INVENTORY MANAGEMENT

CHAPTER 13

REPORTERS: RELLAMA & GUONG

 LECTURE OUTLINE:
• Elements of Inventory
Management
• Inventory Control Systems
• Economic Order Quantity
Models
• Reorder Point, min-max
method,
• Two-bin system, order
cycling method and
• ABC Classification
 Stock of items kept
to meet future
What Is demand

Inventory? Purpose of
inventory
management
• how many units to order
• when to order
Inventory and Bullwhip effect

Supply Chain • demand information is distorted as it moves

awayfrom the end from the end-use customer
• higher safety stock inventories to are stored to

Management
compensate

Seasonal or cyclical demand

Inventory provides independence from

vendors

Take advantage of price discounts

Inventory provides independence between

stages and avoids work stoppages
Inventory and Customers usually
perceive quality
Quality service as availability
Management in the of goods they want when
they want them
Supply Chain
Inventory must be
sufficient to provide
high-quality customer
service in QM
 Types of Inventory

Raw materials Purchased parts and Work-in-process Items being Tools and equipment
supplies (partially transported
completed) products
(WIP)
Two Forms of Demand
• Dependent
Demand for items used to produce final products

(Tires stored at a Goodyear plant are an example

of a dependent demand item)

• Independent
Demand for items used by external customers

(Cars, appliances, computers, and houses are

examples of independent demand inventory
Inventory Costs
• Carrying cost
- cost of holding an item in
inventory

• Ordering cost
- cost of replenishing inventory

• Shortage cost
- temporary or permanent loss of
sales when demand cannot be met
Inventory Control
Systems
• Continuous system (fixed-order-
quantity)
- constant amount ordered when
inventory declines to predetermined
level

• Periodic system (fixed Periodic

system (fixed-time-period)
- order placed for variable amount
after fixed passage of time
Economic Order
Quantity
(EOQ) Models

• The economic order quantity (EOQ)

refers to the ideal order quantity a
company should purchase in order to
minimize its inventory costs.
 Reorder Point

• A reorder point is the

level of inventory at which a business
should place a new order or run the
Reorder point = (daily sales velocity) × (lead time
risk that stock will drop below a
in days) + safety stock
comfortable level, or even down to zero
— leaving customers unhappy and orders
unfulfilled. Usually, ROP refers to
buying inventory to replenish stock.
 Min-Max Method

• The Min/Max inventory method

is a reordering strategy
that sets a trigger to
reorder when the minimum
value is reached. Then it
orders the necessary to
reach the maximum, or the
new stock level following
the order.
Two-bin system

When items in the first bin

have been depleted, an order
is placed to refill or
replace them. The second bin
is then supposed to have
enough items to last until
the order for the first bin
arrives. In short, the first
bin has a minimum of working
stock, and the second bin
keeps reserve stock or
remaining material.
Order Cycling Method

• This method involves taking

an inventory at
predetermined intervals,
such as every 30, 60, or 90
days and then placing orders
to ensure there is
sufficient stock until the
next inventory is taken.
This approach is more apt to
work for companies with
limited inventory as it’s a
time-intensive approach for
companies with larger
inventories.
ABC Classification
• ABC analysis also referred
to as ABC Classification, is
a vital part of
Inventory Management. It
allows business owners to
distinguish the products in
their stock and focus on
managing them based on their
worth. The main objective of
ABC analysis is to make
maximum out of minimum
investment without wasting
any resources or inventory.
REFERENCE:

(OPERATION MANAGEMENT-6TH EDITION BY ROBERTA RUSSELL & BERNARD W. TAYLOR. III)

https://www.netsuite.com/portal/resource/articles/inventory-management/reorder-point-rop.shtml#:~:text
=A%20reorder%20point%20is%20the,buying%20inventory%20to%20replenish%20stock
.

https://supplybrain.ai/en/min-max-inventory-method-advantages-and-disadvantages/#:~:text=The%20M
in%2FMax%20inventory%20method,economic%20order%20quantity%20(EOQ)
.

https://www.oreilly.com/library/view/regression-analysis-with/9781788627306/6bb0d820-6200-4bfe-aa9
1-e7b7ffa2a9c1.xhtml

https://www.investopedia.com/terms/t/two-bin-inventory-control.asp

https://www.optiproerp.com/blog/right-method-for-inventory-control/#:~:text=Order%2DCycling%20Syst
em,the%20next%20inventory%20is%20taken
.

https://www.deskera.com/blog/abc-analysis/#:~:text=Key%20Takeaways%3A-,ABC%20analysis%20is
%20an%20inventory%20classification%20strategy%20that%20categorizes%20the,indicates%20the%2
0least%20essential%20inventory
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