Malaviya National Institute of Technology Jaipur (MNIT)

Department Of Mechanical Engineering

(Specialization:- Industrial Engineering)

Presentation
On
Inventory Control
Submitted by:
Submitted to:
Gitesh Karan
Dr. Rajeev Agarwal
2023PIE5377
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S.NO TITLE PAGE NO.

1 Introduction 3

2 Types of Inventory 4

3 INVENTORY MODEL 5

4 Types of Deterministic Model 6

5 Costs in Inventory 7-8

6 When to use Inventory Control 9

7 Model-I Classical EOQ Model 10-12

8 Problem-1 13-15

9 Problem -1 Solution by Excel Solver 16

10 Model –II Economic Production Quantity With Incremental Inventory Build up 17-18

11 Problem-2 19-22

12 Reference 232
 Introduction [1]

• Most businesses must maintain inventory on hand to deal with

uncertainties in demand.
• Too much inventory increases the holding cost of maintaining
inventory in stock (capital, storage, maintenance, and handling), and
too little increases shortage cost (lost sales, disruption in production,
and loss of customer’s goodwill).
• As units are withdrawn from stock, inventory is replenished
periodically by initiating new orders from suppliers, with each new
order incurring a (fixed) setup cost that is independent of the size of
the order.

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 Types of Inventory [1]

Raw materials: These are the resources required in the production or processing
activity of the firm.
Components: Components correspond to items that have not yet reached completion
in the production process. Components are sometimes referred to as subassemblies.
Work-in-process: Work-in-process (WIP) is inventory either waiting in the system
for processing or being processed. Work-in-process inventories include component
inventories and may include some raw materials inventories as well. The level of
work-in-process inventory is often used as a measure of the efficiency of a production
scheduling system.
 Finished goods: Also known as end items, these are the final products of the production
process. During production, value is added to the inventory at each level of the
manufacturing operation, culminating with finished goods.

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 INVENTORY MODEL [2]

Deterministic Model:A deterministic inventory model is one where inventory control is

structured on the basis that all variables associated with inventory are known, predictable and
can be predicted with a fair amount of certainty. Because of this, inventory is counted, tracked,
stocked and ordered according to a stable set of assumptions that largely remain the same.

Probabilistic Model:On the other end of the spectrum is the probabilistic model, which says
that there is generally some degree of uncertainty associated with inventory variables, the
demand pattern in particular. With this model, everything inventory control related is predicated
on the assumption that demand may fluctuate and may not always be predictable.

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Types of Deterministic Model [3]

1. The basic EOQ model

2. The EPQ model
3. The quantity discount model

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 [1]
Costs in Inventory
• Purchasing cost is the price per unit of an inventory item. At times,
the item is offered at a discount if the order size exceeds a certain
amount, which is a factor in deciding how much to order.
• Setup cost represents the fixed charge incurred when an order is
placed. It can also include the cost associated with receiving a
shipment. The cost is fixed regardless of the size of the order
requested or the shipment received.
• Holding cost represents the cost of maintaining inventory in stock. It
includes the interest on capital and the cost of storage, maintenance,
handling, obsolescence, and shrinkage due to fraud or theft.

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Contd…
• Shortage cost is the penalty incurred when stock is out. It includes
potential loss of income, disruption in production, the additional cost
of ordering emergency shipments (usually overnight), and the (hard-
to-estimate) subjective cost of loss in customer goodwill.

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 When to use Inventory Control [5]

• Inventory model is used when we want to get answers of the

following two questions:
1. How much to order?
2. When to order?
• Inventory model also aim to:
1. To minimize cost of inventory
2. To maintain a smooth production o/p

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 Model-I Classical EOQ Model [1]

 Assumptions:
• Average demand is continuous & constant
• Supply LT is constant
• Independence b/w inventory items
• Purchase price and the cost parameters are constant
• The order quantity ,EOQ is equal to the delivery quantities.

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Contd..

K = Setup cost associated with the placement of an order (rupees per order)
h = Holding cost (rupees per inventory unit per unit time)

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Contd…

• Economic order quantity

• Reorder point =d*L

Where,
d=average daily demand
L=lead time

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 Problem-1 [4]

• The John Equipment Company estimates its carrying Cost at 15% and
its ordering cost at $9 per order. The estimated annual requirement is
48,000 units at a price of $4 per unit.
• Find the following:
a) What is the most economical number of units to order?
b) How many orders should be placed in a year?
c) How often should an order be placed?

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Contd…
Formula of EOQ i.e. Note: All costs are in $
Step-1

Step-3

Step-2

Formula for Time between two order i.e

. no. of days in a year /no. of order in year

Formula for no. of order i.e. Demand/EOQ

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Contd…
Final Results

Note: All costs are in $

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Problem -1 Solution by Excel Solver

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Model –II Economic Production Quantity With Incremental Inventory
Build up [4]

Assumptions
1. Only one product is involved.
2. Annual demand is known.
3. The usage rate is constant.
4. Usage occurs continually, but production occurs periodically.
5. The production rate is constant when production is occurring.
6. Lead time is known and constant.
7. There are no quantity discounts.

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Contd…

Where ,
S=Setup cost
D= Demand per year
H= Holding Cost
p=Prodction rate
u= Usage rate
tp CT

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 Problem-2 [4]

• A toy manufacturer uses 48,000 rubber wheels per year for its popular
dump truck series. The firm makes its own wheels, which it can produce
at a rate of 800 per day. The toy trucks are assembled uniformly over the
entire year. Carrying cost is $1 per wheel a year. Setup cost for a
production run of wheels is $45. The firm operates 240 days per year.
Determine the
a. Optimal run size.
b. Minimum total annual cost for carrying and setup.
c. Cycle time for the optimal run size.
d. Run time.

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Contd…
Note: All costs are in $

Step-1 Step-2

Result of step-1

Formula used
Formula used

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Contd…
Step-3 Step-4

Result of step-2

Formula used Formula used

Result of step-3

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Contd…

Step-5

Final Results
Note: All costs are in $

Result of step-4

Formula used

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 Reference
[1] : Hamdy A.Taha,Operation Research:An Introduction ,10th edition(England:Pearson Education
Limited,2017)
[2] :Chan Melanie ,The difference between Deterministic & Probabilistic Inventory Model,UNLEASHED ,19
May 2019, https://www.unleashedsoftware.com/blog/inventory-control-deterministic-vs-probabilistic-models
[3] :William J. Stevenson , Operation Management , 12th edition (New York:McGraw-Hill Education,2015)
[4] : Tamplin True, Economic Oder Quantity (EOQ):Practical Problem and Solution ,Finance Strategists, 03
March 2023,
https://www.financestrategists.com/accounting/cost-accounting/material-costing/economic-order-quantity-eo
q-problems-and-solutions/
[5] : Production and Operation Management, Prof. Rajat Agrawal, Department of Management studies, IIT
Roorkee,NPTEL Lecture

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