Inventory Management in

Supply Chains

Prof. Loveraj Takru

 Objectives of Inventory Control
• Assurance of having Items Needed
• Economic Buying

1. Avoiding any likely shortage of material.

2. Avoiding overstocking of materials.
3. Reducing inventory-carrying cost.
4. Providing flexibility to the purchase department to apply appropriate
purchasing policies such as:
(i) taking quantity discounts for lower unit prices
(ii) forward buying in case of cost likely to increase
(iii) to adjust quantity to match with economic lots
(iv) to order full truck load to reduce transportation cost
(v) to adjust quantity conforming to standard packaging requirements
 Inventory Control Techniques

• The total inventory cost has three elements:

1. Cost of inventory purchased during the year.

2. Acquisition cost or cost of ordering.

3. Inventory-carrying cost.
Economic Order Quantity
 Economic Order Quantity
The following symbols are used in the EOQ formula:
• Q is Economic Order Quantity
• Co is Ordering Cost

• Ch is Cost of Holding Inventory (Ch)

• D is Annual Demand

• Q * = √ 2DCo/Ch
 Assumptions made in the use of formula

1. Demand is constant and known.

2. Lead time is constant.

3. Replenishment is instantaneous.
4. There are no quantity discounts.
 Advantages of using the formula

1. The formula substitutes facts in place of judgment. Personal bias is reduced

and the quantity decisions are consistent and in line with the policy.
2. The formula can be used with the help of a computer with minimum effort.
The mathematical method can be relied on more, relieving the buyer of all
the responsibilities with assurance of the correct decisions.
3. The formula can be used without any moderation under stable conditions.
4. The formula provides a useful starting point in cases where the final
determination of the ordering quantity is influenced by price fluctuations,
seasonal factors, advance coverage, and other elements not considered in
the formula.
Reorder Point Model of Inventory Control
 Reorder Point Fluctuations

• Changes in Rate of Consumption

• Maintenance Requirements
• Delivery Schedule Changes
• Bulk Purchasing
• Slab Prices
• Requirement

Other External Factors

• Forward Buying
• Staggered Deliveries
 PURCHASE STRATEGIES

• AGGREGATION
• POOLING
• QUANTITY DISCOUNT
• VOLUME DISCOUNT
• SLAB PRICING
 Some other models

• Fixed Order Interval Model

• Single Period Model

• Inventory is a “Flexibility Buffer”

– Inventory vs. Customer Service: A Trade-Off
 INVENTORY ANALYSIS METHODS

• ABC ANALYSIS
• VED ANALYSIS
• FSN ANALYSIS
Managing Optimal Product
Availability Levels
 Supply Chain Management Methods
• Vendor-Managed Inventory (VMI) Program
• MRP I
• MRP II
• ERP