Here are the key inventory levels calculated based on the information provided: (a) Reorder level = Maximum usage x Maximum reorder period A = 75 x 6 = 450 units B = 75 x 4 = 300 units (b) Minimum Level = Reorder level - (Average usage x Average reorder period) A = 450 - (50 x 5) = 150 units B = 300 - (50 x 3) = 100 units (c) Maximum level = Reorder level + Reorder quantity - (Minimum usage x Minimum reorder period) A = 450 + 300 - (25 x 4) = 750 units B = 300 + 500 - (25 x 2) = 600 units (d

1. INVENTORY MANAGEMENT
BPL 361
Prepared by: Yassin W. Kilumbu
Phone No. 0719 313746
Email – kilumbuy@gmail.com

2. Supply chain
• Procurement
• Transportation
• Warehouse mgt
• Distribution
• Material handling
• Selling
• Inventory management and control
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4. An overview of Inventory Management
• All organizations keep inventory. “Inventory” includes a company’s
raw materials, work in process, supplies used in operations, and
finished goods.
• Inventory:
• those stocks or items used to support production and customer service.
• Service level:
• probability (%) that stock will be available to meet demand.
• Inventory management and control is the art or science of controlling the amount
of inventory held in various forms such as RM, FG, MRO, etc within a business
concern to meet economically the demand placed upon that business. It is
concern with what should be ordered, when it should be ordered and how much
of it should be ordered.

5. An overview of Inventory Management
• Stock consists of all the goods and materials that are stored by an
organization. It is a store of items that is kept for future use.
• An inventory is a list of the items held in stock
• An item is a distinct product that is kept in stock: it is one entry in the
inventory.
• A unit is the standard size or quantity of an item

6. An overview of Inventory Management
• Types of Inventory:
• raw materials:
purchased parts used in manufacturing other items
• work-in-process:
parts that are in the manufacturing process
• sub-assemblies:
manufactured parts that are partially completed and
stocked in inventory
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7. An overview of Inventory Management
Types of Inventory
• finished goods:
• Items ready for sale to a customer
• MRO:
• maintenance, repair and operation supplies.
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8. 1.1:Types of inventory
• ABC analysis
• A class items
• B class items
• C class items
• FNS analysis
• Fast moving items
• Normal moving items
• Slow moving items
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9. 1.1:Types of inventory
• Independent demand inventories eg fished goods and spare parts
• Dependent demand inventories eg. Raw materials, subassemblies and
WIP.
Also inventories can be classified as;
• Production materials eg. RM, WIP, FG
• Non-Production materials such as Fuel, MRO, stationanries
• Capital expense items
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10. 1.1:Types of inventory
Moreover, one may classify inventories as;
• Raw materials
• Piece parts
• Bought-out parts
• Equipment and spares
• Tools, Jigs and fixtures
• Work In Progress
• Packing materials
• Scrap and Residual
• Free-issue materials
• General stores
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11. Functions of Inventory
• Functions of inventory:
• safety stocks:
• protect against uncertainties of materials supply and consumer demand
• cycle stocks:
• result from ordering or producing in lots
• transit stocks:
• materials must be moved from one location to another
• speculative stocks:
• expected price increase
• promotional stocks:
• additional inventory accumulated for a promotional event.
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12. Reasons for holding inventory
Predictability:
In order to engage in capacity planning and production scheduling, you
need to control how much raw material, parts, and subassemblies you
process at a given time.
Fluctuations in demand:
A supply of inventory on hand is protection: You don’t always know
how much you are likely to need at any given time, but you still need to
satisfy customer or production demand on time.
Unreliability of supply:
Price protection
Quantity discounts:
Lower ordering costs

13. Reasons for holding inventory
• Reasons for holding inventory:
• Purchased parts:
• variations in supplier lead time
• quantity discounts
• price changes
• scarcities of materials
• Manufactured parts:
• cover period between production runs
• allow flexibility in production scheduling
• variations in product demand (safety stock)
• economies of scale

14. Inventory Costs
• Cost of inventory production and holding:
• order/set-up costs:
• cost of replenishing inventory through changes in the production run for a different item
• includes labor and other associated costs
• carrying costs:
• cost of capital
• insurance costs
• costs of space, staff
• inventory handling, deterioration, damage, obsolescence, insurance
• opportunity costs:
• restriction of other investments that could have been made with the same money
• stock-out costs:
• lost sale
• halted production
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15. Categories of inventory risks
• Obsolescence
• Fashion changing
• Price increase
• Fluctuations in demand or supply
• Deterioration of stock
• Theft
• Diverting cash from some more valuable application
• Exceeding capacity of storage facility
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16. Inventory Management objectives
• Objectives of inventory management:
• minimize costs:
• working capital
• carrying costs
• scrap and rework
• highest level of customer service.
• What is the contribution of purchasing department to the overall
organisation performance? How do you measure it?
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17. 1.8: SUCCESSFUL INVENTORY MANAGEMENT
• Successful inventory management involves balancing the costs of
inventory with the benefits of inventory. Many small business
owners fail to appreciate fully the true costs of carrying inventory,
which include not only direct costs of storage, insurance and taxes,
but also the cost of money tied up in inventory
• This fine line between keeping too much inventory and not enough is
not the manager's only concern. Others include:
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18. 1.8: SUCCESSFUL INVENTORY MANAGEMENT(2)
• Maintaining a wide assortment of stock
• Increasing inventory turnover
• Keeping stock low
• Obtaining lower prices by making volume
• Having an adequate inventory on hand
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19. RELATIONSHIP WITH OTHER DEPARTMENTS-INVENTORY PROBLEM AND
RESOLUTION OF INTER-DEPARTMENT CONFLICTS
•PMU vs production
•PMU vs engineering
•PMU vs sales
•PMU vs transportation
•PMU vs finance
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20. Stockholding policy
• Stock holding policy is an effective business statement that addresses
the needs of controlling/managing item in organization
• Usually involve business reasons and justifications to add any new
item to inventory
• The company should have a stock holding policy to control adding any
new item to the company inventory.
• This policy must be clear and understood by all end-user departments
to avoid the need to hold stock
• The policy should ensure that, all inventory should add value to the
organization success

21. Stockholding policy
The policy should explain the;
Likelihood to use
Consequences of not having item in inventory and
time to deliver
• Based on that, the company should decide to add the item or not
and quantity to keep
• All company departments should understand the purpose of Stock
Holding Policy and participate effectively to keep inventory in
minimum level
• This includes the economical balance between the costs of holding
items in stock VERSUS the consequences of NOT having the item
immediately available when required

22. Stockholding policy
• Benefits of Stock Holding Policy
• Reduce stock holding cost (Calculated as 20% of inventory value).
• Optimize inventory level.
• Utilize warehouse space.
• Utilize warehouse equipment.
• Increase inventory control.
• Increase efficiency and productivity

23. Stockholding policy
• Fail on managing stock policy result on increasing holding cost as
included as follow
►Cost of holding one unit of an item in stock for one period of time.
►Cost incurred in connection with storekeeping function, storage cost
varies widely with the type of materials stored.
►Cost associated with investment in inventory and maintenance of the
investment in storage.

24. Stockholding policy
► Storage cost may include:
Capital costs – opportunity costs
Handling including all movement, special packaging, refrigeration, putting
on pallets, etc.)
Taxes
Insurance
Storage like space cost, rent etc
Shrinkage - decrease in quantity due to, pilferage, thefts, damage or loss
Obsolescence - lost value from shifts in styles, technology or customer
preferences
Deterioration

25. Ordering policy
• Ordering policy
Rule as to when material is to be purchased, such as when stock falls
below minimum inventory level
Inefficiency of controlling the order policy result on increasing ordering
cost
►Cost of replenishing inventory through changes in the production run
for a different item.
►Cost of placing a repeat order for the item.
►Vary directly with the number of orders or setups placed and not
with the size of an order.
►As the number of order increase also ordering/set up cost increase

26. Ordering policy
►Expense of issuing a purchase order
Making requisitions e.g. correspondence and telephone cost
Analyzing vendors e.g. Allowance for staff
Writing purchase orders, e.g. Paper work
Expediting of orders, e.g. Allowance for staff
Receiving and inspection e.g. Unloading, Checking, Testing etc.

27. Inventory level
• Five categories of inventory level
1. Minimum level
2. Maximum level
3. Average stock level
4. Danger level
5. Re-ordering level

28. Inventory level
• Formulas:
Maximum Level of Stock = (Reorder Level + Reorder Quantity) –
(Minimum rate of consumption x Minimum reorder period)
Maximum Level may be alternatively fixed as Safety Stock + Reorder
Quantity or EOQ.
Minimum level of stock = Reorder level – (Average rate of consumption
x Average reorder period)
Reorder level or Ordering level = Maximum rate of consumption ×
Maximum reorder period
Danger level = average consumption x maximum reorder period for
emergency purchase
Average level = (minimum stock level + maximum stock level)/2

29. Examples
Example 1
In organization XAMN has the following information for two components A and B are used as
follows:
• Normal usage 50 units per week each
• Minimum usage 25 units per week each
• Maximum usage 75 units per week each
• Reorder Quantity A 300 units; B 500 units
• Reorder Period A 4 to 6 weeks, B 2 to 4 weeks
• Calculate for each components:
• (a) Reorder level,
• (b) Minimum Level,
• c) Maximum level,
• (d) Average Stock Level.

30. Examples
Example 2
• If the minimum stock level and average stock level of raw material A
are 4,000 and 9000 units respectively, find out its reorder quantity.
Note; Average stock level = Minimum stock level + ½ of Reorder
Quantity

31. Holding & Ordering cost
Cost
Order Quantity (Q)
Ordering Cost
Holding Cost
Total Cost Curve
Q* (Optimal order Quantity)

32. Total inventory cost
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Q - Lot size of the order
H - Average annual
holding cost per unit
D - Annual demand
S - Cost per order
Annual
carrying
cost
Annual
ordering
cost
Total cost = +
Q
2
H
D
Q
S
TC = + -
-
Q/2 = Average inventory
on hand
D/Q = Number of orders
per year

33. INVENTORY ANALYSIS AND THE CONTROL OF STOCK RANGE
• Almost every kind of item has different storage requirement.
• Care must be taken to ensure that the appropriate storage conditions
are provided
• Some items are attractive and susceptible to loss through theft whiles
others need to be kept cool, warm or away from direct sunlight.
• So, stock must be categorized into groups with similar storage needs
and must be given code number for easy identification
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34. Codification
• Process of assigning letters, numbers or both which is used to identify items in a
warehouse or stockyard, eg. A/BG/D, O1.41.22, T649 AHH.
• The system relates to a particular classification, section and items
• Different code number must be given to every item for its identification.
• Hence all items must be classified before they are given code numbers.
• When the process of coding is complete, the list of code numbers, description,
size, etc is published in a document known as stores vocabulary.
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35. 2.2: Coding methods
• Coding by nature of the item (class of the item)
• Coding by end use
• Coding by stores location systems
• Coding by source of supply
• Coding by reference to customer
• Colour coding
• Technical spares code
• Common user items- No need to code them
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36. Advantages of coding
• Avoids repeated use of long descriptive titles
• Accurately identifies all items
• Prevents duplication of items
• Assists standardisation and the reduction of varieties
• Provides a foundation for an efficient purchasing organisation
• Forms a convenient basis for the sorting and recording of documents
• Simplifies mechanical recording
• Is convenient for central analysis of unit storehouse records
• Can be employed as a basis for stock accounts
• Simplifies pricing and costing
• May be used as a storehouse location system
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37. 2.3: advantages of coding
• Avoids repeated use of long descriptive titles
• Accurately identifies all items
• Prevents duplication of items
• Assists standardisation and the reduction of varieties
• Provides a foundation for an efficient purchasing organisation
• Forms a convenient basis for the sorting and recording of documents
• Simplifies mechanical recording
• Is convenient for central analysis of unit storehouse records
• Can be employed as a basis for stock accounts
• Simplifies pricing and costing
• May be used as a storehouse location system
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38. 2.4 : approaches of controlling the range of stock
There are various ways of controlling the stock range which include the
following;
A. Standardisation and variety reduction
B. Identification and elimination of slow moving, obsolete, redundant
etc items
C. Use of stockless buying techniques and
D. Cost – Benefit analysis
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39. A. Standardization and Variety reduction
• Standardisation is a process of reducing the number of varieties of
inventories in stock by adoption of specification for continued use on
all future production or purchase order
• Specification is the process of giving full description of an item or
object which is to be manufactured, bought or reprocessed including
its dimensions, chemical and physical properties etc. so that, basing
on detailed description, the item or object can fit for intended
purpose.
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40. Importance/benefits of specification
• Correct materials can be bought, manufactured or reprocessed.
• Reliable inspection regarding quality can be undertaken on goods
purchased or produced
• Materials bought or produced will be fit for the intended purposes
• Different suppliers will use the same specifications for their
quotations.
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41. Variety reduction
• A process which involves review of items stocked with the intention
of reducing the numbers, types, sizes, grades etc of stocked items.
• Important steps in variety reduction include;
• Determination of the use of each item in stock
• Determine which items have similar properties and thus can be substituted
for each other
• Determine the range of items which should be stocked
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42. Variety reduction
• Decide which items can be safely eliminated
• Draw a clear and complete specification and standards for
the remaining items.
• Thereafter, the stores vocabulary requires amendment in
accordance with the decision reached. Hence new
specifications must be approved.
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43. Advantages of Variety reduction
• Fewer orders are placed
• Less money is tied up in inventory
• Lower administrative cost
• More time for purchasing staff in doing other strategic issues
• Fewer quotations to prepare
• Fewer enquiries to send out and tenders to evaluate
• More effective stores vocabulary use
• Location of materials will be simplified
• Stock levels may be reduced
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44. B. Control of slow moving, obsolete and
redundant items
• There might be a number of items which may not required or used by
the organisation. These items may include;
• Obsolescence items
• Obsolete items
• Redundant/surplus materials
• Scrap
• Dormant inventories
• Dead inventories
• Slow moving items
• waste
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45. Identification of slow moving, obsolete and redundant
items
Most of these items mentioned above can be identified through
• Asking the storekeeper for a list of such items
• Look the movement of inventories on inventory records and list those
with no transaction for about six months
• Compare two consecutive stocktaking lists and check all items whose
stock quantity was about the same.
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46. Elimination of slow moving, obsolete and
redundant items
Then reconcile the resultant lists and you have one cross-checked list of
such unwanted items. Eliminated now by;
• Putting a stop order on each item-make sure that no more is obtained
• Try to use up the surplus materials or sale them
• Purchasing department should get rid of such materials on request.
Suppliers may be asked to take them back at cost, less a small
handling charges
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47. Elimination of slow moving, obsolete and redundant
items
Also, you may eliminate or disposal slow moving, redundant and
obsolescence items by;
• Circulating to other potential users
• Advertising, inviting offers
• Sell by auction
• Sell to a merchant or dealer
• Sell to employees
• Give to charitable organisations
• Recycle
• Dismantle for spares
• Dump
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48. C. Cost-Benefit analysis
Before stocking any item, the costs of doing this should be weighed
against benefits of stocking. These costs may include but not limited
to the following;
• cost of capital
• insurance costs
• costs of space, staff
• inventory handling, deterioration, damage, obsolescence,
insurance
If the costs of stocking are less than thee benefits of stocking,
then stock that item otherwise do not stock
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49. D. Stockless buying techniques
Advantages of stockless buying techniques
• Reduction in buyer’s inventory investment and warehouse space
• Better inventory turnover for the buyer
• Purchase savings in lower prices and paperwork simplification to the
buyer
• The seller will have good relationship with the buyer and long
contract period
• Free warehousing will be provided by the buyer
• The seller will be more flexible in filling shelves than when is required
to meet orders.
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50. Musilim University of Mororgoro (MUM) decides to reduce material handled in the store by carrying out standardization
and verity reduction exercise. Among the items whose varieties need to be reduced are chairs. Currently, two different sizes
are maintained iron chair and wood chair with the annual demand of 9000 and 64,000 chairs respectively.
Every kind of chair is treated as a separate item and ordered strictly on EOQ basis from separate suppliers. MUM wants to
reduce the varieties to only wood chair. Investigation shows that all wood chairs are more portable and most preferred by
students. The cost of placing one order is TZS 100/= and carrying cost per units per year is TZS 2/=.The policy is to
maintain a fixed amount of 100 units for every size as buffer stock regardless of the demand intensity
Required: Determine EOQ, Buffer stock and Total cost saving after variety reduction