INVENTORY

• Inventory is a stock or store of goods of the

raw materials, semi-finished goods and also
finished goods.

• concept of under stocking & overstocking.

NATURE & IMPORTANCE OF INVENTORIES

• Help in operations
• Help in customer satisfaction.
• 30% of current assets.
• 90% of working capital.
• ROI…. Reduction in inventory results in
increase in ROI.
 KINDS OF INVENTORY FOR MFG. FIRM

• Raw material & purchased parts

• Partially complete goods called WIP
• Finished goods
• Replacement parts, tools.
• Goods in transit to warehouse or customer.

INVENTORY OF SERVICE FIRMS

• Supplies and equipments
 FUNCTIONS OF INVENTORY
• To meet anticipated customer demand
• To smooth production requirement.
• To decouple operations.
• To protect against stock out.
• To take advantage of order cycle.
• To hedge against price increase.
• To permit operations.
• To take advantage of quality discount.
MEASURES TO JUDGE EFFECTIVE INVENTORY

• Inventory turnover ratio:

how many times a year inventory is sold.
COST OF GOODS SOLD/AVG. INVENTORY

• Days of inventory on hand:

expected number of days of sales that can be
supplied from existing inventory.
 REQUIREMENTS OF EFFECTIVE INVENTORY
SYSTEM
• To keep track of the inventory on hand and on
order.
• A reliable forecast of demand that includes an
indication of possible forecast error.
• Knowledge of lead time & lead time variability.
• Reasonable estimate of inventory holding
cost, ordering cost & storage cost.
 INVENTORY COSTS
• Holding or carrying cost:
cost to carry an item in inventory for a length
of time.
• Ordering cost:
costs of ordering and receiving inventory.
• Storage cost:
costs resulting when demand exceeds the
supply of inventory.
 A-B-C approach
It is the classification approach of the
inventory
…where….

A= very important
B= moderately important
C= least important.
 ECONOMIC ORDER QUANITITY

Economic order quantity is the level of

inventory that minimizes the total inventory
holding costs and ordering costs.
 FORMULAS
• Annual carrying cost= Q/2*H
• Annual ordering cost= D/Q*S
…..where….
Q= order quantity in units.
H= holding cost per units.
D= demand
S= ordering cost.
• Total cost= annual carrying cost + annual ordering
cost
• EOQ =
 ECONOMIC PRODUCTION QUANITITY

ASSUMPTIONS
• Only 1 item is involved.
• Annual demand is known.
• Usage rate is constant.
• Usage occurs continuously.
• The production rate is constant.
• Lead time doesn’t vary.
• No quantity discount.
 QUANTITY DISCOUNT
EFFECTS OF QTY DISCOUNT
• reduced purchase price.
• fewer order that wiill result from buying in
large orders
• increase in carrying cost.
•Minimize total cost. (carrying cost + ordering
cost + purchase price)
 When to order?
REORDER POINT
EOQ model gives the answer of how
much to order but not providing when to
order.

REORDER POINT:
ROP when the quantity on hand of an item
drops to this amount, the item is reorder.
 DETERMINANTS OF THE REORDER POINT
QUANTITY
• The rate of demand ( based on forecast)
• The lead time
• The extent of demand and/or lead time variablity.
• The degree of stock out risk acceptable to
management.
ROP= d*LT
…where…
D= demand rate (unit/day or week)
LT= lead time in days or weeks
 FIXED ORDER INTERVAL MODEL
This model used when orders must be placed
at fixed time intervals. The timing order is set.
HOW MUCH TO ORDER??
• It is depended upon demand. If demand is varying
than order size will vary from cycle to cycle.
REASON FOR USING F.O.I.M.
• Supplier’s policy
• Easy to monitor stocks.
 DETERMINING AMOUNT TO ORDER.

AMOUNT TO ORDER=

expected demand during protection interval

+
Safety stock
-
Amount on hand at reorder time
 SINGLE PERIOD METHOD
Single period model is for ordering of
perishables and other items with limited
useful lives.