INVENTORY &

CAPACITY
MANAGEMENT
WHAT IS INVENTORY ?
 Inventory is a stock or store of goods .
 Inventory can also be defined as a stock of
materials created to satisfy eventual
demand.
TYPES OF INVENTORIES:

 Raw materials & purchased parts

 Partially completed goods called
work in progress (WIP)
 Finished-goods inventories (manufacturing
firms)
or merchandise (retail stores)
 Replacement parts, tools, and supplies
 Goods-in-transit to warehouse or customers
(pipeline inventory)
WHAT IS INVENTORY
MANAGEMENT ?
 Inventory management is a core operations
management activity.
 Good inventory management is important for
the successful operation of most businesses
and their supply chains.
 Operations, marketing, and finance have
interests in good inventory management.
 Bad inventory management hampers
operations, diminishes customer satisfaction,
and increases operating costs.
OBJECTIVES OF INVENTORY
MANAGEMENT :
 The basic objective of Inventory Management
has traditionally been to keep inventory at
desired level that will meet product demand
and be cost effective.
 The major objective of Inventory
Management (control system) is to discover
and maintain the best possible level of
inventory in terms of both unit of product
and least possible cost.
INVENTORY COUNTING SYSTEM:

 Periodic System
 Physical count of items in inventory made at
periodic intervals such as weekly, monthly
etc..many small retailers use this approach.
i.e., shelves, stock room etc..
 Perpetual Inventory System(continual
system)
A system that keeps track of removals
from inventory
continuously, thus monitoring current
levels of each item
WHAT IS UPC & RFID ?
 Universal Bar Code (UPC) - Bar code printed
on a label that has information about the
item to which it is attached. i.e.,
supermarkets, discount stores etc..
 Radio frequency Identification (RFID)-
keeping track of inventories throughout a
supply chain is vitally important for inventory
system. i.e. Bar code used via radio waves .
 501- country code
 2345- company code
 67890- product code
 0- control code
BAR CODES FOR SOME
IMPORTANT COUNTRIES:
 USA & CANADA-000-019
 FRANCE – 300-379
 GERMANY- 400-440

 JAPAN-450-459
 RUSSIA-460-469
 TAIWAN-471
 SRI LANKA-479
 SAUDI ARABIA – 628
 ISRAEL-729
 SWEDEN-730-739
 MEXICO-750
 BRAZIL-789-790
 SOUTH KOREA -880
 INDIA-890
 BANGLADESH-894
 PAKISTAN-896
 AUSTRALIA-930-939
 MALAYSIA -955
 CHINA- 690-699
KEY INVENTORY TERMS:

 Lead time: time interval between ordering

and receiving the order
 Holding (carrying) costs: cost to carry an
item in inventory for a length of time,
usually a year
 Ordering costs: costs of ordering and
receiving inventory
 Shortage costs: costs when demand exceeds
supply
IMPORTANT FORMULA’S FOR
INVENTORY CALCULATION:
1.UNIT HOLDING COST = H
2.UNIT ORDERING COST=S
3.TOTAL ORDER QUANTITY = Q
4.ECONOMIC ORDER QUANTITY=EOQ
5.DEMAND=D
6.TOTAL COST=T
7.TOTAL HOLDING COST= Q X H
2
8.TOTAL ORDERING COST= D X S
Q

9.TOTAL COST=( Q X H) + ( D X S )
2 Q
10.EOQ = √2DS
H
PROBLEM
A local distributor for a accessories company
expects to sell approximately 9600
accessories. Annual carring cost is $ 16 per
accessories, and ordering cost is $ 75.
(a) What is the EOQ?
(b) What is the total annual cost if the EOQ
quantity is ordered?
PROBLEM
 Piddling manufacturing assembles local
garments. It purchases 3600 accessories a
year at $ 65 each. Ordering costs are $ 31,
and annual carring costs are 20 percent of
the purchase price.
(a) Compute the optimal quantity
(b) What is the carring cost?
(c) What is the ordering cost?
(d) Calculate the total annual cost ?
WHAT IS QUANTITY DISCOUNT ?
 Quantity discount rate are price reductions
for large orders offered to customers to
induce them to buy in large quantities.
 As prices decrease order of quantities
increase.
The buyer’s goal with quantity discount rate
is to select the order quantity that
minimize total cost in the following
equation where p is unit price:
Total cost = ANNUAL HOLDING COST+ANNUAL
ORDERING COST+PURCHASING COST==( Q X
H) + ( D X S ) + PD 2
Q
PROBLEM
The maintenance department of a large
factory uses about 816 cases of luquid
cleanser annually. Ordering costs are $ 12,
Carring cost are $ 4 per case a year and the
new price schedule indicates that orders of
less than 50 cases will cost $ 20 per case, 50
to 79 cases will cost $ 18 per case, 80 to 99
cases will cost $ 17 per cases and larger
orders will cost $ 16 per case.
RANGE PRICE

1 to 49 $ 20

50 to 79 18

80 to 99 17

100 or more 16
 Determine
(a) the common minimum point for EOQ
(b) the total cost if the feasible minimum point
is on the lowest price range, that is the
optimal order quantity.
(c) the total cost if the feasible minimum point
is in any other price range.
PROBLEM
A manufacturing factory uses 4000
Trimmings a year. Trimmings are priced in
the following table. It costs
approximately $ 30 to prepare an order
and receive it, and carring costs are 40
percent of purchase price per unit on an
annual basis.
RANGE PRICE

1-449 $ 0.90

550-999 $ 0.85

1000 OR MORE $ 0.80

Determine
 (a) the common EOQ
 (b) the total cost if the feasible minimum point
is on the lowest price range, that is the optimal
order quantity.
 (c) the total cost if the feasible minimum point
is in any other price range.