Inventory Control

STORES &
INVENTORY
CONTROL
PRESENTATION OUTLINE
1. Stores
2. Inventory
3. Inventory Control
4. Methods
STORES & INVENTORY CONTROL 2

STORES

STORES
 MATERIALS THAT ARE KEPT UNTIL NEEDED
 MAY ALSO BE REFERRED TO AS STOCKS,

PROVISIONS, HOLDINGS, OR RESERVES
 THESE ACT AS A BUFFER BETWEEN

OPERATIONS -- TO ALLOW OPERATIONS TO
CONTINUE NORMALLY THROUGH VARIATIONS
AND UNCERTAINTY IN SUPPLY & DEMAND

TYPES OF STORES
1) RAW MATERIALS
THESE ARE FROM SUPPLIERS

AND ARE KEPT UNTIL NEEDED
FOR OPERATIONS/USE

TYPES OF STORES
2) WORKS IN PROGRESS
THESE ARE UNITS WHICH ARE

CURRENTLY BEING WORKED ON

TYPES OF STORES
3) FINISHED GOODS
THESE ARE UNITS WHICH ARE

WAITING TO BE SHIPPED TO THE
CUSTOMERS OR PROJECT SITE

TYPES OF STORES
4) SPARE PARTS
5) CONSUMABLES
THESE ARE NEEEDED TO SUPPORT

OPERATIONS BUT DO NOT FORM A
PART OF THE FINAL PRODUCT

TYPES OF STORES
SOURCE: WATERS, 2003

STORE CYCLE

IMPORTANCE OF STORES
 STORES ARE ESSENTIAL IN
EVERY COMPANY
 WITHOUT THESE, OPERATIONS

ARE SIMPLY IMPOSSIBLE

IMPORTANCE OF STORES
 STORES AFFECT:
 LEAD TIME AND AVAILABILITY OF MATERIALS WHICH AFFECTS

CUSTOMER SERVICE, SATISFACTION, & THE PERCEIVED VALUE OF
PRODUCTS
 SIZE, LOCATION, AND TYPE OF FACILITIES BASED ON STORAGE

REQUIREMENTS, SAFETY, HEALTH, AND ENVIRONMENTAL
CONCERNS

INVENTORY

INVENTORY
 SIMPLY REFERS TO A LIST OF ITEMS
HELD IN STORE
 EACH ENTRY REPRESENTS A

DISTINCT ITEM
 EACH ITEM IS STORED IN STANDARD

QUANTITIES OR UNITS
INVENTORY CONTROL

INVENTORY CONTROL
 REFERS TO THE FUNCTION OF
MAKING DECISIONS FOR POLICIES,
ACTIVITIES, AND PROCEDURES TO
MAKE SURE THE RIGHT AMOUNT
OF EACH ITEM IS HELD IN
STORE AT ANY TIME

APPROACHES TO INVENTORY CONTROL
3 BASIC QUESTIONS:
1. WHAT ITEMS SHOULD WE KEEP IN STORE?
2. WHEN SHOULD WE PLACE AN ORDER WITH SUPPLIERS?
3. HOW MUCH SHOULD WE ORDER?

1. WHAT ITEMS SHOULD WE KEEP IN STORE?
STORES MUST REMAIN AT THE LOWEST LEVEL THAT

ALLOWS ACCEPTABLE SERVICE:
 EXISTING ITEMS AT REASONABLE LEVELS
 NOT ADDING UNNECESSARY ITEMS
 REMOVING ITEMS WHICH ARE NO LONGER USED

2. WHEN SHOULD WE PLACE AN ORDER
WITH SUPPLIERS?
A. PERIODIC
PLACING ORDERS OF VARIABLE SIZE AT

REGULAR INTERVALS OF TIME
ANY DEMAND VARIATION IS ALLOWED FOR BY

CHANGING THE ORDER SIZE
B. FIXED
STORE LEVELS ARE CONTINUOUSLY MONITORED

AND WHEN THEY FALL TO A SPECIFIED LEVEL, A
FIXED AMOUNT IS ORDERED

CHANGING THE TIME BETWEEN ORDERS

C. SUPPLY & DEMAND
ORDERING ENOUGH STOCK TO MEET KNOWN

DEMAND OVER A SPECIFIED PERIOD

CHANGING THE QUANTITY & TIME BETWEEN
ORDERS

3. HOW MUCH SHOULD WE ORDER?
THERE ARE COSTS (ADMINISTRATION, DELIVERY)

FOR EVERY TIME WE PLACE AN ORDER:
LARGE, INFREQUENT ORDERS = LOW COSTS, HIGH STORE LEVEL
SMALL, FREQUENT ORDERS = HIGH COSTS, LOW STORE LEVEL
MANAGERS MUST LOOK FOR A COMPROMISE

BETWEEN THE 2 EXTREMES TO MINIMIZE OVERALL
COST
INVENTORY CONTROL METHODS
2 CATEGORIES BASED ON THE WAYS OF ASSESSING DEMAND
1. INDEPENDENT DEMAND – USES FORECASTS TO DEFINE

OPTIMAL ORDER QUANTITIES AND TIMES
A. ECONOMIC ORDER QUANTITY
B. PERIODIC REVIEW

INVENTORY CONTROL METHODS
2 METHODS BASED ON THE WAYS OF ASSESSING DEMAND
2. DEPENDENT DEMAND – USES THE CORRELATION OF THE

DEMANDS FOR DIFFERENT ITEMS
A. MATERIAL REQUIREMENTS PLANNING
B. JUST-IN-TIME

ECONOMIC ORDER QUANTITY

ECONOMIC ORDER QUANTITY (EOQ)
 AN INDEPENDENT
DEMAND METHOD THAT
REFERS TO THE OPTIMAL
ORDER SIZE THAT
SHOULD BE HELD IN STORE
TO BALANCE THE VARIOUS
COSTS OF STORES
 THE MODEL MAKES THE
FOLLOWING ASSUMPTIONS:
1. DEMAND IS CONSTANT
2. ALL COSTS ARE CONSTANT
3. NO SHORTAGES
4. FIXED ORDER SIZE

WHERE:
Qo = Economic order quantity

RC = Fixed Reorder cost (telephone, delivery, receiving, quality checks per order)
D = Demand (annual number of units to be sold)
HC = Holding cost (annual cost of holding 1 unit of an item in store)

Annual Number of Orders = D / Qo
Annual Order Interval = Qo / D
WHERE:
Qo = Economic order quantity
D = Demand (annual number of units to be sold)
ROL = LT x Demand per unit time

WHERE:
ROL = Reorder Level (amount of store on hand to cover the demand)
LT = Lead Time (time before the delivery is needed)
EXAMPLE:
A COMPANY SUPPLYING STEEL DOORS HAS AN ANNUAL DEMAND OF 1,000 UNITS AT A PRICE
OF P20,000 PER UNIT. THE COMPANY HAS ESTIMATED THAT THE ANNUAL HOLDING COST IS
20% OF THE UNIT PRICE AND ITS REORDERING COST AT P50,000 PER ORDER.
1.WHAT IS THE ECONOMIC ORDER QUANTITY?
2. HOW MANY ORDERS SHOULD BE PLACED IN A YEAR?
3. HOW OFTEN SHOULD AN ORDER BE PLACED IN MONTHS?
4.ASSUMING A LEAD TIME OF 1 WEEK AND DEMAND RATE OF 14 UNITS PER WEEK,
WHAT IS THE REORDER LEVEL?
EXAMPLE:
A COMPANY SUPPLYING STEEL DOORS HAS AN ANNUAL DEMAND OF 1,000 UNITS AT

A PRICE OF P20,000 PER UNIT. THE COMPANY HAS ESTIMATED THAT THE ANNUAL
HOLDING COST IS 20% OF THE UNIT PRICE AND ITS REORDERING COST AT P50,000
PER ORDER.
1.WHAT IS THE ECONOMIC ORDER QUANTITY?
Qo = √((2 x 50,000 x 1,000)/(20,000 x 0.20))
Qo = √(100,000,000/4,000)
Qo = √25,000
STORES & INVENTORY CONTROL
Qo = 159 units 31
EXAMPLE:

PER ORDER.
2. HOW MANY ORDERS SHOULD BE PLACED IN A YEAR?

Annual No. of Orders = 1,000 units / 159 units
Annual No. of Orders = 6 orders approximately

EXAMPLE:

PER ORDER.
3. HOW OFTEN SHOULD AN ORDER BE PLACED IN MONTHS?

Order Interval = 159 units / (1,000 units / year)
Order Interval = 0.159 year x 12 months / year = approximately 2 months

EXAMPLE:

PER ORDER.
4. ASSUMING A LEAD TIME OF 1 WEEK AND DEMAND RATE OF 14 UNITS

PER WEEK, WHAT IS THE REORDER LEVEL?
ROL = 1 week x 14 units / week
ROL = 14 units 34
PERIODIC REVIEW

PERIODIC REVIEW
 AN INDEPENDENT DEMAND
METHOD WHERE WE ORDER
A VARYING AMOUNT AT
REGULAR INTERVALS

PERIODIC REVIEW
 2 QUESTIONS:
 HOW LONG SHOULD THE ORDER

INTERVAL BE?
IT CAN BE ANY CONVENIENT PERIOD

(E.G. END OF EVERY WEEK OR MONTH;
EVERY MORNING)

PERIODIC REVIEW
 WHAT SHOULD THE
TARGET STORE LEVEL BE?
SERVICE LEVEL
THE MAXIMUM ACCEPTABLE

PROBABILITY THAT A DEMAND
CAN BE MET FROM THE STORE

PERIODIC REVIEW
 WHAT SHOULD THE
TARGET STORE LEVEL BE?
SAFETY STOCK
ADDITIONAL STORE TO
AVOID SHORTAGES

PERIODIC REVIEW
SAFETY STOCK
SS = Z x σ x √(T+LT)
where:
Z = z-score corresponding to the service level
σ = standard deviation of demand
T = order interval
LT = lead time
or by using MS Excel:
NORMSINV(Service level)
STORES & INVENTORY CONTROL NORMSINV(0.95) = 1.64 40
PERIODIC REVIEW
TARGET STORE LEVEL ORDER SIZE
TSL = D x (T+LT) + SS OS = TSL - SOH

where: where:
D = average demand TSL = target store level
T = order interval SOH = store on hand
LT = lead time
SS = safety stock

PERIODIC REVIEW
EXAMPLE:
A CERAMIC FLOOR TILE MANUFACTURER HAS AN AVERAGE DEMAND OF 10,000 UNITS PER
MONTH AND A STANDARD DEVIATION OF 1,000 UNITS. THE COMPANY CHECKS STORES
EVERY 3 MONTHS, HAS AN ORDERING POLICY OF 95% SERVICE LEVEL AND HAS A CONSTANT
LEAD TIME OF 1 MONTH.
1.WHAT IS THE QUANTITY OF THE SAFETY STOCK?
2.WHAT IS THE TARGET STORE LEVEL?
3.ASSUMING THAT UPON CHECKING,THE COMPANY HAS 20,000 UNITS IN STORE.

WHAT IS THE QUANTITY OF THE ORDER TO BE PLACED?
PERIODIC REVIEW
EXAMPLE:
1.WHAT IS THE QUANTITY OF THE SAFETY STOCK?

SS = Z x σ x √(T+LT)
SS = 1.64 x 1,000 units x √(3 mos. + 1 mo.)
SS = 3,280 units

PERIODIC REVIEW
EXAMPLE:
2.WHAT IS THE TARGET STORE LEVEL?

TSL = D x (T + LT) + SS
TSL = 10,000 units/month x (3 mos. + 1 mo.) + 3,280 units
TSL = 10,000 units/month x 4 months + 3,280 units

TSL = 43,280 units 44
PERIODIC REVIEW
EXAMPLE:
3.ASSUMING THAT UPON CHECKING,THE COMPANY HAS 20,000 UNITS IN STORE.

WHAT IS THE QUANTITY OF THE ORDER TO BE PLACED?
OS = TSL - SOH
OS = 43,280 units – 20,000 units

OS = 23,280 units 45
PERIODIC REVIEW & EOQ
 PERIODIC REVIEW
+ SIMPLE & CONVENIENT TO ADMINISTER (ROUTINE)
- LACK OF KNOWLEDGE & DETAIL ON STORE LEVELS
 ECONOMIC ORDER QUANTITY
+ FIXED ORDER SIZE AND LOWER STORE LEVELS
- BASED ON ASSUMPTIONS
HYBRID METHODS
 PERIODIC REVIEW WITH REORDER LEVEL
 ORDERS ARE ONLY PLACED WHEN STORE ON HAND IS

BELOW THE TARGET STORE LEVEL
 REORDER LEVEL AND TARGET STOCK (MIN-MAX SYSTEM)
 MINIMUM STORING LEVEL TRIGGERS A REORDER TO REACH

THE MAXIMUM STORING LEVEL
MATERIAL REQUIREMENTS PLANNING

 USES PLANNED PRODUCTION
TO FIND THE DEMAND FOR
MATERIALS
 BASED ON THE SCHEDULE OF

WORK, INVENTORY RECORDS,
AND BILL OF MATERIALS

 STORE LEVELS ARE
GENERALLY LOW BUT
RISE AS DELIVERIES ARE
MADE JUST BEFORE
CONSTRUCTION STARTS
EXAMPLE:
A CONTRACTOR NEEDS TO FABRICATE 5 SETS OF FLUSH DOORS. BASED ON THE BILL OF

MATERIALS, THESE WILL REQUIRE: 5 BOARDS OF PLYWOOD WHICH IS IN STORE, 5 SHEETS OF
VENEER, AND 13 PCS OF LUMBER FOR THE FRAME. IF THESE MUST BE FINISHED WITHIN 2
WEEKS, AND THE CARPENTER CAN FINISH 1 DOOR A DAY, WHEN SHOULD THE COMPANY
PLACE AN ORDER FOR THE MATERIALS?

EXAMPLE:

1.VERIFY THE MATERIAL AVAILABILITY:
PLYWOOD – 5 BOARDS ON HAND
VENEER – 5 SHEETS TO BE ORDERED
LUMBER – 13 PCS TO BE ORDERED
EXAMPLE:

2. DETERMINE WHEN THESE ORDERS MUST ARRIVE:
TARGET TIME – ASSEMBLY DURATION = ORDER ARRIVAL
14 days – 5 days = 9 days after the initial date

EXAMPLE:

3. SUPPOSE THAT THE LUMBER SUPPLIER GAVE A LEAD TIME OF 2 DAYS AND
THE VENEER SUPPLIER GAVE A LEAD TIME OF 3 DAYS, WHEN SHOULD THESE
ORDERS BE PLACED?
PLYWOOD: 9 days – 2 days = 7 days after initial date
VENEER: 9 days – 7 days = 2 days after initial date 54
JUST-IN-TIME

JUST-IN-TIME
 MATERIALS ARE SUPPLIED IN THE RIGHT
ORDER, IN THE RIGHT AMOUNT AT THE
RIGHT TIME
 IT IS NOT DONE TOO EARLY (WHICH WILL

NEED FINISHED GOODS TO BE STORED)
 IT IS NOT DONE TOO LATE (WHICH WILL GIVE

POOR CUSTOMER SERVICE)

JUST-IN-TIME
 JIT PRINCIPLES:
 IF STORES ARE HELD TO COPE WITH SUPPLY

VARIATIONS, FIND WAYS TO REDUCE THE
VARIATION
 IF STORES ARE HELD TO COVER UNCERTAIN

DEMAND, FIND WAYS TO REMOVE THE
UNCERTAINTY

JUST-IN-TIME
 EXAMPLE USAGE OF JIT:
 TOYOTA
 APPLE
 ONLINE BUSINESSES
 DROPSHIPPING – ORDERED ITEMS ARE PURCHASED FROM A 3RD
PARTY, THEN THESE ITEMS ARE SHIPPED DIRECTLY TO THE
CUSTOMER
 MCDONALD’S AND OTHER FAST-FOOD CHAINS
 PUBLISHING COMPANIES
JUST-IN-TIME
 KEY ELEMENTS:
 STABLE ENVIRONMENT
 STANDARDIZED PRODUCTS
 CONTINUOUS FIXED PRODUCTION
 AUTOMATED, HIGH VOLUME OPERATIONS
 RELIABLE EQUIPMENT
 MINIMUM STORES
 SMALL BATCHES AND LEAD TIME FOR SUPPLY
 RELIABLE SUPPLIERS
MRP & JIT
 MATERIALS REQUIREMENT PLANNING  JUST-IN-TIME
1. PUSHES MATERIALS THROUGH A PRE- 1. PULLS MATERIALS THROUGH A
DEFINED SCHEDULE PROCESS
2. PLANNING-ORIENTED 2. CONTROL-ORIENTED
3. FOCUS ON INFORMATION SYSTEM 3. FOCUS ON PHYSICAL OPERATIONS
4. INCREASED CLERICAL EFFORT 4. REDUCED CLERICAL EFFORT
5. AS MUCH DATA AS POSSIBLE 5. MINIMAL DATA NEEDED
6. VARYING RATE OF PRODUCTION 6. FIXED RATE OF PRODUCTION
7. INCREASED BATCH SIZESMINIMAL 7. ORDER BATCHES
8. DAYS’ STORE OF MATERIAL 8. HOURS’ STORE OF MATERIAL

THANK YOU!
REFERENCES
Counttuts. (2019). Economic Order Quantity (EOQ) Explained With Example. Retrieved from
https://www.youtube.com/watch?v=uhMcWdlkWxE
Designing Buildings. (2021). Construction Inventory Management. Retrieved from
https://www.designingbuildings.co.uk/wiki/Construction_inventory_management
Designing Buildings. (2021) Just in time. Retrieved from https://www.designingbuildings.co.uk/wiki/Just_in_time
Graphic Products. (n.d.). Periodic Inventory System. Retrieved from https://www.graphicproducts.com/articles/periodic-
inventory-system/
Harbour, S. (2019). The Advantages & Disadvantages of Economic Order Quantity. Retrieved from
https://smallbusiness.chron.com/advantages-disadvantages-economic-order-quantity-eoq-35025.html
Inventopedia. (2021). What Are Some Examples of Just-In-Time Inventory Processes?. Retrievede from
https://www.investopedia.com/ask/answers/051215/what-are-some-examples-just-time-jit-inventory-processes.asp
NEHP. (2018). Just In Time In Construction (JIT Delivery). Retrieved from https://blog.cpsgrp.com/nehp/just-in-time-in-
construction
Waters, D. (2003). Inventory Control and Management. John Wiley & Sons, Ltd.

Inventory Control

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STORES &

STORES & INVENTORY CONTROL 2

STORES & INVENTORY CONTROL 3

 MAY ALSO BE REFERRED TO AS STOCKS,

 THESE ACT AS A BUFFER BETWEEN

STORES & INVENTORY CONTROL 4

THESE ARE FROM SUPPLIERS

STORES & INVENTORY CONTROL 5

THESE ARE UNITS WHICH ARE

STORES & INVENTORY CONTROL 6

THESE ARE UNITS WHICH ARE

STORES & INVENTORY CONTROL 7

THESE ARE NEEEDED TO SUPPORT

STORES & INVENTORY CONTROL 8

SOURCE: WATERS, 2003

SOURCE: WATERS, 2003

SOURCE: WATERS, 2003

STORES & INVENTORY CONTROL 10

 WITHOUT THESE, OPERATIONS

STORES & INVENTORY CONTROL 11

 LEAD TIME AND AVAILABILITY OF MATERIALS WHICH AFFECTS

 SIZE, LOCATION, AND TYPE OF FACILITIES BASED ON STORAGE

STORES & INVENTORY CONTROL 12

STORES & INVENTORY CONTROL 13

 EACH ENTRY REPRESENTS A

 EACH ITEM IS STORED IN STANDARD

STORES & INVENTORY CONTROL 15

STORES & INVENTORY CONTROL 16

1. WHAT ITEMS SHOULD WE KEEP IN STORE?

2. WHEN SHOULD WE PLACE AN ORDER WITH SUPPLIERS?

3. HOW MUCH SHOULD WE ORDER?

STORES & INVENTORY CONTROL 17

STORES MUST REMAIN AT THE LOWEST LEVEL THAT

 EXISTING ITEMS AT REASONABLE LEVELS

 NOT ADDING UNNECESSARY ITEMS

 REMOVING ITEMS WHICH ARE NO LONGER USED

STORES & INVENTORY CONTROL 18

PLACING ORDERS OF VARIABLE SIZE AT

ANY DEMAND VARIATION IS ALLOWED FOR BY

STORE LEVELS ARE CONTINUOUSLY MONITORED

ANY DEMAND VARIATION IS ALLOWED FOR BY

STORES & INVENTORY CONTROL 20

ORDERING ENOUGH STOCK TO MEET KNOWN

ANY DEMAND VARIATION IS ALLOWED FOR BY

STORES & INVENTORY CONTROL 21

THERE ARE COSTS (ADMINISTRATION, DELIVERY)

LARGE, INFREQUENT ORDERS = LOW COSTS, HIGH STORE LEVEL

SMALL, FREQUENT ORDERS = HIGH COSTS, LOW STORE LEVEL

MANAGERS MUST LOOK FOR A COMPROMISE

1. INDEPENDENT DEMAND – USES FORECASTS TO DEFINE

A. ECONOMIC ORDER QUANTITY

STORES & INVENTORY CONTROL 23

2. DEPENDENT DEMAND – USES THE CORRELATION OF THE

A. MATERIAL REQUIREMENTS PLANNING

STORES & INVENTORY CONTROL 24

STORES & INVENTORY CONTROL 25

2. ALL COSTS ARE CONSTANT

4. FIXED ORDER SIZE

STORES & INVENTORY CONTROL 27

Qo = Economic order quantity

STORES & INVENTORY CONTROL 28

ROL = LT x Demand per unit time

1.WHAT IS THE ECONOMIC ORDER QUANTITY?

2. HOW MANY ORDERS SHOULD BE PLACED IN A YEAR?