NAME AYUSH SRIVASTAVA

ROLL NO. 2314509011

PROGRAMME MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER III
COURSE NAME INVENTORY MANAGEMENT
CODE DSCM304

ASSIGNMENT SET – I
Q.1) Provide a detailed explanation of the Economic Order Quantity (EOQ) Model. What are the
assumptions, limitations, and practical applications in real-world scenarios of EOQ model.

Ans. EOQ Model

The EOQ model is a mathematical formula to compute the optimal order quantity, which minimizes the
total inventory cost, including the ordering cost and the holding cost. It's one of the most valuable tools
for inventory management since it helps businesses balance both of these costs to gain efficiency.

Assumptions- The EOQ model has the following assumptions:

• Constant Demand: The demand for the product is known and does not change over time.

• Constant Lead Time: The time taken to get an order (lead time) is fixed and can be forecasted.

• Constant Ordering Cost: The cost of an order is constant, and it doesn't depend on the order
quantity.

• Constant Holding Cost: The holding cost of one unit of inventory for a specified period is constant.

• No Quantity Discounts: There are no discounts available for ordering larger quantities.

Formula - The EOQ formula is expressed as:

EOQ = √((2DS) / H)

Where:

EOQ: Economic Order Quantity

D: Annual Demand

S: Ordering Cost per Order

H: Holding Cost per Unit per Year

Limitations- Though the EOQ model is a powerful tool, it has its limitations:

• Constant Demand: Real-world demand often fluctuates, making the assumption of constant demand
unrealistic.

• Constant Lead Time: Lead times change with factors such as supplier performance and
transportation delay.

• Constant Costs: The order and holding costs vary due to factors like inflation, supplier negotiations,
and the cost of storing.
 • No Quantity Discounts: No consideration of possible savings when purchasing in large quantities.

• Single Product: Designed for one product and not for a group of products whose demands depend
on one another.

Practical Applications- Despite its limitations, the EOQ model has several practical applications in real
world scenarios

▪ Inventory Management: It helps businesses determine the optimal order quantity to

minimize inventory costs.

• Production Planning: It can be used to schedule production runs to meet demand efficiently.

• Supply Chain Management: It aids in coordinating with suppliers to ensure timely deliveries and
minimize stockouts.

• Buying Decisions: It assists in the optimal determination of order quantities and periodicity.

Q.2 ) What are the components of independent demand inventory system. Discuss its importance along
various industries.

Ans. An independent demand inventory system forms a strategic approach to inventory items whose
demand is not linked directly to that of other items. It is important in businesses in numerous industries to
be able to meet the optimum stock levels that minimize costs, hence giving satisfaction to their customers.

Important parts of independent demand inventory systems

• Demand Forecasting: Accurate demand forecasting forms the crux of an effective inventory
management practice. This is possible only if past history data and market trends coupled with
extraneous factors help businesspersons determine what is likely to be demanded in the near
future.

• Inventory Control: The procedure followed in inventory control mainly comprises monitoring
stock levels and reordering points to obtain an optimal order quantity. These practices include
Economic Order Quantity, also known as EOQ and Reorder Point, abbreviated as ROP.

• Lead Time Management: Lead time is the time taken to receive an order after it has been placed.
Lead time management is critical in inventory management as it ensures timely replenishment of
stock and prevents stockouts.

• Safety Stock: Safety stock is a buffer stock maintained to account for demand variability and
potential supply chain disruptions. It helps prevent stockouts and ensures product availability.

• Order Quantity: The number of units ordered each time is calculated based on factors such as
EOQ calculations, supplier constraints, and storage capacity.

• Reorder Point: The reorder point is the inventory level at which a new order should be placed to
avoid stockouts. It considers factors like lead time demand1 and safety stock.

• Inventory Carrying Cost: This is the cost of holding inventory, including storage, insurance, and
opportunity cost of capital.
 • Ordering Cost: This is the cost incurred in placing and processing an order, including
administrative costs, shipping fees, and handling charges.

Importance Across Industries

Independent demand inventory systems are crucial to several industries because of their impact on
efficiency, customer satisfaction, and bottom-line performance. Some of the most important industries
where such systems play a critical role include the following:

• Retail: Optimizes levels of inventory to meet changing demand patterns, reduces stockouts and
overstock situations, and increases customer satisfaction.

• Manufacturing: Ensures availability of raw materials and components on time, minimizes

production downtime, and optimizes schedules of production.

• Healthcare: Ensure the availability of critical medical supplies with optimum stock levels; prevent
shortages; and optimize costs.

• Automotive: Control inventory of spare parts and accessories; shorten lead times for repair and
maintenance activities; and enhance customer services.

• Electronics: Inventory of electronic components and finished products would be controlled; the
industry could respond quickly to new technological developments; and avoid high obsolescence
costs.

• Efficient independent demand inventory management will yield such benefits for business as
costs reduction, customers are satisfied and increased operational efficiency among other
Q.3 Discuss some of the factors influencing Safety Stock levels. What are some of the methods for setting
safety stock levels?

Ans. Factors Influencing Safety Stock Levels

Safety stock is a form of buffer inventory designed to mitigate uncertainties in demand and supply.
Several factors influence the level of safety stock required:

• Demand Variability: Higher variability in demand necessitates a higher level of safety stock to
accommodate the fluctuations.
• Lead Time Variability: Unpredictable lead times increase the risk of potential stockouts, and thus,
a higher level of safety stock is required.
• Service Level: This is the probability that meets the demand of customers and directly affects the
levels of safety stock. The greater the service level, the higher is the safety stock.
• Cost of Stockout: Cost arising out of stockouts including loss in sales, customer dissatisfaction,
and loss of production will impact the safety stock levels.
• Cost of Holding Inventory: The cost of holding inventory, including storage, insurance, and
financing costs, limits the amount of safety stock that can be economically justified.
• Supplier Reliability: Less reliable suppliers require higher safety stock levels to account for
potential supply disruptions.
• Forecast Accuracy: Less accurate forecasts increase the need for safety stock to cover potential
forecast errors.
• Seasonal Demand: Seasonal demand patterns may affect the safety stock levels since higher
demand periods require more inventory.
• Product Obsolescence: For products with short lifecycles, lower safety stock levels may be
appropriate to avoid excess inventory.
• Economic Conditions: Economic downturns or upturns may affect demand and supply, thus
requiring changes in safety stock levels.

How to Determine Safety Stock Levels

There are several methods that can be used to determine the appropriate safety stock level:
Statistical Methods:

• Standard Deviation Method: This method utilizes historical demand data to compute the standard
deviation of demand. A safety stock level is then calculated based on a desired service level and
the number of standard deviations.
• Service Level Approach: This approach sets a target service level, such as 95% or 99%, and
calculates the corresponding safety stock level using statistical distributions such as the normal
distribution or Poisson distribution.
• Rule of Thumb:
• Fixed Percentage of Demand: Fixed percentage of average demand is added as safety stock. It is
simple but not as accurate as statistical methods.
• Days of Supply: A fixed number of days of supply is maintained as safety stock. This method is
useful for products with relatively stable demand.
• Simulation:This simulation model can be used in the study of a variety of demand and supply
scenarios to analyze what effects varying levels of safety stocks would have on inventory costs
and service levels. The method is more all-encompassing but highly computation-intensive.
ASSIGNMENT SET – II

Q.4) What is Inventory Stratification and what is its importance in managing inventory? What are
the major factors considered in Inventory Stratification?

Ans. a Inventory Stratification

Inventory stratification is a method to classify the inventory items according to their value, importance, or
consumption rate. This makes it possible for businesses to properly prioritize the management of their
inventory and to allocate resources correspondingly. Through inventory stratification, organizations can
identify key items and concentrate on optimizing management.

Importance of Inventory Stratification- Inventory stratification provides several benefits:

• Improved Inventory Control: By categorizing items, businesses can implement more targeted
control measures for high-value or critical items.
• Enhanced Resource Allocation: Stratification helps allocate resources efficiently, ensuring that
high-value items receive the necessary attention and control.
• Reduced Inventory Costs: By focusing on the most valuable items, businesses can reduce holding
costs and minimize the risk of obsolescence.
• Improved Customer Satisfaction: Organizations can better respond to customer demand and
decrease stockouts by focusing on essential items.
• Better Decision Making: Stratification offers the benefit of understanding inventory performance,
and data-driven decisions can be made for continuous improvement.
• Major Factors Used in Inventory Stratification

There are a few considerations when stratifying inventory:

Dollar Value:

• High-Value Items: These items contribute significantly to the overall value of the inventory and
need to be closely monitored and controlled.
• Low-Value Items: These will have a lower impact on total inventory value and thus perhaps may
be less rigorously controlled.

Usage Rate:

• High-Move Items: Demand is extremely high. Needs frequent replacement.

• Low-Move Items: Demand is relatively low. May be susceptible to obsolescence or spoilage.

Criticality:

• Critical Items: These items are crucial in production or customer satisfaction. They need rigorous
control to prevent stockout situations.
• Non-Critical Items: These items are less critical and may have more flexibility in terms of
inventory levels.
Vendor Lead Time:

• Long Lead Time Items: These items have longer lead times and require careful planning to avoid
stockouts.
• Short Lead Time Items: These items have shorter lead times and can be replenished more quickly.
• Product Lifecycle:
New Products: These products may require higher safety stock levels to accommodate uncertainty in
demand.
Mature Products: Their demand patterns are stable and, therefore, may necessitate lower safety stock
levels.
Considering these factors, companies can develop an overall stratification system of inventory that caters
to their specific needs and objectives. This system will help them implement different techniques of
inventory management, such as ABC analysis, VED analysis, and FSN analysis.
 Q.5 ) What are the stages of Food Product Development Process? Discuss some of the strategies for managing
the volume of Product Development Activity in Distribution inventory.

Ans Steps Food Product Development Process

This usually entails the following: an idea generation stage with an appropriate method. Generating of
New Product Ideas from appropriate methods of sources such as through market research, feedback by
the consumers, and others.

• Concept Development - Now, after selecting any appropriate idea, it must get polished as a
detailed concept, followed by specifying product position, target markets and so forth.
• Product Formulation: This stage involves developing the product's formulation, including the
selection of ingredients, recipe development, and nutritional analysis.
• Product Testing: The product is tested for taste, texture, appearance, and other sensory
attributes. Consumer testing is also conducted to gather feedback and identify areas for
improvement.
• Process Development: This stage involves developing the manufacturing process, including
equipment selection, process flow design, and quality control procedures.
• Packaging Development: The design for the packaging is completed keeping in mind shelf life,
product protection, and identity.
• Commercialization: The product launch with production, distribution, and marketing.
• Strategies to control the product development volume

High volume activity can be a challenging affair when dealing with product development. There are a
few strategies for successful handling of the same:

Prioritization:

• Product Portfolio Analysis: Evaluate the potential of each product idea based on market
demand, profitability, and strategic fit.
• Resource Allocation: Prioritize projects according to their strategic importance and allocate
resources accordingly.
Efficient Project Management:

• Project Management Tools: Use project management tools such as Gantt charts and Kanban
boards to track progress and identify bottlenecks.
• Agile Development: Implement agile methodologies to break down projects into smaller, more
manageable tasks and deliver results faster.
Standardization and Modularization:

• Common Modules: Identify modules, which can be used more than once in different products,
thereby saving time and cost in development.
• Standardised Processes: Standardise all the processes of formulation, testing, and packaging.
This will help in having a streamlined process for new product development.
Collaboration and Knowledge Sharing:

• Cross-Functional Teams: Encourage cross-functional teams from the R&D, marketing, and
operations departments to facilitate knowledge sharing and expertise transfer.
• Knowledge Management Systems: Implement systems that capture, share, and disseminate best
practices, lessons learned, and technical knowledge
Outsourcing:
 • Contract Manufacturing: Outsource non-core activities such as manufacturing or packaging to
specialized service providers.
• Third-Party R&D: Partner with external R&D organizations to accelerate product development.
• Through these strategies, food companies can effectively manage a high volume of product
development activity, reduce time to market, and increase their chances of launching successful
products.

Q. 6 Elaborate on the various kinds of Cycle Counting methods in inventory management along with their
significance and application.

Ans - Cycle Counting Methods in Inventory Management

Cycle counting is a physical inventory-taking technique that involves counting a small portion of inventory
each day. This method is more efficient than traditional annual physical inventories, as it allows for timely
identification and correction of inventory discrepancies.

Here are some common cycle counting methods:

1. Fixed Location Cycle Counting

• Description: In this method, specific locations or bins are selected for counting on a predetermined
schedule.
• Relevance: It allows regular scanning at each inventory location to reduce significant gaps.
• Use: Appropriate to be used in warehouse setups with a large number of SKUs and with set up
warehouse locations.
2. Random Location Cycle Counting

• Overview: A particular inventory location is chosen in a random manner to carry out the counting.

• Relevance: It makes potential inventory issues visible, especially those that might not become
apparent through the fixed locations approach.
• Application: Ideal for those with dynamic storage locations or in case of frequent changes in the
stock.

3. ABC Analysis Cycle Counting

• ABC Analysis Cycle Counting

• This technique involves dividing the items to be counted into three categories that are ranked
according to the value of the item and its criticality. More frequent counts are taken of A-class items
than those of B and C classes.
• Significance: The method centers on the more valuable and critical items and gives them priority in
count-taking and management.
• Application: Commonly used in several sectors for focusing on counting efforts of inventory.

4. Cycle Counting by SKU

• Definition: The count is made by SKU or product code.

• Significance: It allows to know the slow-moving and obsolete inventory. This technique is also
useful to minimize the inventory.
 • Application: Useful for those firms which have a huge number of SKUs or which would like to
study the performance of inventory by product.
5. Cycle Counting by Supplier

• Description: Supplier counts the inventory items.

• Importance: The technique may help identify potential supplier performance problems, such as
inconsistent delivery times or product quality problems.
• Use: Useful when a company has a limited number of suppliers or where supplier relationships are
desired to be improved.

Benefits of Cycle Counting:

• The inventory accuracy is enhanced due to regular cycle counting of inventory items.
• This reduces the time and resources required in conducting annual physical inventory counts.
• Better cost control. Accurate inventory data will help in optimizing levels of inventory, reducing
carrying costs, and avoiding stockouts.
• Decision-making is improved by real-time inventory data, enhancing purchasing, production, and
sales decisions.
• Customer satisfaction will be increased as accurate inventory levels satisfy the demand of
customers and avert stockouts.
• By implementing a well-designed cycle counting program, businesses can easily improve their
inventory management practices and achieve operational excellence.