INVENTORY

CONCEPT
“Inventory is an idle material resource
of an enterprise awaiting future sales,
use, or transformation”

“Inventory is the stock of any item or

resource used in an organization and
can include: raw materials, finished
products, component parts, supplies,
and work-in-process”
TYPES
PURPOSES OF INVENTORY

1. To maintain independence of operations

2. To meet variation in product demand
3. To allow flexibility in production
scheduling
4. To provide a safeguard for variation in
raw material delivery time
 According to Tersine,1994:
As per the utility, inventory can be categorized
as per the following:
2.Working /Cycle/Lot size stock
Average amount of inventory to get the benefits
of minimum ordering & holding costs, quantity
discounts and or favourable freight rates.
3.Safety Stock
stock held to protect against uncertainties
of demand & supply.
1. Anticipation Stock
Holding high level inventory to meet the peak
seasonal demand, erratic requirements, or
inconsistency in the production capacity.
3. Pipeline Stock/ work in Process
Inventory
Goods in transit from manufacturer to be delivered
to a customer
5. Decoupling Stock
Inventory accumulated between the various
departments’ activities
1. Psychic Stock
Window display of an inventory in order to
stimulate demand
Why CHECK Inventory??
Elements of Inventory Costs

3. PROCUREMENT COST
4. CARRYING COST
5. STOCK-OUT COST
 Inventory Procurement Cost
Includes:
 Cost of order processing i.e. use of stationary
and services, cost of staff etc.
 Cost of transmission of an order i.e. cost of
postage & follow-up messages through telephone,
fax, etc.
 Cost of Transportation i.e. freight, transit
insurance, protective packaging, etc.
 Cost of Invoice Pricing i.e. checking, approval,
book entries & payment procedures.
 Cost of Goods receiving, handling, inspecting and
entry in the stock register/computer.
 Cost of final feeding of data in Logisitcs
information system
 Inventory Carrying Cost

Includes:
 Space rent for the storage of goods
 Cost of working Capital locked in the inventory
 Cost of insurance of goods
 Cost of spoilage in the quality of goods in storage,
breakages in handling
 Cost of deterioration due to passes of time and
change in weather
 Cost of obsolescence of goods or depriciation
 Stock-out Cost

Internal shortages due to

 Lost production
 Delay in completion date

External shortages resulting in

 Back order cost
 Loss of potential sale thus loss of present profit
 Future profit cost due to loss of corporate image
COST of Stocking a Material

Total Inventory
Cost
Carrying
Costs

Procurement Costs
QOPT
Order Quantity (Q)

TOTAL INVENTORY COSTS

OBJECTIVE:
Analyze and attend two major issues;
Order Quantity (EOQ) & Re-Order
Points (RP)

Inventory Management
1. Model –I (Basic EOQ)
Assumptions:

3. Annual Demand, Carrying Cost, & ordering

cost for a material can be estimated.
4. Average inventory level for a material is half of
order quantity, i.e. there is no safety stock.
5. Stock-out, customer responsiveness and other
cost having no effect.
6. Quantity discount does not exist.
Basic Fixed-Order Quantity TC=Total annual
(EOQ) Model Formula cost
D =Demand
Total Annual Annual Q =Order quantity
Annual = Carrying + Ordering S =Cost of
Cost Cost Cost placing an order
or setup cost
C=Annual
carrying cost per
unit of inventory

Q D
per year

TC = C + S
2 Q
Total order quantity should be minimum to get the
optimal quantity, thus,

2DS
EOQ = Q =
C
 Reorder point, R = DT

D = Average Daily Demand

T = Average Replenishment Cycle time

Determination of Reorder
Point
 Basic Fixed-Order Quantity Model
and Reorder Point Behavior
1. You receive an order quantity Q. 4. The cycle then repeats.

Number
of units
on hand Q Q Q

R
2. Your start using L L
them up over time. 3. When you reach down to a
Time level of inventory of R, you place
R = Reorder point your next Q sized order.
Q = Economic order quantity
L = Lead time