Inventory Management

Inventory is stock or store of goods

• Raw material
• Work-in-process
• Finished goods

Function of Inventory
• To meet anticipated demand
• To smooth production requirements – seasonal
• To protect against stockouts
• To take advantages of quantity discounts
• To permit operations – about WIP
 Inventory Management
Inventory Costs
• Holding cost
• Ordering cost
• Shortage cost

Material Classification

A Class A: 10-15% contributes 60-70% value

Cost

B Class B: 20-30% contributes 20-30% value

C Class C: 60-70% contributes 5-10% value

Quantity
 Inventory Management
Inventory ordering & usage occur in cycles
Quantity

ROP

Time
LT
 Inventory Management
Economic Order Quantity (EOQ)

EOQ is the order size that minimizes total cost

Assumptions

• Only one product is involved

• Annual demand requirements are known
• Demand is spread evenly
• Lead time does not vary
• No quantity discount
 Inventory Management
Cost Curves
Annual Cost

Total cost

Holding cost

Material cost
Ordering cost
EOQ Order Quantity
 Inventory Management
Cost Calculations
Q
Annual holding cost = H
2
D
Annual ordering cost = S
Q
Q D
Total cost = TC = H + S
2 Q
Q D
Total cost (including material) = TC = H + S + D * P
2 Q

2 DS
For minimum cost, Q=
H
 Inventory Management
Quantity Discount TC is affected by the price
discount on order size

Total cost
Annual Cost

Holding cost

Material cost

Ordering cost
EOQ Order Quantity