Inventory Control Management

A
Project Report
Submitted in partial fulfillment for the award of Under Graduate Degree of
BACHELOR OF ENGINEERING
In
Mechanical Engineering
“INVENTORY CONTROL MANAGEMENT”
Submitted to
Rajiv Gandhi Proudyogiki Vishwavidyalaya
BHOPAL (M.P.)
2016-2017
Department of MechanicalEngineering
SWAMI VIVEKANAND COLLEGE OF ENGINEERING
INDORE, (M.P)
Guide By
Proff. Amit Kumar Kundu
Mech. Engg. Dept.
Student
Gopal Bhargava
(0822ME131038)
Harish Nair
(0822ME131039)
Mayur Patidar
(0822ME131054)
Mukesh Chauhan
(0822ME131058)

Swami Vivekanand College of Engineering,
Indore. (M.P)
CERTIFICATE
This is to certify that Mr.Gopal Bhargava (0822ME131038), Mr.Harish Nair
(0822ME131039), Mr.Mayur Patidar (0822ME131054), Mr.Mukesh Chauhan
(0822ME131058), has completed his project work, titled
“INVENTORY CONTROL MANAGEMENT”
As per the syllabus and has submitted a satisfactory report on this project as a partial
fulfillment towards the degree of
BACHELOR OF ENGINEERING
In
MECHANICAL ENGINEERING
From
RAJIV GANDHI PROUDYOGIKI VISHWAVIDYALAYA, BHOPAL
Guide By Submitted To Principal
Proff. Amit Kumar Dr. Pradeep Patil Dr. R.S. Tare
Kundu
H.O.D.
Mechanical Engg. Dept. Mechanical Engg. Dept. S.V.C.E.,
S.V.C.E., Indore (M.P.) S.V.C.E., Indore (M.P.) Indore (M.P.)

ACKNOWLEDGEMENT
We are thankful to the technical university Rajiv Gandhi Proudyogiki
Vishwavidyalaya, Bhopal for giving us opportunity to convert my theoretical
knowledge into the practical skills through this project.
Any work of this magnitude requires input, efforts and encouragement of people from
all sides. In compiling this project, we have been fortunate enough to get active and
kind cooperation from many people without which my endeavors wouldn't have been a
success. The project work has been made successful by the cumbersome effort of the
faculties.
We express our profound sense of gratitude to Dr. P.K. Dubey, Swami Vivekanand
College of Engineering, and Indore (M.P.) who was involved right from the inception
of ideas to the finalization of the work.
We would like to express our deep gratitude to our project guide Proff. Amit Kumar
Kundu, under whose valuable guidance, for encouraging us regularly and providing us
each and every facility. We were able to execute our project smoothly.
We would like to express a deep sense of gratitude and thank profusely to Head of
Mechanical Engineering, S.V.C.E, Indore (M.P.) Dr. Pradeep Kumar Patil for sincere
& invaluable guidance, suggestions and attitude which inspired me to submit thesis
report in the present form.
Last but not the least; we are grateful to our parents and family members and
colleagues, for their continuous support and encouragement in success of this project.
Gopal Bhargava (0822ME131038)
Harish Nair (0822ME131039)
Mayur Patidar (0822ME131054)
Mukesh Chauhan (0822ME131058)

APPROVAL SHEET
The dissertation work entitled “INVENTORY CONTROL MANAGEMENT”
submitted by Gopal Bhargava (0822ME131038), Harish Nair (082ME131039),
Mayur Patidar (0822ME131054), Mukesh Chauhan (0822ME131058) to the
Swami Vivekanand College Of Engineering Indore is approved as fulfillment for the
award of the “Bachelor of Engineering in Mechanical Engineering” from RGPV,
BHOPAL (M.P.).
Internal Examiner External Examiner
Date: Date:
Director
Swami Vivekanand College Of Engineering,
Indore (M.P.)

CANDIDATE’S DECLARATION
I hereby declare that work which is being presented in the thesis entitled
“INVENTORY CONTROL MANAGEMENT” in partial fulfilment of the
requirement for the award of Degree of Bachelor of Engineering in Mechanical
Engineering to Rajiv Gandhi Proudyogiki Vishwavidyalaya, Bhopal, (M.P.) is an
authentic record of my own work carried out under the guidance of Proff.Amit Kumar
Kundu.
Date:
Place: Indore Gopal Bhargava (0822ME131038)
Harish Nair (0822ME131039)
Mayur Patidar (0822ME131054)
Mukesh Chauhan (0822ME131058)

ABSTRACT
Every organization needs inventory for smooth running of its activities. It serves as a
link between production and distribution processes. The investment in inventories
constitutes the most significant part of current assets and working capital in most of the
undertakings. Thus, it is very essential to have proper control and management of
inventories. The purpose of inventory management is to ensure availability of materials
in sufficient quantity as and when required and also to minimize investment in
inventories. So, in order to understand the nature of inventory management of the
organization, in this project we analyzing different inventory control techniques for
efficient inventory management system.

LIST OF NOTATIONS
Notation Description
Q Order Quantity
Qo Optimal Order Quantity
D Demand
UC Unit Cost
RC Reorder Cost
HC Holding Cost
T Cycle Length
To Optimal Cycle Length
VC Variable Cost Per Unit Time
VCo Optimal Variable Cost Per Unit Time
TC Total Cost Per Unit Time
TCo Optimal Total Cost Per Unit Time
ROL Reorder Level
LT Lead Time

CONTENTS
PARTICULARS PAGE NO.
ACKNOWLEDGEMENT i
APPROVAL SHEET ii
DECLARATION iii
ABSTRACT iv
LIST OF NOTATIONS v
1. INTRODUCTION (1-7)
1.1 Basics of Inventory 2-4
1.2 Objectives of Inventory Control 5
1.3 Benefits of Inventory Control 6
1.4 Limitations of Inventory Control 7
2. LITERATURE REVIEW (8-10)
3. INVENTORY DEFINATIONS 11
4. TYPES OF INVENTORY (12-20)
3.1 Raw Materials 12-13
3.2 Work in Process 14-15
3.3 Finished Goods 16-17
3.4 Transit Inventory 18
3.5 Buffer Inventory 19
3.6 Comparison of types of Inventory 20
5. REASONS TO HOLD INVENTORY (21-22)

6. What is EOQ (23-24)
7. EQUATIONS FOR INVENTORY MANAGEMENT (25-30)
5.1 Economic Order Quantity 25-26
5.2 Model for Known Demand 27-28
5.3 Model for Planned Shortages and Backorders 29
5.4 Sources of Information 30
8. OBSERVATIONS (31-32)
9. CALCULATION (33-42)
9.1 Calculation for 50% Dextrose Solution 33-34
9.2 Calculation for Chlorpheniramine 35-36
9.3 Calculation for Paracetamol 37-38
9.4 Calculation for Ranitidine 39-40
9.5 Calculation for Soframycin 41-42
10. OVERVIEW OF CALCULATION (43-44)
11. REFEREENCES (45-46)

INTRODUCTION
The key decision in manufacturing, retail and some service industry businesses is how
much inventory to keep on hand. Inventory is usually a business’s largest asset. The
instant inventory levels are established; they become an important input to the
budgeting system. Inventory decisions involve a delicate balance between three classes
of costs: ordering costs, holding costs, and shortage costs.
According to the Merriam- Webster Dictionary, Inventory is defined as, “the quantity
of goods or materials on hand”
Inventory is also known as “an itemized list of goods or valuables, with their estimated
worth; specifically, the annual account of stock taken in any business” by the online
Dictionary.Com.

1.1 Basics of Inventory Control
 Item Descriptions
All of your items should have well defined, unique descriptions, for many of
the same reasons that apply to locations. Without good descriptions, people can
become confused about whether or not they have stock on an items, or what
items needs to be ordered. It can also be hard to search for items in reports, or
find similar items when searching your inventory system. Our opinions about
creating good descriptions for your items are a little more firm and we’ll
explain in greater detail later.
 Item Numbers
Item numbers also help uniquely identify items, but one of their greatest
benefits is lost on people who haven’t used a software system to track their
inventory: they serve as a shorthand, or abbreviated item description. When
you are searching your inventory, making transactions, filling orders, filtering
or searching reports, item numbers really come in handy. Instead of typing
descriptions that can be hundreds of characters long, and hard to distinguish at
a glance, most companies can use items numbers of only five or six characters
or numbers in length. It makes it easier to use your inventory software, and
anything that makes something easier, improves the chances that it will get
done.

 Units of Measure
Units of Measure, things like “pcs” “ea” “lbs” “bags” etc... give meaning to
quantities and they belong in their own separate place, outside of descriptions
and the numeric quantity fields. Using well created and consistent units of
measure will make stock levels, shipping quantities, and ordering quantities,
easier to understand.
 A Good Starting Count
Loading data into a new inventory software program is an excellent time to get
a good count of your stock levels. Once you have labeled your locations,
cleaned up your descriptions, created item numbers, and consistent units of
measure, getting a good stock level count will be much easier, faster, and better
organized.
 A Software System that Tracks all Inventory Activity
If you’re reading this, you probably realize that keeping your inventory data
with pen and paper, or on a spreadsheet, just won’t cut it. Good inventory
software will make it easier for you to track your inventory, allow many users
access to it, offer your insight into your inventory activity, and keep an
accurate historical record of what’s happened.

 Creating Policies and Training People about the Entire
Inventory System
The people who work with your stock and use your inventory system are the
most critical element in establishing a pretty good inventory management
system. You must make sure that these people know what to do with items that
are received, taken from stock, reserved for future use, required for production,
or who is responsible for making certain transactions, etc... In some cases this
may only be one or two people, but there’s nothing wrong with writing down
your policies and making sure they get followed. If you or the people you work
with aren’t consistent about the way inventory is handled, it won’t matter what
software you use, you will only experience frustration and failure.

1.2 Objectives of Inventory Control
1) To minimize capital investment in inventory by eliminating excessive stocks;
2) To ensure availability of needed inventory for uninterrupted production and for
meeting consumer demand;
3) To provide a scientific basis for planning of inventory needs;
4) To tiding over the demand fluctuations by maintaining reasonable safety stock;
5) To minimize risk of loss due to obsolescence, deterioration, etc.;
6) To maintain necessary records for protecting against thefts, wastes leakages of
inventories and to decide timely replenishment of stocks.

1.3 Benefits of Inventory Control
Scientific inventory control provides the following benefits:
1) It improves the liquidity position of the firm by reducing unnecessary tying
up of capital in excess inventories.
2) It ensures smooth production operations by maintaining reasonable stocks of
materials.
3) It facilitates regular and timely supply to customers through adequate stocks
of finished products.
4) It protects the firm against variations in raw materials delivery time.
5) It facilitates production scheduling, avoids shortage of materials and
duplicates ordering.
6) It helps to minimize loss by obsolescence, deterioration, damage, etc.
7) It enables the firms to take advantage of price fluctuations through economic
lot buying when prices are low.

1.4 Limitations of Inventory Control
1) Efficient inventory control methods can reduce but cannot eliminate
business risk.
2) The objectives of better sales through improved service to customer;
reduction in inventories to reduce size of investment and reducing cost of
production by smoother production operations are conflicting with each
other.
3) The control of inventories is complex because of the many functions it
performs. It should be viewed as shared responsibilities.

LITERATURE REVIEW
Lead time is defined as the time from the moment the customer places an order to the
moment it is received by the customer. Lead time can be observed in manufacturing
process and supply chain process frequently. Generally it was observed that the supplier
needs some time to fulfill an order after receiving it. This time is known as lead-time.
Every company desires a reduction in time that is consumed to deliver a product in the
market. In business, lead time minimization is normally preferred. In the cases where
customer’s demand is not certain and varies from time to time, to decrease the lead time
becomes very important, since a long lead time can put the companies at a risk of
shortages before the arrival of stock. Liao and Shyu [8] were the first, among those
researchers who initially worked on variable lead time in developing an inventory
model. They developed the model for fix order quantity and normally distributed
demand. For the reduction of lead time the authors developed the model by assuming
that the lead time function can be decomposed into various different components,
which can be reduced up to a predefined minimum duration with the help of piecewise
linear crashing cost functions. In this model they evaluated the optimal value of lead
time and proved that the total cost can be decreased by reducing the lead time. Kim and
Benton [9] presented a stochastic continuous review inventory model in which a linear
relationship between lot size and lead time has been established. In this model they
verified that any business can make considerable savings if one can think about the
impact of lot size on lead time and on the requirement of buffer stock. Lead plays a
very important role in every field related to inventory management. Ouyang et al.
[10] proposed that “By shortening the lead time, one can lower the safety stock, reduce
the loss caused by stock out, improve customer service level, and increase the
competition ability in business.” The shortages are also included in their model. They
assumed that the occurring shortages are partially backlogged and a fraction of demand
during stock out is assumed to be a lost sale. Finally, they concluded that, “When the
distribution of the lead time demand is completely known, a mixture inventory model
with backorders and lost sales can be solved.” Moon and Choi [11] considered, “A
continuous review inventory model with a mixture of backorders and lost sales in

which the order quantity, the reorder point and lead time are decision variables.” The
main objective of this paper was to improve the existing model of Ouyang et al. [10]. In
their model they optimized both the order quantity and the reorder point simultaneously
while in Ouyang’s model the consideration was given only to the optimization of lead
time. An inventory model with complete and partial knowledge of lead time was
developed by Hariga and Ben-Daya [12]. This was a continuous review inventory
model in
which lead time, lot size and reorder point all were considered as the decision
variables.They also proposed, “An inventory control model with variable lead time for
periodic review and base stock inventory policies.” In the later models they also
consider situations of complete and partial knowledge about the lead time demand
distribution. Pan and Yang [13] introduced an inventory model with fixed and variable
lead time for crashing costs considerations. In this paper they stated that, “Inventory
lead time can be shortened at the expense of additional cost. Hence, the variable lead
time can be regarded as a decision variable since it can be decomposed into several
components, each having a crash cost function of the respective reduced lead time.” In
the research associated with this topic the used crash cost functions were related to lead
time only but in the paper of Pan and Yang [13] the lot size and lead time both were
related to crashing cost function. An inventory model with normal demand is first
presented and another model with unknown demand distribution is discussed. Further
Wu and Lin [14] explored an inventory model with lead time under the assumption that
the quantity received at the arrival of stock may be different from the ordered quantity.
In this model they showed that with the help of crashing cost the lead time can be
reduced. They also included the shortages, partial backlogging and the option of
investing in ordering cost reduction in their model. Hsu et al. [15] developed an EOQ
model for the items having a certain expiry date and are deteriorating in nature with
uncertain lead time. In this model demand is taken as seasonal and price sensitive and
shortages are allowed. In this paper supplier’s lead time y is treated as a random
variable depending on the managing cost. The range for the random variable y is given
by Singh and Singh [16] presented a supply chain inventory model for expiring items
with stochastic lead time. This paper is developed with fuzzy ramp type demand. The

occurring shortages are partially backlogged and the rate of backlogging is imprecise in
nature. In this paper the authors stated that “supplier's lead time is a stochastic function
of his managing cost. The extra costs incurred on retailer, due to the uncertain lead time
in terms of shortage costs or lost sales costs are owed by the supplier.” Digiesi et al.
[17] developed a supply lead time 26 uncertainty in an inventory model, but they did
not explain about the available storage space at the time of arrival of stock.

INVENTORY DEFINATIONS
A.) Safety Stock- The second portion of inventory that is held to protect against the
impact of uncertainity.
B.) Base Stock- That portion of inventory that is replenished after it is sold to
customers.

TYPES OF INVENTORY
1. Raw Materials
This type of inventory includes any goods used in the manufacturing process, such as
components used to assemble a finished product. Raw materials may also include
partially finished goods or materials. For example, for an orange juice company,
oranges, sugar and preservatives are raw materials; while for a computer manufacturer,
chips, circuit boards and diodes are raw materials. Inventory items may be classified as
raw materials if the organization has purchased them from an outside company, or if
they are used to make components.
There are two subcategories of raw materials, which are:
 Direct materials.
These are materials incorporated into the final product. For example, this is the wood
used to manufacture a cabinet.
 Indirect materials.
These are materials not incorporated into the final product, but which are consumed
during the production process. For example, this is the lubricant, oils, rags, light bulbs,
and so forth consumed in a typical manufacturing facility.
The cost of raw materials on hand as of the balance sheet date appears in the balance
sheet as a current asset. Raw materials may be aggregated into a single inventory line
item in the balance sheet that also includes the cost of work-in-process and finished
goods inventory.
Raw materials of all types are initially recorded into an inventory asset account with a
debit to the raw materials inventory account and a credit to the accounts payable
account.

When raw materials are consumed, the accounting treatment varies, depending on their
status as direct or indirect materials. The accounting is:
 Direct materials.
Debit the work-in-process inventory account and credit the raw materials inventory
asset account. Or, if the production process is brief, bypass the work-in-process account
and debit the finished goods inventory account instead.
 Indirect materials.
Debit the factory overhead account and credit the raw materials inventory asset
account. At the end of the month, the ending balance in the overhead account is
allocated to the cost of goods sold and ending inventory.
Raw materials may sometimes be declared obsolete, possibly because they are no
longer used in company products, or because they have degraded while in storage, and
so can no longer be used. If so, they are typically charged directly to the cost of goods
sold, with an offsetting credit to the raw materials inventory account.

2. Work-in-Process
Work-in-process inventory items are those materials and parts that are waiting to be
made into something else. These may include partially assembled items that are waiting
to be completed. Work-in-process inventory items may include finished goods that
have not yet been packaged and inspected, as well as raw materials that have moved
from storage to a preassembly area. For example, in an orange juice company, the
oranges may come in to a storage area, where they are raw goods, but once they have
been moved out of the storage area and onto the assembly line for juicing, they become
work-in-process inventory. In a small company, work-in-process goods may be stored
in the same area as raw materials and finished goods.
The formula for WIP is:
Work in process = (operating inventory goods in process + raw materials used during
the period + direct labor during the period + factory overhead for period) - ending
inventory.

HOW IT WORKS (EXAMPLE):
For example, let's assume Company XYZ manufactures widgets. It takes two weeks to
make a widget. On the last day of the month, when Company XYZ "closes the books,”
the company counts its inventory and sees that it has 10,000 widgets. It also has 4,000
partially completed widgets. These 4,000 partially completed widgets are recorded as
work in process on the left-hand side of the balance sheet (that is, they are recorded as
assets).
WHY IT MATTERS:
For obvious reasons, work in process is not worth as much as completed goods, but
they are worth more than raw materials because they have incurred some labor
and overhead.
Changes in the amounts of work in process can be telling. For instance, an increase
suggests an uptick in demand for a company's goods (which is almost always a good
thing for the company's shareholders, though it may also signal that the
company will need capital soon to cope with the growth). In turn, widespread increases
in work in process for an industry or entire economic sector may indicate economic
growth; likewise, decreases may indicate a pending slowdown.

3. Finished Goods
Finished goods are any products that are ready to be shipped out or sold directly to
customers, including to wholesalers and retailers. Finished goods may be waiting in a
storage area or on a shop floor. If the amount of inventory of finished goods increases
faster that the amount of raw goods and work-in-process goods, then production may
need to slow down until more finished goods are sold. In some businesses, goods are
not included in the finished goods inventory until they are sold. For example, in
companies where goods are made to order.
The formula for WIP is:
Finished goods at the end of a period = finished goods at the start of period + finished
goods produced − finished goods sold

Example:
Glucose Labs manufactures glucose for use in medicine. On 1 December 2012, the
company had 5 tons of sucrose (which is a raw material) costing $5,000, during the
month it purchased 200 tons for $220,000, 3 tons remained at the year-end costing
$3,000. Its labor cost amounted to $10,000 while its overheads were $15,000. Work-in-
process inventory on 1 December 2012 was worth $10,000 while the work-in-process
inventory as at 31 December 2012 was $8,000. Finished goods inventory as at 1
December 2012 was $25,000 while cost of goods sold for December amounted to
$240,000. Find the finished goods.
Solution:
Finished goods produced = opening raw materials inventory ($5,000) + raw materials
purchased ($220,000) − closing raw materials inventory ($3,000) + labor ($10,000) +
overheads ($15,000) + opening work in process inventory ($10,000) − closing work in
process ($8,000) = $249,000
Finished goods at the end of a period = finished goods at the start of period ($25,000) +
finished goods produced ($249,000) − finished goods sold ($240,000) = $34,000.

4. Transit Inventory
Transit inventories result from the need to transport items or material from one location
to another, and from the fact that there is some transportation time involved in getting
from one location to another. Sometimes this is referred to as pipeline inventory.
Merchandise shipped by truck or rail can sometimes take days or even weeks to go
from a regional warehouse to a retail facility. Some large firms, such as automobile
manufacturers, employ freight consolidators to pool their transit inventories coming
from various locations into one shipping source in order to take advantage of
economies of scale. Of course, this can greatly increase the transit time for these
inventories, hence an increase in the size of the inventory in transit.

5. Buffer Inventory
As previously stated, inventory is sometimes used to protect against the uncertainties of
supply and demand, as well as unpredictable events such as poor delivery reliability or
poor quality of a supplier's products. These inventory cushions are often referred to as
safety stock. Safety stock or buffer inventory is any amount held on hand that is over
and above that currently needed to meet demand. Generally, the higher the level of
buffer inventory, the better the firm's customer service. This occurs because the firm
suffers fewer "stock-outs" (when a customer's order cannot be immediately filled from
existing inventory) and has less need to backorder the item, make the customer wait
until the next order cycle, or even worse, cause the customer to leave empty-handed to
find another supplier. Obviously, the better the customer service the greater the
likelihood of customer satisfaction.

 Comparison of types of Inventory by Function:-
INPUT PROCESS OUTPUT
Raw Materials Work In Process Finished Goods
Consumables required
for processing. E.g. :
Fuel, Stationary, Bolts
& Nuts etc. required in
manufacturing
Semi-Finished
Production in various
stages, lying with
various departments
like Production, WIP
Stores, QC, Final
Assembly, Paint Shop,
Packing, Outbound
Store etc.
Finished Goods at
Distribution Centers
throughout Supply
Chain
Maintenance
Items/Consumables
Production Waste and
Scrap
Finished Goods in
transit
Packing Materials Rejections and
Defectives
Finished Goods with
Stockiest and Dealers
Local purchased Items
required for production
Spare Parts Stocks &
Bought Out items
Defectives, Rejects and
Sales Returns
Repaired Stock and
Parts
Sales Promotion &
Sample Stocks

REASONS TO HOLD INVENTORY
Most of the organizations have raw material inventory warehouses attached to the
production facilities where raw materials, consumables and packing materials are stored
and issue for production on JIT basis. The reasons for holding inventories can vary
from case to case basis.
1. Meet variation in Production Demand
Production plan changes in response to the sales, estimates, orders and stocking
patterns. Accordingly the demand for raw material supply for production varies
with the product plan in terms of specific SKU as well as batch quantities.
Holding inventories at a nearby warehouse helps issue the required quantity and
item to production just in time.
2. Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various factors like
seasons; festivals etc and past sales data help companies to anticipate a huge
surge of demand in the market well in advance. Accordingly they stock up raw
materials and hold inventories to be able to increase production and rush
supplies to the market to meet the increased demand.
3. Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be cheaper
for the company than buying frequent small lots. In such cases one buys in bulk
and holds inventories at the plant warehouse.

4. Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to changes in
demand and supply in the national or international market, impact of taxes and
budgets etc, the company’s tend to buy raw materials in advance and hold
stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories to take
advantage of the quantity discounts offered by the supplier. In such cases the
savings on account of the discount enjoyed would be substantially higher that of
inventory carrying cost.
5. Reduce Transit Cost and Transit Times
In case of raw materials being imported from a foreign country or from a far
away vendor within the country, one can save a lot in terms of transportation
cost buy buying in bulk and transporting as a container load or a full truck load.
Part shipments can be costlier.
In terms of transit time too, transit time for full container shipment or a full
truck load is direct and faster unlike part shipment load where the freight
forwarder waits for other loads to fill the container which can take several
weeks.
There could be a lot of factors resulting in shipping delays and transportation
too, which can hamper the supply chain forcing companies to hold safety stock
of raw material inventories.
6. Long Lead and High demand items need to be held in Inventory
Often raw material supplies from vendors have long lead running into several
months. Coupled with this if the particular item is in high demand and short
supply one can expect disruption of supplies. In such cases it is safer to hold
inventories and have control.

WHAT IS ECONOMIC ORDER QUANTITY (EOQ)
Economic order quantity (EOQ) is the order quantity of inventory that
minimizes the total cost of inventory management.
The Economic Order Quantity (EOQ) is the number of units that a company should add
to inventory with each order to minimize the total costs of inventory—such as holding
costs, order costs, and shortage costs. The EOQ is used as part of a continuous review
inventory system in which the level of inventory is monitored at all times and a fixed
quantity is ordered each time the inventory level reaches a specific reorder point. The
EOQ provides a model for calculating the appropriate reorder point and the optimal
reorder quantity to ensure the instantaneous replenishment of inventory with no
shortages. It can be a valuable tool for small business owners who need to make
decisions about how much inventory to keep on hand, how many items to order each
time, and how often to reorder to incur the lowest possible costs.
The EOQ model assumes that demand is constant, and that
inventory is depleted at a fixed rate until it reaches zero. At that point, a specific
number of items arrive to return the inventory to its beginning level. Since the model
assumes instantaneous replenishment, there are no inventory shortages or associated
costs. Therefore, the cost of inventory under the EOQ model involves a tradeoff
between inventory holding costs (the cost of storage, as well as the cost of tying up
capital in inventory rather than investing it or using it for other purposes) and order
costs (any fees associated with placing orders, such as delivery charges). Ordering a
large amount at one time will increase a small business's holding costs, while making
more frequent orders of fewer items will reduce holding costs but increase order costs.
The EOQ model finds the quantity that minimizes the sum of these costs.

Expression for Economic Order Quantity (EOQ)
Q = √
2×RC×D
HC
Where,
Q = Order Quantity;
RC = Reorder Cost;
D = Demand;
HC = Holding Cost;

EQUATIONS FOR INVENTORY MANAGEMENT
1. Economic order quantity
Qo = √
2×RC×D
HC
2. Optimal Stock Cycle length
To =
𝑄𝑜
𝐷
3. Variable Cost Per Unit Time
VC =
𝑅𝐶×𝐷
𝑄
+
𝐻𝐶×𝑄
2
4. Optimal Value Of Variable cost per unit time
VCo = HC × Qo
5. Total Cost Per Unit Time
TC = 𝑈𝐶 × 𝐷 + 𝑉𝐶
6. Optimal cost per unit time
TCo = 𝑈𝐶 × 𝐷 + 𝑉𝐶𝑜

7. Change of variable cost moving away from the EOQ
𝑉𝐶
𝑉𝐶𝑜
=
1
2
[
𝑄𝑜
𝑄
+
𝑄
𝑄𝑜
]
8. Reorder Level
ROL = LT × D – n × 𝑄𝑜

 MODEL FOR KNOWN DEMAND
Assumptions of this model are as following –
1. Deterministic demand;
2. Replenishment rate is finite;
3. Consumption rate is constant;
4. Lead time is constant;
5. No shortage is allowed;
6. There is no discount on bulk purchase;
LEAD TIME –
It is time period between placement of order and delivery of order.

Model for finite replenishment rate, P
1. Optimal Order Quantity
Qo = √
2×RC×D
HC
× √
𝑃
P−D
2. Optimal Time Cycle Time
To = √
2×RC
𝐻𝐶×𝐷
× √
𝑃
P−D
3. Optimal Variable Cost
VCo = √2 × 𝑅𝐶 × 𝐻𝐶 × 𝐷 × √
𝑃−𝐷
𝑃
4. Optimal Total Cost
TCo = UC × 𝐷 + 𝑉𝐶𝑜
* Calculation of this project is done on this type of model where replenishment
rate is finite.

 MODEL FOR PLANNED SHORTAGES AND
BACKORDERS
SC = shortage cost per unit per unit time
7. Optimal Oreder Quantity
Qo = √
2×RC×D×(HC+SC)
HC×SC
8. Optimal Amount to be Backordered
So = √
2×RC×D×HC
(SC+HC)×SC
9. Time During Which Demand is Met
T1 =
𝑄𝑜−𝑆𝑜
𝐷
10. Time During Which Demand is Backordered
T2 =
𝑆𝑜
𝐷
11. Cycle Time
T = T1 + T2

 SOURCES OF INFORMATION
Accounting Information
1. Cost of Products Sold = opening stock + net purchases – Closing Stock
2. Value of stock = number of units in stock * unit time
3. Average cost =
Total cost of units
Number of units bought
4. Closing stock = opening stock + purchases –sales
5. Gross profit = sales revenue – cost of units sold

OBSERVATION
Most frequent drugs used locally are:-
1. 50% Dextrose 2. Chlorpheniramine
3. Paracetamol 4. Ranitidine
4. Soframycin

Data required to make calculations are –
 RC (Reorder Cost)
 HC (Holding Cost)
 D (Demand)
 P (Procurement Rate)
 UC (Unit Cost)
Data obtained from medical shop as are –
Sr.No. Drugs UC ( ) Quantity D HC ( ) RC ( ) P
1 50% Dextrose 30.60 500 ml 240 600 6808.8 500
2 Chlorpheniramine 60.00 1 Tab 60 600 3460.8 150
3 Paracetamol 04.00 1 Tab 480 600 1776.0 1000
4 Ranitidine 29.00 1 Tab 180 600 4921.2 450
5 Soframycin 23.64 30 gm 120 600 2640.0 300

CALCULATION
 Calculation for 50% Dextrose Solution –
1. Optimal Order Quantity:-
Qo = √
2×RC×D
HC
× √
𝑃
P−D
Qo = √
2×6808.8×240
600
× √
500
500−240
Qo = 73.80 × 1.386
Qo = 102.286 ≅ 103
2. Optimal Time Cycle Time:-
To = √
2×RC
𝐻𝐶×𝐷
× √
𝑃
P−D
To = √
2×6808 .8
600 ×240
× √
500
500−240
To = 0.307 + 1.386
To = 1.693
3. Optimal Variable Cost:-
VCo = √2 × 𝑅𝐶 × 𝐻𝐶 × 𝐷 × √
𝑃−𝐷
𝑃
VCo = √2 × 6808.8 × 600 × 240 × √
500−240
500
VCo = 44282.438 × 0.7211
VCo = 31932.066

4. Optimal Total Cost:-
TCo = 30.60 × 240 + 31932.066
TCo = 39276.066

 Calculation for Chlorpheniramine –
Qo = √
2×RC×D
HC
× √
𝑃
P−D
Qo = √
2×3460.8×60
600
× √
150
150 −60
Qo = 26.308 × 1.290
Qo = 33.937 ≅ 34
To = √
2×RC
𝐻𝐶×𝐷
× √
𝑃
P−D
To = √
2×3460 .8
600 ×60
× √
150
150−60
To = 0.438 + 1.290
To = 1.728
VCo = √2 × 𝑅𝐶 × 𝐻𝐶 × 𝐷 × √
𝑃−𝐷
𝑃
VCo = √2 × 3460.8 × 600 × 60 × √
150−60
150
VCo = 15785.36 × 0.774
VCo = 12217.868

TCo = 60 × 60 + 12217.868
TCo = 15817.868

 Calculation for Paracetamol –
Qo = √
2×RC×D
HC
× √
𝑃
P−D
Qo = √
2×1776×480
600
× √
1000
1000 −480
Qo = 53.306 × 1.386
Qo = 73.883 ≅ 74
To = √
2×RC
𝐻𝐶×𝐷
× √
𝑃
P−D
To = √
2×1776
600×480
× √
1000
1000 −480
To = 0.111 + 1.386
To = 1.497
VCo = √2 × 𝑅𝐶 × 𝐻𝐶 × 𝐷 × √
𝑃−𝐷
𝑃
VCo = √2 × 1776 × 600 × 480 × √
1000 −480
1000
VCo = 31983.996 × 0.721
VCo = 23030.461

TCo = 4 × 460 + 23030.461
TCo = 24870.461

 Calculation for Ranitidine –
Qo = √
2×RC×D
HC
× √
𝑃
P−D
Qo = √
2×4921.2×180
600
× √
450
450 −180
Qo = 54.338 × 1.290
Qo = 70.096 ≅ 71
To = √
2×RC
𝐻𝐶×𝐷
× √
𝑃
P−D
To = √
2×4921.2
600×180
× √
450
450 −180
To = 0.301 + 1.290
To = 1.591
VCo = √2 × 𝑅𝐶 × 𝐻𝐶 × 𝐷 × √
𝑃−𝐷
𝑃
VCo = √2 × 4921.2 × 600 × 180 × √
450−180
450
VCo = 32603.361 × 0.774
VCo = 25235.001

TCo = 29 × 180 + 25235.001
TCo = 30455.001

 Calculation for Soframycin –
Qo = √
2×RC×D
HC
× √
𝑃
P−D
Qo = √
2×2640×120
600
× √
300
300−120
Qo = 32.496 × 1.290
Qo = 41.919 ≅ 42
To = √
2×RC
𝐻𝐶×𝐷
× √
𝑃
P−D
To = √
2×2640
600×120
× √
300
300 −120
To = 0.270 + 1.290
To = 1.560
VCo = √2 × 𝑅𝐶 × 𝐻𝐶 × 𝐷 × √
𝑃−𝐷
𝑃
VCo = √2 × 2640 × 600 × 120 × √
450 −120
300
VCo = 19497.692 × 1.048
VCo = 20433.581

TCo = 23.64 × 120 + 20433.581
TCo = 23270.381

OVERVIEW OF CALCULATION
Sr.No Drug Qo To VCo TCo
1 50% Dextrose 103 1.693 31932.066 39276.066
2 Chlorpheniramine 34 1.728 12217.868 15817.868
3 Paracetamol 74 1.497 23030.461 24870.461
4 Ranitidine 71 1.591 25235.001 30455.001
5 Soframycin 42 1.560 20433.581 23270.381

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