INVENTORY I

Definition
Importance
Inventory Decisions
ABC Analysis
EOQ Model

Inventory
The raw materials, work-in-process goods and
completely finished goods that are considered to
be the portion of a business's assets that are ready
or will be ready for sale.

Plastic Raw Materials

Finished Products

Inventory
Inventory is the total amount of goods and/or
materials contained in a store or factory at any
given time.

Inventory
The word 'inventory' can refer to both the total
amount of goods and the act of counting them.

Inventory Control
Stock Control

Importance of Inventory
1. Smoothing out irregularities in supply.
Filling the gap between supply and demand

2. Buying or producing in lots or batches.

Making possible lower production cost
3. Allowing organization to cope with
perishable materials.
To keep items which are not always available

Inventory Decisions

1. How much to order?

2. When to order?

Economic Order Quantity (EOQ) Model

how much to buy model
is the level of inventory that minimizes the total
inventory holding costs and ordering costs.
Inventory Costs
1. Ordering cost
> the costs of getting an item into the firms inventory.
2. Carrying/Holding costs
> the cost of maintaining the inventories.
Carrying costs include:
Interest on money invested
Obsolescence cost
Storage space cost
Stores operation
Taxes, insurance, and pilferage

Economic Order Quantity (EOQ) Model

how much to buy model
Underlying Assumptions:
1. The ordering cost is constant.
2. The rate of demand is constant.

3. The lead time is fixed.

4. The purchase price of the item is constant
i.e no discount is available

5. The replenishment is made instantaneously, the whole batch is

delivered at once.

Economic Order Quantity (EOQ) Model

how much to buy model
Example
Caroline the owner of Carolines Boutique, Ltd.,
estimates that she will sell 40 decorator table this
year worth $10,000. Her accountants have determined
that ordering costs amounts to $25 per order and that
the carrying costs amount to 12 percent of the
average inventory. Determine the economic order
Quantity.

Economic Order Quantity (EOQ) Model

how much to buy model
1

No. of Orders Per Year

$ per order

Average inventory

Carrying Costs

Ordering Costs

Total Costs/year

Economic Order Quantity (EOQ) Model

how much to buy model
EOQ FORMULAS
Optimal number of orders per year

No

AC
2P

2P
AC

Optimal number of days supply per order

Nd 365

Optimal value per order

Nv

2AP
C

Optimal number of units per order

Nu

2AP
R 2C

Economic Order Quantity (EOQ) Model

how much to buy model

Dave Danesh experiences an annual demand

of $220,000 for pro quality golf balls at the
Arizona Golf Supply Company. It costs Dave
$30 to place an order and his carrying cost is
18% of the average inventory. How many
orders per year should Dave place for the balls?

Economic Order Quantity (EOQ) Model

how much to buy model

Maud Littlefield, owner of Computer Village,

needs to determine an optimal ordering policy
for Porto-Exec computers. Annual demand for
the computers is $28,000 and carrying cost is
23 percent. Maud has estimated order costs to
be $48 per orders. What are the optimal dollars
per order?

Economic Order Quantity (EOQ) Model

how much to buy model
Central University uses $96,000 annually of a
particular reagent in the chemistry department
labs. The purchasing director of the university
estimates the ordering cost at $45 and thinks
that the university can hold this type of
inventory at an annual storage cost of 22
percent of the purchase price. How many
months supply should the purchasing director
order a one time to minimize total annual cost of
purchasing and carrying?

Sources
http://www.ims-productivity.com/page.cfm/content/ABCPareto-analysis/

http://www.bola.biz/operations/stock/pareto.html
http://www.inventoryops.com/economic_order_quantity.htm