The document discusses key concepts in inventory management including defining inventory as raw materials, work-in-process, and finished goods. It describes different types of inventories like seasonal, decoupling, and safety stock. It also outlines techniques for inventory control like ABC classification and economic order quantity modeling. The concepts of reorder point, safety stock, inventory costs, and quantity discounts are summarized as important aspects of managing inventory levels.

1. Inventory Management
Rajendran Ananda Krishnan
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2. Inventory Management
Inventory- Any idle resource that could be put to some future use.
Inventory- A stock or store of goods
inventory includes raw material, work-in-process, finished goods and
stores and spares.
Institute of Chartered Accountants of India defines inventory in AS2
as
“Inventories as an assets held
- For sale in the ordinary course of business
- In the process of production for such sale
- In the form of materials and supplies to be consumed in the
production process or in rendering services.
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3. Types of inventory
Types of inventory
1. Seasonal Inventory
2. Decoupling inventory
3. Pipe-line Inventory
4. Cyclic Inventory
5. Safety Stock
Others
Raw Materials Inventory
Work in Progress Inventory
Finished Goods Inventory
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4. Inventory Management and control
Inventory Management involves the “Development and
administration of polices , systems and procedures which will
minimize total costs relative to inventory decisions and related
functions such as customer service requirements ,production
scheduling , purchasing and traffic” .
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5. Inventory control Techniques
1. Always better control (ABC) classification.
2. Vital, essential and desirable (VED) classification.
3. Fast moving, slow moving and non-moving (FSN).
4. Economic order quantity (EOQ).
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6. Inventory Cost
 Inventory costs includes ordering cost plus carrying costs.
1. Ordering Costs
2. Carrying Costs
 Capital Costs
 Storage Space Costs
 Inventory Service Costs
 Handling-equipment Costs
 Inventory Risk Costs
3. Out-of-stock Costs or Shortage Cost
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7. Economic Order Quantity
EOQ is the optimal order size at which the total annual cost is the
least.
It is used to identify a fixed order size that will minimize the sum
of the inventory carrying cost and ordering cost.
Assumptions of the basic inventory model
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
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8. Economic Order Quantity
Graphic Presentation of EQQ
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9. The Inventory Cycle
Profile of Inventory Level Over Time
Q Usage
Quantity
rate
on hand
Reorder
point
Receive Place order Receive
order order Safety Stock
Place Receive
order order
Lead time
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10. Safety Stock
Safety Stock - Stock that is held in excess of expected demand due
to variable demand rate and/or lead time.
To meet the uncertainty demand , an additional quantity , known as
safety stock is kept
Higher the uncertainty in demand- Higher safety stock
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11. Safety Stock
Quantity
Maximum probable demand
during lead time
Expected demand
during lead time
ROP
Safety stock
LT Time
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12. Reorder Point
Reorder Point - When the quantity on hand of an item drops to pre
determined amount, the item is reordered
Determinants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stock out risk (safety stock)
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13. Quantity Discounts
• Quantity Discounts are price reductions for large orders offered to
customers to induce them to buy in large quantities
Example- A Chicago surgical supply company publishes the price list
for gauge strips
Order Quantity Price per box
1 to 44 $ 2.00
45 t0 69 $1.70
70 or more $ 1.40
The buyer’s goal with quantity discounts is to select the order quantity
that will minimize
TC= Carrying cost + Ordering cost+ Purchasing cost
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14. Key Inventory Terms
• Lead time: time interval between ordering and receiving the
order
• Holding (carrying) costs: cost to carry an item in inventory for
a length of time, usually a year
• Ordering costs: costs of ordering and receiving inventory
• Shortage costs: costs when demand exceeds supply
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