INVENTORY MANAGEMENT

I. Inventory
 physical stock of items that a business or production organization keeps in hand for
efficient running of affairs or its production

II. Inventory Classifications

A. Raw Materials (and Supplies)
B. Production Inventory
C. Manufacturing Repair and Operations Inventory
D. Work-in-process Inventory
E. Finished Goods/ Finished Products Inventory
F. Materials-in-transit Inventory
G. Dealers’ Stock
H. Total Inventory

III. Costs
A. Direct Costs
B. Indirect Costs
C. Fixed Costs
D. Variable Costs
E. Order Costs
F. Holding/Carrying Costs

IV. Inventory Turnover Ratio

Inventory Turnover Ratio = cost of revenue/average inventory

V. Inventory Management Functions and Benefits

 Ensure balanced flow
 Minimize stock-outs
 Reduce excess
 Lead to lowest storage or inventory carrying cost
 Higher inventory turnover
 Minimize damage and waste
 Minimize after “best before date” cases
 Minimize time filling request forms to shipping

VI. Inventory Models

A. Economic Order Quantity (EOQ) – accounting formula that determines the point at which the
combination of order costs and inventory carrying costs are least
B. Fixed Order Interval System – periodic review inventory scheme where inventory is checked
regularly such as once a month
C. Fixed Quantity Oder System – order and reorder are placed whenever inventory touches a
certain level (order or reorder point)
 D. Operational Replenishment System – inventory is replaced at periodical levels, and if there has
been any depletion since the last review an order or reorder is placed

VII. Inventory Counting

A. Perpetual Inventory System – system that keeps track of removals from inventory continuously,
thus monitoring the current levels of each item
B. Periodic Inventory System – physical count of items made at periodic intervals