INVENTORY

MANAGEMENT
FIANANCIAL MANAGEMENT

PREPAIRED BY; PARAC, MANDY

WHAT IS INVENTORY
MANAGEMENT?
INVENTORY MANAGEMENT
Inventory management is the
supervision of a company’s
inventory, including the processes
for producing, ordering, storing,
and selling products in the market.
This includes managing the
warehousing and processing of
raw materials, components, and
finished products.
 IMPOTANCE OF
INVENTORY MANAGEMENT
Inventory management impacts production,
warehouse costs, and order fulfillment. Having
effective inventory management helps contain costs
and ensure businesses have the correct amount of
stock. It also cuts down on excess inventory.
BENEFITS OF INVENTORY MANAGEMENT

Efficient inventory management can streamline production and fulfillment

processes for a business. Here are some benefits of an inventory management
strategy:

Lower costs and saves Reduce losses to improve

money cash flow
Prevent overspending on Forecast sales trends
warehouse storage Satisfies customers with
Minimize storage needs timely deliveries
INVENTORY MANAGEMENT CHALLENGES

The main challenges in inventory management is keeping too much

inventory that the company is unable to sell, lacking the inventory to fulfill
orders that come in, and not tracking inventory correctly. Here are some
other challenges:

Poor or outdated processes and inventory management

systems
Changes in customer demand as needs and desire change
Difficulty navigating a warehouse to locate specific
products
TYPES OF INVENTORY MANAGEMENT
RAW GOODS
Raw goods are materials used in the
manufacturing of products. Usually, they
appear in the early phases of production.
Raw materials can include metal, plastic,
fabric, or wood that are used to create
finished goods. They may come from one or
more suppliers.
WORK IN PROGRESS (WIP)
WIP is a partially finished product that is
waiting to be completed. WIPs take account
of production costs such as labor, raw
materials, and equipment, which are then
later attributed to cost of goods.
FINISHED GOODS
Finished goods are products that are
available in stock for customers to buy.
When a WIP is complete, it becomes part of
finished goods inventory.
Maintenance, repair, and operations goods
(MRO):
MRO are materials and equipment that are
used in production but do not count as part
of the final product. This may include
personal protective equipment, office and
cleaning supplies, and more.
INVENTORY MANAGEMENT METHODS

JUST IN TIME (JIT) Benefits:

Reduces waste on unnecessary stock
Just-in-time (JIT) inventory management Lower costs by avoiding having unused
aims to maximize efficiency and lower costs goods
by coordinating inventory arrival with the Avoids having more storage space for
start of production. The goal of this method inventory than necessary
is to keep as little inventory on hand as
possible and still meet a high production
volume level for the product's demand. To
have a successful JIT inventory business,
you’ll need proper forecasting of needs and
close relationships with dependable
suppliers.
INVENTORY MANAGEMENT METHODS

Material requirements planning Benefits:

(MRP)
Material requirements planning (MRP) is a
supply planning system that helps
manufacturing businesses determine the
inventory requirements to meet a product’s
demand. MRPs function based on demand
and bill of materials (BOM) by examining the
types of materials needed, the required
amount of each material, and the
manufacturing completion date.
Gives businesses a balanced inventory
Allows businesses to have the right
amount of material for production
Eliminates manual processes, like
looking up past sales and existing
inventory
INVENTORY MANAGEMENT METHODS

Economic order quantity (EOQ) Benefits:

Minimizes storage and holding costs
Economic order quantity (EOQ) is a formula
Helps maintain inventory levels that
used to calculate the optimal order size to
match customer demand
meet demand and stay within budget. EOQ is
Provides specific numbers for how much
useful for any business, large or small, that
inventory to hold
manages inventory. The goal is to reduce the
amount of over-ordering and waste, lower
the cost of storage, and maximize quantity
discounts offered by vendors.
INVENTORY MANAGEMENT METHODS

Economic order quantity (EOQ)

FORMULA:
EOQ = √2xDxK/H

In this formula:
D = The number of units purchased of a particular product per year (annual demand)
O = Order cost per purchase order (order cost)
H = Annual holding cost per unit (holding cost)
INVENTORY MANAGEMENT METHODS

Economic order quantity (EOQ)

James runs an eCommerce store
that sells t-shirts, buying interesting
designs in bulk and holding stock at
a small warehouse.
He sells about 1,000 t-shirts per
year, and calculates that his fixed
order cost per purchase order is
around $1.50. His holding cost per
unit, per year is about $3.
So, putting that into a formula, our
key figures are:
Annual demand in units (D): 1,000
Order cost per purchase order
(S): $1.50
Holding cost (H): $3
INVENTORY MANAGEMENT METHODS

Economic order quantity (EOQ)

If we then put these figures into the economic order quantity formula, the
equation you get is:

EOQ = √2xDxK/H
EOQ = √(2 x 1,000 x $1.50 / $3)
EOQ= ?
INVENTORY MANAGEMENT METHODS

Economic order quantity (EOQ)

EOQ = √2xDxK/H
EOQ = √(2 x 1,000 x $1.50 / $3)
= √3000/3
= √1000
EOQ= 31.6 or 32 t-shirts

If we round that up, we see that James’ ideal order size to minimize his
costs while meeting customer demand is 32 t-shirts.
INVENTORY MANAGEMENT METHODS

Day of sales inventory (DSI) Benefits:

The day sales in inventory (DSI) is a sales Reduce cost from overspending on
monitoring and inventory tracking inventory
measurement tool. The DSI is also called the Effectively manage cash flow
average age of inventory because it Prevent waste from outdated inventory
calculates how long it takes for a business to Helps determine the statistical data for a
sell its inventory and considers how long the company’s inventory management,
current inventory will last. tracking, and sales
INVENTORY MANAGEMENT METHODS

Day of sales inventory (DSI)

FORMULA:
DSI = (Average inventory /Cost of goods sold) x 365

The inventory is the number of products a business has left at the end of the
year. The cost of goods sold is a company’s direct production costs for its
inventory. Cost of Goods Sold (COGS) refers to labor, materials, and other
expenses directly associated with manufacturing a company’s products.
INVENTORY MANAGEMENT METHODS

Day of sales inventory (DSI))

Daniel is the owner of a candle shop. He wants to assess his business’s Days
Sales in Inventory for the previous year. According to company records, the
value of the unsold stock (ending inventory) is $20,000, and the cost of goods
sold is $125,000.
INVENTORY MANAGEMENT METHODS

Day of sales inventory (DSI))

The calculation of DSI can be done as follows:

DSI = (Average inventory/cost of goods sold or sales) x 365

DSI = ($20,000/$125,000)x365
DSI= ?
INVENTORY MANAGEMENT METHODS

Day of sales inventory (DSI))

DSI = (Average inventory/cost of goods sold or sales) x 365

DSI = ($20,000/$125,00)x365
= 0.16 X 365
DSI = 58.4 days

According to this estimate, the “Days Sales in Inventory” is 58.4,

which indicates that the company typically converts its inventory
into cash in 58 (approximately) days or that its inventory will survive,
on average, for 58 days.
THANK YOU
Members:
DELACRUZ, JHEMALYN
GONATO, TREXIE
MARAMARA, ERICA
PARAC, MANDY