:0929
1:48:1150. So when you do this you will find
1:48:14out and multiply by 100 in order to
1:48:17because it is in percentage. So you need
1:48:19to multiply with 100. So you will see
1:48:22that this inventory basically have the
1:48:25annual value which is 38.6% 6%
1:48:30of the total value of these inventory
1:48:35items. Okay.
1:48:38The same way for B you can divide 26 350
1:48:41with this 23. So when you start dividing
1:48:44you will find out the percentage that
1:48:46what is the percentage contribution of
1:48:49these inventory items in the total
1:48:52annual value of this whole inventory of
1:48:56this silicon chips company. Okay. So
1:49:00then it has 3.1 you have 2.5 2.9. So
1:49:05each inventory item has its own
1:49:08percentage contribution okay towards
1:49:13uh uh towards the total inventory cost
1:49:16or total inventory value okay but and
1:49:19when you sum them okay when you sum all
1:49:22of them it give you like 100%
1:49:27of
1:49:29uh percentage okay so now we need to
1:49:34classify them. Okay. Now we find out the
1:49:36percentages. We need to classify them
1:49:38into A B C classes. Okay. So you
1:49:42remember that we said that the class A
1:49:46basically consists of 70%.
1:49:49Okay. So it may be like 20% of items
1:49:53like very less number of items but still
1:49:56their contribution is 70 or 70. So 70
1:50:00doesn't mean that it should be exact 70.
1:50:02It should it can be around 70 68 70 72
1:50:0675 like this. Okay. So we find out that
1:50:10item one
1:50:12and item two
1:50:14collectively
1:50:17have
1:50:1972% of annual value contribution. Okay.
1:50:25So these items have a higher annual
1:50:29value which combine is like 72. So these
1:50:34should be classified as class A. Okay.
1:50:39Then the next we have like you know the
1:50:42item two, item four, item 8. So these
1:50:48collectively
1:50:50the second highest. Okay. 11.3 6.5. So
1:50:54we just basically arrange them like you
1:50:56know based on their contribution 38.6
1:50:59the highest contribution and I 10 is 0.1
1:51:03the lowest contribution okay as annual
1:51:05value.
1:51:07So in B we basically group the item
1:51:10having 23 23% contribution which can be
1:51:16classified as
1:51:19uh class B. Okay. So we have three
1:51:23inventory items
1:51:25but their total contribution is 23 in
1:51:28the total cost. Okay.
1:51:32Then
1:51:33we have another uh group which is called
1:51:36C. They might have a lot of a lot number
1:51:40of products. For example, the number of
1:51:42product here is one 2 3 4 5. Okay. The
1:51:49total number of inventory items are
1:51:51five. Okay. But their contribution or
1:51:54the total value is very low. Okay. For
1:51:57example, they are classified in C
1:52:00because their total annual value is only
1:52:035%. Okay. So you see in class A all the
1:52:08total number of items are less but still
1:52:11their annual value is much higher. So
1:52:13they need a much better handling policy
1:52:16to be properly managed. compared to
1:52:20class B
1:52:22and then B needs a better policy
1:52:25compared to class A. So you see that we
1:52:30mention like if we didn't have these
1:52:32classes and we give the same like policy
1:52:37or the same handling or same time for
1:52:40the item in this and the item in this.
1:52:44So we will find out that we are putting
1:52:47extra effort here and the item in C.
1:52:51Okay. So if we classify them
1:52:53effectively. So either the effort that
1:52:55we were putting before on C we can put
1:52:58an additional effort here because these
1:53:00are high value items for us in order to
1:53:04generate much better profit. Okay. So
1:53:08this is how we basically classify the
1:53:11items into A B C.
1:53:15I hope that will be clear.
1:53:18Okay. Companies typically do the
1:53:21following.
1:53:23So choose better suppliers for category
1:53:26A
1:53:27because as I mentioned that you have
1:53:32a more like you know you can call it an
1:53:35important items in class A or in
1:53:39category A. So important item B that
1:53:43that item [snorts] basically generate
1:53:45you a higher value higher revenue with
1:53:49higher revenue mean higher profit. So if
1:53:53the product is generating you a better
1:53:57results or the better value or a better
1:53:59profit,
1:54:01it certainly need a better handling
1:54:04policies and a better handling policy is
1:54:07like you need to have a better supplier
1:54:10for them like you know this kind of
1:54:12product like because the customer value
1:54:16that product. So if the customer is
1:54:17valuing that product you need to provide
1:54:21a better and better services for
1:54:23customer and for by giving better
1:54:27services to the customer you need to
1:54:29improve in that specific area or or that
1:54:32specific product and if you want to
1:54:34improve that specific product you need
1:54:36to have a better supplier for those
1:54:38products
1:54:40or you have a tighter in like the second
1:54:43one you have a tighter inventory control
1:54:45for category A and then you have a best
1:54:48forecast for category A because the best
1:54:51forecast for category A mean that you
1:54:53don't want to stock out because these
1:54:55are the most in important inventory
1:54:58items. So if you stock out on these
1:55:00inventory items, it means that your
1:55:02business will stop. Okay? So you need to
1:55:05have a better forecasting policies and
1:55:07you need to have a very strict or a much
1:55:10different handling inventory control
1:55:14policies for these category A items.
1:55:17Okay, I hope that will be fine.
1:55:21Anyhow here now you have to check your
1:55:25learning. Okay, you need to practice
1:55:28this. A company [snorts] presents the
1:55:31current state of inventories. Okay. So
1:55:35this is the inventories.
1:55:37Uh they want to prioritize
1:55:39classification into A C like how you
1:55:44classify them into different groups. You
1:55:47have different products. You have a
1:55:49quantity in stock. The inventory items.
1:55:52Okay. Then you have a unit price. Then
1:55:55you have a total cost of product. Okay.
1:55:58This is the total cost of product
1:56:00basically by multiplying it. Here you
1:56:02can just multiply it. Okay, you [snorts]
1:56:04will find these values. This is the
1:56:07total cost. Okay, you have the [snorts]
1:56:10monthly demand as well. Okay, so now you
1:56:14can either make an ABC classification
1:56:16here
1:56:18or you can make a ABC classification
1:56:21here as well. Depends which factor you
1:56:24want to choose in order to classify
1:56:27them. Okay.
1:56:29So you need to check your uh learning uh
1:56:33here uh like how much you learn and you
1:56:38should practice this question. So I I
1:56:41hope uh the things are clear but still
1:56:45if there is some issues that you didn't
1:56:48understand
1:56:50uh so you can send me an email uh you
1:56:52can send me on team message as well. So
1:56:55I will make sure to arrange uh some
1:56:58um
1:57:00meeting uh if it's if it's difficult for
1:57:03me to just write an email for the
1:57:06question that you ask like give a
1:57:08detailed response so I can just ask for
1:57:10a onetoone meeting or like a zoom
1:57:13meeting or team meeting uh I can discuss
1:57:16it with you like it's not an issue but
1:57:18still if you have an issue we have
1:57:19another session as well uh TD session uh
1:57:23we will have quiz in that session as
1:57:25well uh and we can discuss it there. So
1:57:28I hope so uh things will be clear or
1:57:34uh and if you have an issue so you can
1:57:36discuss it with me later. So that's all
1:57:39from my side. So thank you very much uh
1:57:43and have a nice rest of the day. Good
1:57:47luck. My

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