INVENTORY MANAGEMENT

ABC Classification of Inventory Items

Cumulative
Annual Unit Annual Dollar % Annual % Annual
Item Demand Cost Usage Dollar Usage Dollar Usage Classification

1 5,000 $ 30 $ 150,000 48.91 48.91 A

2 200 450 90,000 29.34 78.25 A
3 2,000 10 20,000 6.52 84.77 B
4 800 20 16,000 5.22 89.99 B
5 1,000 10 10,000 3.26 93.25 B
6 1,200 5 6,000 1.96 95.21 C
7 1,300 4 5,200 1.69 96.90 C
8 2,500 2 5,000 1.63 98.53 C
9 3,500 1 3,500 1.14 99.67 C
10 500 20 1,000 .33 100.00 C
306,700

(Exhibit 16.2) 1
 INVENTORY MANAGEMENT
Aggregate Performance Measures
-Average inventory investment

-Turnover ratio
Annual cost of goods sold
Average inventory investment

- Days of inventory
Days per year
Turnover ratio

2
 INVENTORY MANAGEMENT
Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost

Q + DS
TC = H
2 Q

3
 Figure 1 INVENTORY MANAGEMENT
Cost Minimization Goal
The Total-Cost Curve is U-Shaped
Q D
TC = H + S
Annual Cost

2 Q

Ordering Costs

QO (optimal order quantity) Order Quantity

(Q)

4
 INVENTORY MANAGEMENT
EOQ Model
D = Annual Demand rate
S = Variable ordering cost
H = Variable holding cost

2 DS
EOQ =
H
D = 1,000 units/year
S = $50 per order H= $5 per unit per year

2( 1,000 )( 50 )
EOQ =
5
= 20,000 = 141.42
5
 INVENTORY MANAGEMENT
Total Annual Variable Cost
D
Annual variable ordering cost = S
Q

Q
2
Annual variable holding cost = H

Q D
Total annual variable cost = 2 H+ Q S

6
 INVENTORY MANAGEMENT
Total Annual Variable Cost
D = 1,000 S = $50 H = $5
EOQ = 141.42
Total annual variable costs

EOQ: 141.42 1,000

(5) + (50) = $707.11
2 141.42

140 (5) + 1,000 (50) = $707.14

140:
2 140

145: 145 (5) + 1,000 (50) = $707.33

2 145

200: 200 (5) + 1,000 (50) = $750.00

2 200

7
 INVENTORY MANAGEMENT
EOQ
Annual demand 2,400
Price $200
Order cost S $50
Holding cost percent % 0.1
Holding cost H $20
Number of working days per year 250
Order lead time 3
EOQ 109.5
Reorder point 28.8
Number of times to order per year 21.9
Order intervals (Days between orders) 11.4
Average inventory level 54.8
Average annual inventory holding cost $1,095
Average annual order cost $1,095
Average annual total cost $2,191
8