CHAPTER 5: INVENTORY

PLANNING
 Topic 1: Inventory Control

Economic Order Quantity (EOQ)

Q = Order quantity in units

Minimum cost occurs when
i = Annual carrying cost %
carrying costs = ordering costs
c = Unit cost in $
2  A  S
EOQ = A = Annual usage in units
i  c
S = Ordering costs in $/order
Module 2, Section A, Chapter 8 ■ 2 © 2020 APICS Confidential and Proprietary
Topic 2: Inventory Control

Ordering Systems: Order Point System

Order Point = Demand During the Lead Time + Safety Stock
Order Point = (50 Units/Week  2 Weeks) + 100 Units = 200 Units

Module 2, Section A, Chapter 8 ■ 3 © 2020 APICS Confidential and Proprietary

 Topic 1: Inventory Control

Ordering Systems: Periodic Review System

Maximum-Level Inventory = D (T + L) + SS
Order Quantity = Maximum-Level Inventory  Inventory On Hand
D = Demand/unit of time, T = Order interval, L = Lead time, SS = Safety stock

Module 2, Section A, Chapter 8 ■ 4 © 2020 APICS Confidential and Proprietary

Topic 2: Inventory Control

Safety Stock
▪ Inventory retained to protect against
demand and lead time variations.
▪ Set target frequency for use; ± this
frequency is reviewed.
▪ Methods for setting level: fixed
amount, coverage, statistical.
▪ Need to balance cost of safety stock
and cost of stockouts.
▪ To decrease: less frequent orders,
less demand variability, shorter lead
time, more accurate forecasts.
▪ Organizational, regulatory, or industry
requirements may mandate a
minimum level of safety stock.
Module 2, Section A, Chapter 8 ■ 5 © 2020 APICS Confidential and Proprietary
Topic 2: Inventory Control
Service Level
▪ In inventory management,
service level is the expected
probability of not hitting a
stock-out during the next
replenishment cycle or the
probability of not losing sales.
▪
▪ The service level is
determined in a company by
the level of stocks.

▪ 95% service level means

that there's only a 5%
likelihood of stocking-out.
Module 2, Section A, Chapter 8 ■ 6 © 2020 APICS Confidential and Proprietary
Topic 2: Inventory Control

Safety Lead Time

▪ Replenishment orders placed before (or after) normal
order point.
▪ Could result in overstocks.
▪ Can impact bullwhip effect.
▪ Large orders with long lead times, e.g., on container
ships, could result in significant overstocks (or
stockouts).

Module 2, Section A, Chapter 8 ■ 7 © 2020 APICS Confidential and Proprietary

Topic 2: Inventory Control

Methods of Tracking Inventory

Inventory tracking system Improving tracking

Order of steps is important: • Keep it secure.
1. Identify the item by SKU. • Keep it neat.
2. Verify the quantity. • Make labels easily visible
3. Request and get approval and put on everything.
for move or get order. • Use bins and arrangements
4. Execute the inventory to ease counting.
movement. • Treat A, B, C items suitably.
5. Create a record of the • Use technology.
transaction completion.

Module 2, Section A, Chapter 8 ■ 8 © 2020 APICS Confidential and Proprietary

Topic 2: Inventory Control

Methods of Assessing Inventory Accuracy

Periodic Traditional method, requires store shutdown.
Annual count of all items.
Count
Often done by temporary employees.
Disruptive, expensive, error-prone.
Necessary for, e.g., retail.

May Jun July Aug Sep Oct Nov Dec Jan Feb Mar Apr

Cycle Count Count some items each day.

Count all items a set number of times annually.
Count A items more often than B or C items.
Timely correction of errors, no store shutdown.

Module 2, Section A, Chapter 8 ■ 9 © 2020 APICS Confidential and Proprietary