3. Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called
work in progress
• Finished-goods inventories
– (manufacturing firms)
or merchandise
(retail stores)
• Replacement Parts, Tools & Supplies
• Goods in Transit – inwards or outwards
4. ECONOMIC ORDER QUANTITY
a THREE WAYS
1 STATEMENT
2 GRAPH
3 FORMULA
b BASIC INFORMATION
1 Annual Requirements 9,600
2 Carrying Cost 3.00 PER UNIT
Cost of funds tied up
Ware-housing, upkeep and security
Insurance
Deterioration, theft and obsolescence
3 Order Cost 225 per order
Cost of preparing purchase order
Locating suppliers
Transportation
Receiving Costs ( Unloading, Inspection & Storage)
5. ANNUAL DEMAND 9,600
ORDERING COST 225
CARRYING COST 3
BY FORMULA
BY GRAPH
BY STATEMENT
2 9,600 225
2 D OC 4,320,000 1,440,000 1,200
EOQ = ---------------------------------------------------
3
CC
3
1,200
carry cost and order cost are equal at EOQ
1,200 3 0.5 1,800
8 225 1,800
CARRYING TOTAL COST per TOTAL
ANNUAL No. of AVERAGE COST CARRYING order RDERING
O
DEMAND Orders STOCK PER UNIT COST COST
TOTAL COST
a b c d e f g h i
Givenassumed a div by bc div by 2 given dxe given bxg f+h
9,600 4 2,400 1,200 3 3,600 225 900 4,500
9,600 8 1,200 600 3 1,800 225 1,800 3,600
9,600 12 800 400 3 1,200 225 2,700 3,900
9,600 16 600 300 3 900 225 3,600 4,500
6. When to Reorder with EOQ
Ordering
• Reorder Point - When the quantity on hand
of an item drops to this amount, the item is
reordered.
– Lead time X consumption per unit of Lead Time
2 weeks X 500 unit per week = 1,000 units
• Safety Stock - Stock that is held in excess of
expected demand due to variable demand rate
and/or lead time.
– Lead Time from alternative source X consumption
per unit of such time.
7. The Inventory Cycle
Profile of Inventory Level Over Time
Q Usage
Quantity rate
on hand
Reorder
point
Time
Receive Place Receive Place Receive
order order order order order
Lead time
8. ABC Classification System
Classifying inventory according to some
measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. important High
A
Annual
C - least important $ value B
of items
Low C
Few Many
Number of Items
9. ABC Classification of Inventory
Items
Percentage of dollar volume 110
100
90
80
70
60
50
40
30
20 A B C
10
0
0
10
20
30
40
50
60
70
80
90
0
10
Percentage of inventory items (SKUs)
10. Inventory Items Listed in
Descending Order of Dollar Volume
Monthly Percent of
Unit cost Sales Dollar Dollar Percent of
Inventory Item ($) (units) Volume ($) Volume SKUs Class
Computers 3000 50 150,000 74 10 A
Entertainment center 2500 30 75,000
Television sets 400 60 24,000
Refrigerators 1000 15 15,000 16 30 B
Monitors 200 50 10,000
Stereos 150 60 9,000
Cameras 200 40 8,000
Software 50 100 5,000 10 60 C
Computer disks 5 1000 5,000
CDs 20 200 4,000
Totals 305,000 100 100
11. Just-In-Time Purchasing
Just-in-time (JIT) purchasing is the purchase
of goods or materials such that a delivery
immediately precedes demand or use.
Companies moving toward JIT purchasing
argue that the cost of carrying inventories
(parameter C in the EOQ model) has been
dramatically underestimated in the past.
12. Just-In-Time Production
Systems
Just-in-time (JIT) production systems take a
“demand pull” approach in which goods are
only manufactured to satisfy customer orders.
13. Major Features of a JIT System
1. Organizing production in manufacturing cells
2. Hiring and retaining multi-skilled workers
3. Emphasizing total quality management
4. Reducing manufacturing lead time and setup time
5. Building strong supplier relationships
14. Rubber & shoe laces
from supplier just
Just-In-Time Processing before manufacture.
100 pairs of Send rubber and
sneakers... shoe laces directly
got it! to the factory.
Instantly materials requirements
Sales Order
are ascertained & purchase order
Received
issued to supplier Goods Manufactured
and shipped to the
clients
Just-in-Time Production means
no inventories of raw materials
or work-in-process or finished
goods.
