CHAPTER 13:

INVENTORY
MANAGEMENT
THE PROCESS OF ORDERING, STORING, USING, AND SELLING A COMPANY'S
RAW MATERIALS, COMPONENTS, AND FINISHED PRODUCTS.

Marielle Macapagal, Samantha Nicole Malabanan, Janine Sales

WHAT IS INVENTORY?
Inventory is the
accounting of items,
component parts and
raw materials that a
company either uses in
production or sells.
INVENTORY MANAGEMENT
Inventory management is a core operations
management activity. Effective inventory
management is important for the successful
operation of most businesses and their supply
chains. Inventory management impacts
operations, marketing, and finance. Poor
inventory management hampers operations,
diminishes customer satisfaction, and
increases operating costs.
TYPES OF INVENTORY
1. Raw Materials
2. Work-in-process (WIP)
3. Finished goods (FG)
4. Tools and supplies
5. Maintenance and repairs (MRO) inventory
6. Goods-in-transit to warehouse or customers
(pipeline inventory)
INVENTORY FUNCTIONS
Inventories serve a number of
functions such as:
a. Meeting the customer demands.
b. Reducing Lead Time.
c. Managing Production
d. Cost Management
OBJECTIVES OF
INVENTORY CONTROL
To ensure a continuous supply of materials
and stock.
To avoid both overstocking and under-
stocking of inventory.
To maintain the availability of materials
whenever and wherever required in enough
quantity.
To ensure the quality of goods at reasonable
prices.
To maintain a systematic record of inventory.
ABC CLASSIFICATION SYSTEM
A-B-C Approach
Classifying inventory according to
some measure of importance, and
allocating control efforts accordingly

A items (very important)

10 to 20 percent of the number of
items in inventory and about 60 to
70 percent of the annual dollar
value

B items (moderately important)

C items (least important)
50 to 60 percent of the number of
items in inventory and about 10 to
15 percent of the annual dollar
value
HOW MUCH TO ORDER: EOQ
MODELS
Economic order quantity models identify the optimal order quantity
by minimizing the sum if annual costs that vary with order size and
frequency
The basic economic order quantity model
The economic production quantity model
The quantity discount model

BASIC EOQ MODEL

The basic EOQ model is used to find a fixed order quantity that will
minimize total annual inventory costs
ASSUMPTIONS:
Only one product is involved
Annual demand requirements are known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
TOTAL ANNUAL COST
TOTAL COST MINIMIZATION:
 DERIVING EOQ
Using calculus, we take the derivative of the total cost function
and set the derivative (slope) equal to zero and solve for Q.

The total cost curve reaches its minimum where the carrying and
ordering costs are equal
QUANTITY DISCOUNT MODEL
Quantity Discount
Price reduction for larger orders offered to customers to
induce them to buy in large quantities
 WHEN TO REORDER
Reorder Point
When the quantity on hand of an item drops to
this amount, the item is reordered.
Determinants of the reorder point
a. The rate of demand
b. The lead time
c. The extent of demand and/or lead time
variability
d. The degree of stockout risk acceptable to
management
REORDER POINT: UNDER CERTAINTY

Demand or lead time uncertainty creates the possibility that demand will be
greater than available supply
To reduce the likelihood of a stockout, it becomes necessary to carry safety
stock
SAFETY STOCK
Stock that is held in excess of expected demand due to variable demand
and/or lead time
SAFETY STOCK
As the amount of safety
stock carried increases, the
risk of stock out decreases.
This improves customer
service level
Service Level
The probability that
demand will not exceed
supply during lead time
Service level = 100% -
Stock out Risk
HOW MUCH SAFETY STOCK
The amount of safety stock that is appropriate for a given situation
depends upon:
a. The average demand rate and average lead time
b. Demand and lead time variability
c. The desired service level
 REORDER POINT
The ROP based on a normal distribution of lead time demand
REORDER POINT: DEMAND UNCERTAINTY

Note: If only demand is variable, then

REORDER POINT: LEAD TIME UNCERTAINTY

Note: If only lead time is variable, then

OPERATIONS STRATEGY
Improving inventory processes can offer significant
cost reduction and customer satisfaction benefits
Areas that may lead to improvement:
Record keeping - Records and data must be
accurate and up-to-date
Variation Reduction
Lead Variation
Forecast Errors
Lean Operations
Supply Chain Management
REFERENCE/S:
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