UNIT VI

Inventory Management
 Outcome

• Analyze the concept of inventory management and

examine EOQ technique for order placement.
News Analysis December 2
 Nature of Inventory
Inventories are stock of the product a company is manufacturing for
sale and components that make up the product. The various forms in
which inventories exist in a manufacturing company are: raw materials,
work-in-process and finished goods.

Components:
1)raw materials
2)work-in-process
3)finished goods
 Need for Inventories

Maintaining inventories involves tying up of the company’s funds and

incurrence of storage and handling costs. There are three general
motives for holding inventories.

1)Transaction motive

2)Precautionary motive

3)Speculative motive
 MCQ

Inventory holding costs include:

A.Cost of capital tied up

B.Insurance costs

C.Cost of warehousing, obsolescence, deterioration and theft

D.All of the above

 Answer
D. All of the above
 Objectives of Inventory Management
The aim of inventory management, should be to avoid excessive and
inadequate levels of inventories and to maintain sufficient inventory for
the smooth production and sales operations. An effective inventory
management should:

•Ensure a continuous supply of raw materials to facilitate uninterrupted

production

•Maintain sufficient stock of raw materials in periods of short supply and

anticipate price changes
 Contd……
• Maintain sufficient finished goods inventory for smooth
sales operations and efficient customer service

• Minimise the inventory costs

• Control inventory investment by maintaining optimum

inventory
 MCQ

Which of the following is true for Inventory control?

A.Economic order quantity has minimum total cost per order

B.Inventory carrying costs increases with quantity per order

C.Ordering cost decreases with lo size

D.All of the above

 Answer
D. All of the above
 Inventory Management Techniques
Economic order quantity (EOQ) Model
Ordering costs: requisitioning, order placing, transportation,
receiving, inspecting and storing, administration
Carrying costs: warehousing, handling, clerical and staff, insurance,
depreciation and obsolescence
Ordering and Carrying costs trade-off: A = total requirements, O
= order cost, C = carrying cost

2AO
EOQ =
c
 Illustration
The John Sports Inc. purchases tennis balls at $20 per dozen from its
suppliers. The John Sports will sell 34,300 dozens of tennis balls evenly
throughout the year. The total cost to handle a purchase order is $10.
The insurance, property tax and rent for each dozen tennis balls in the
average inventory is $1.40. The company wants a 5% return on
average inventory investment.
1)Compute the economic order quantity.
2)Compute the total annual inventory expenses to sell 34,300 dozens of
tennis balls if orders are placed according to economic order quantity
computed in part 1.
 Solution
1. Economic order quantity
2AO
EOQ =
c

*$0.40 + ($20 × 5/100) = $1.4

2. Total annual inventory expenses to sell 34,300 dozens
of tennis balls:

= Annual ordering cost + Annual holding cost

= (Number of orders × Cost per order) + (Average units × Holding cost
per unit)
= (*49 orders × $10) + [(700/2) × 1.4]
= $490 + $490
= $980

*Number of orders to be placed: 34,300/700 = 49 orders

 Inventory Management Process
a) Explicitly state the inventory policy
b) Create an inventory monitoring cell
c) Management group for controlling purchases
d) Periodic meetings between purchase, materials planning
and production executives
e) Monthly reviews of total inventory at plant/corporate level
f) Identify critical inventory items for closer scrutiny
 MCQ
Pam runs a mail-order business for gym equipment. Annual demand
for the Trico Flexers is 16,000. The annual holding cost per unit is $2.50
and the cost to place an order is $50. What is the economic order
quantity?

A.700

B.800

C.900

D.1000
Answer