Inventory management is art of planning, organising and controlling the storage and flow of material in the organisation. It includes various techniques like Economic Order Quantity, reorder point, minimum level, maximum level etc.

2. Presented By:
Shruti Gupta

3. What is Inventory??
 It refers to the stockpile of products a firm
would sell in future in normal course of
business operations and the components that
makeup the product.
 It includes:
i. Raw material
ii. Work in progress
iii. Finished goods

4. Inventory management
 Successful inventory management involves
creating a purchasing plan that will ensure
that items are available when they are
needed (but that neither too much nor too
little is purchased) and keeping track of
existing inventory and its use.

5. Objectives
 Two counterbalancing parts:
1. To minimise investments in inventory
2. To meet the demand for products by
efficiently organising the production and
sales operations.

6. Costs involved in holding inventory:
 Ordering cost: is the fixed cost of placing and
receiving an order.
 Following costs are included in ordering cost:
i. Preparing a purchase order or requisition
form.
ii. Receiving, inspecting and recording the goods
received to ensure both quantity & quality.

7.  Carrying costs: are variable costs per unit of
holding an item in inventory for a specified
time period.
 It can be divided into two categories:
i. Those that arise due to storing of
inventory: storage, insurance, deterioration,
serving costs.
ii. The opportunity cost of funds

8.  Total cost: is the sum of the ordering cost
and carrying cost. This is compared with the
benefits arising out of inventory to
determine the optimum level of inventory.

9. Benefits of holding inventory:
 Benefits in Purchasing
 Benefits in Production
 Benefits in Work - in – progress
 Benefits in Sales

10. Techniques:
 Classification System: ABC System
It is an inventory management technique
that divides inventory into three categories
of descending importance based on the
rupee investment in each.

11. Inventory Breakdown
Group Number of items
(%)
Inventory value (%)
A 15 70
B 30 20
C 55 10
Total 100 100

12. Order Quantity Problem
 Economic Order Quantity (EOQ) Model
It is the technique for determining optimum
order quantity which is the one that
minimises the total of its order and carrying
costs; it balances fixed ordering cost against
variable carrying cost.

13. Assumptions for EOQ Model:
 Firm knows with certainty the annual usage of a
particular item of inventory.
 Rate at which the firm uses inventory is steady over
time.
 Orders placed to replenish inventory stocks are received
at exactly that point in time when inventories reach
zero.
 Ordering & carrying costs are constant over the range
of possible inventory level being considered.

14. Approaches to illustrate EOQ:
 Trial & Error (Analytical) Approach:
 A firm’s inventory planning period is one year. Its
inventory requirement for this period is 1,600 units.
Assume that its acquisition costs are Rs. 50 per order.
Carrying costs are expected to be Re. 1 per unit per
year.
 Firm can procure inventory in following lots:
(i) 1,600 (ii) 800 (iii) 400 (iv) 200 (v) 100.
which of these is EOQ?

15. 1.Size of order
(units) 1,600 800 400 200 100
2.Number of orders
1 2 4 8 16
3.Cost per order (Rs.)
50 50 50 50 50
4.Total ordering cost
(2×3) (Rs.) 50 100 200 400 800
5.Carrying cost per
unit (Rs.) 1 1 1 1 1
6.Average inventory
(units) 800 400 200 100 50
7.Total carrying cost
(5×6) (Rs.) 800 400 200 100 50
8.Total cost (4+7)
(Rs.) 850 500 400 500 850

16. Mathematical (Shortcut) Approach:
Where
 A = Annual usage of inventory (units)
 B = Buying Cost per Order
 C = Carrying Cost per Order
C
2AB
=EOQ

17.  Using the facts in previous example, we can
find out EOQ as follows:
 EOQ = √2×1,600×50 = 400 units
1

18. Limitations of EOQ Model:
 Assumption of constant consumption &
instantaneous replenishment of inventories are
of doubtful validity.
 Assumption of a known annual demand for
inventories is another limitation.
 There are some computational problems. For
instance formula can give EOQ in fractions,
say, 232.5 units.

19. Order Point Problem:
 Reorder Point: is the point at which to order
inventory expressed equationally as:
Lead time in days × daily usage

20. Safety Stock
 It implies extra inventories that can be
drawn down when actual lead time &/or
usage rates are greater than expected.

21. Illustration
 Two components, A & B are used as
follows:
 Normal usage: 50 units each p.w.
 Minimum usage: 25 units each p.w.
 Maximum usage: 75 units each p.w.
 Re – order quantity: A: 300 units
B: 500 units
Re – order period: A: 4 to 6 weeks
B: 2 to 4 weeks

22. Solution
 Reorder level = (max. usage × max.
delivery time)
 A = 75 × 6 weeks = 450 units
 B = 75 × 4 weeks = 300 units
 Minimum level = reorder level – (normal
usage × avg. delivery time in weeks)
 A = 450 – (50 × 5) = 200 units
 B = 300 – (50 × 3) = 150 units

23.  Maximum level = reorder level – (min. usage ×
min. delivery time) + reorder quantity
 A = 450 – (25 × 4) + 300 = 650 units
 B = 300 – (25 × 2) + 500 = 750 units
 Average stock level = min. level +
(reorder qty./2)
 A = 200 + 300/2 = 350 units
 B = 150 + 500/2 = 400 units