The document discusses inventory costs, including ordering costs, carrying costs, and shortage costs. It explains that inventory cost is considered by management to determine optimal inventory levels. Ordering costs include procurement wages while carrying costs are storage fees, taxes, insurance, and opportunity costs. Shortage costs arise when stock runs out, like lost time. The document also covers the economic order quantity (EOQ) model, which aims to minimize total inventory costs by finding the ideal order quantity. The EOQ formula balances setup and holding costs.

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Presented By
Dr. Niraj Chaudahri
Assistant Professor,
Sanjivani College of Engineering ,
Dept.of MBA,
Kopargaon
1
Sanjivani College of Engineering, Kopargaon
Department of MBA
www.sanjivanimba.org.in
203- Operation Management
Topic :- Inventory Cost

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Inventory cost
• Inventory cost includes the costs to order and hold
inventory, as well as to administer the related
paperwork. This cost is examined by management as
part of its evaluation of how much inventory to keep
on hand.
• This can result in changes in the order fulfillment rate
for customers, as well as variations in the production
process flow.

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Ordering Costs
• These costs include the wages of the
procurement department and related payroll
taxes and benefits, and possibly similar labor
costs by the industrial engineering staff, in
case they must pre-qualify new suppliers to
deliver parts to the company.
• These costs are typically included in an
overhead cost pool and allocated to the
number of units produced in each period.

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Carrying costs
• Carrying costs are the various costs a business pays for
holding inventory in stock. Examples of carrying costs
include warehouse storage fees, taxes, insurance,
employee costs, and opportunity costs.
• Most of these costs are also included in an overhead cost
pool and allocated to the number of units produced in
each period

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Shortage costs
• Shortage costs are those costs that are
incurred when a business runs out of stock,
including: Time lost when raw materials are
not available. Cost of shrinkage, pilferage
and obsolescence

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Economic order quantity (EOQ)
• Economic order quantity (EOQ) is the ideal
order quantity a company should purchase to
minimize inventory costs such as holding costs,
shortage costs, and order costs. This
production-scheduling model was developed in
1913 by Ford W. Harris.
• Economic order quantity is important because it
helps companies manage their inventory
efficiently.

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Economic order quantity (EOQ) Model
• The EOQ model seeks to ensure that the right
amount of inventory is ordered per batch so a
company does not have to make orders too
frequently and there is not an excess of
inventory sitting on hand. It assumes that
there is a trade-off between inventory holding
costs and inventory setup costs, and total
inventory costs are minimized when both
setup costs and holding costs are minimized.

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Assumptions underlying the EOQ Model
• The cost of the ordering remains constant.
• The demand rate for the year is known and evenly spread
throughout the year.
• The lead time is not fluctuating (lead time is the latency
time it takes a process to initiate and complete).
• No cash or settlement discounts are available, and the
purchase price is constant for every item.
• The optimal plan is calculated for only one product.
• There is no delay in the replenishment of the stock, and
the order is delivered in the quantity that was demanded,
i.e. in whole batch

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EOQ Formula

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EOQ Formula

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EOQ Formula

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EOQ Formula