Page 186 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Unit 9: Inventory Model and Safety Stocks

This classification is commonly used by companies, as very often they need not keep extremely Notes
accurate track of all inventory items. For instance, high-value, high-usage items must be tracked
carefully and continuously but certain parts with a relatively low value or infrequent use can be
monitored loosely.
Controls for Class ‘A’ Items: All Class ‘A’ items require close control. However, where stock out
costs are high, special attention is required. Raw materials that are used continuously, in
extremely high volume, are often purchased at rates that match usage rates. Contracts are often
executed with vendors, with penalty clauses, for the continuous supply of these materials.
Buffer stocks that provide excellent service levels are justified for such items.

!
Caution Where purchase of inventory items is not guided by either economical quantities
or cycles, the items need careful monitoring.
It is possible to achieve significant savings by changing the rate of flow periodically as demand
and inventory positions change. Minimum supplies need to be ensured to guard against demand
fluctuations and possible interruptions of supply.
For the balance of Class ‘A’ items, normally reports are generated on a weekly basis, to provide
the necessary close surveillance over inventory levels. Close surveillance reduces the risk of a
prolonged stock out. Depending upon the inventory system used, time triggered or event
triggered orders are released.
Control for Class ‘B’ Items: These items are generally monitored and controlled by a computer-
based exception reporting system. Periodic review by the management is necessary, but model
parameters are reviewed less often than with Class A items. Normally, stock out costs for Class
B items should be moderate to low, and buffer stocks should provide adequate control for stock
outs, even though the ordering may occur less often.
However, for items that are scarce, lead time analysis and purchasing strategies can be critical.
This is also true for a number of items that may have to be imported and in addition to normal
transportation times, time required for clearance through customs may not be highly predictable.
Controls for Class ‘C’ items: Class C items account for the bulk of inventory items. In many
cases, reorder point system is designed in such a way that it does not require a physical stock
evaluation,

Example: Using a “two-bin” system. The inventory is physically separated into two bins
one of which contains an amount equal to the reorder inventory level. Stock is drawn from the
second bin. For each item, action is triggered when the bin gets empty.
Routine controls adequately cover the requirements for this class of inventory. Semiannual or
annual review of the system parameters should be performed to update usage rates, re-establish
supply lead times, and the reorder points. Cost savings might result in changes in EOQ, but they
may not be significant.

9.3.2 Other Classification Systems

Material items are classified based upon their commercial importance, demand patterns (regular,
sporadic etc.) and supply reliability (of both raw material suppliers and own manufacturing),
etc.
Most of these systems operate in a similar manner to the ABC Classification. A brief description
and comparison of these classifications are given in Table 9.4.

LOVELY PROFESSIONAL UNIVERSITY 181