Inventory management involves determining the appropriate level and types of stocked goods. There are two types of demand: independent demand which is uncertain, and dependent demand which is certain. Effective inventory management requires tracking inventory levels, forecasting demand, and understanding costs like holding, ordering, and shortage costs. The economic order quantity (EOQ) model can be used to determine the optimal order quantity that minimizes total inventory costs. The reorder point is the level at which an item should be reordered, and safety stock is extra inventory held to protect against uncertain demand or lead times.

1. Inventory ManagmentInventory Managment
By-
Poornima Singh Pawar
12-1

2. Inventory managementInventory management
 Inventory management is a science
primarily about specifying the shape and
percentage of stocked goods. It is required at
different locations within a facility or within
many locations of a supply network to
precede the regular and planned course of
production and stock of materials.
12-2

3. 12-3
Independent Demand
A
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
Independent demand is uncertain.
Dependent demand is certain.
Inventory: a stock or store of goods
InventoryInventory

4. 12-4
Inventory ModelsInventory Models
 Independent demand – finished goods, items
that are ready to be sold
 E.g. a computer
 Dependent demand – components of
finished products
 E.g. parts that make up the computer

5. 12-5
Types of InventoriesTypes of Inventories
 Raw materials & purchased parts
 Partially completed goods called
work in progress
 Finished-goods inventories
 (manufacturing firms)
or merchandise
(retail stores)

6. 12-6
Types of Inventories (Cont’d)Types of Inventories (Cont’d)
 Replacement parts, tools, & supplies
 Goods-in-transit to warehouses or
customers

7. 12-7
Functions of InventoryFunctions of Inventory
 To meet anticipated demand
 To smooth production requirements
 To decouple operations
 To protect against stock-outs

8. 12-8
Functions of Inventory (Cont’d)Functions of Inventory (Cont’d)
 To take advantage of order cycles
 To help hedge against price increases
 To permit operations
 To take advantage of quantity
discounts

9. 12-9
Objective of Inventory ControlObjective of Inventory Control
 To achieve satisfactory levels of
customer service while keeping
inventory costs within reasonable
bounds
 Level of customer service
 Costs of ordering and carrying inventory
Inventory turnover is the ratio of
average cost of goods sold to
average inventory investment.

10. 12-10
 A system to keep track of inventory
 A reliable forecast of demand
 Knowledge of lead times
 Reasonable estimates of
 Holding costs
 Ordering costs
 Shortage costs
 A classification system
Effective Inventory ManagementEffective Inventory Management

11. 12-11
Inventory Counting SystemsInventory Counting Systems
 Periodic System
Physical count of items made at periodic
intervals
 Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item

12. 12-12
Inventory Counting SystemsInventory Counting Systems
(Cont’d)(Cont’d)
 Two-Bin System - Two containers of
inventory; reorder when the first is
empty
 Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached 0
214800 232087768

13. 12-13
 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
Key Inventory TermsKey Inventory Terms

14. 12-14
Deriving the EOQDeriving the EOQ
Using calculus, we take the derivative of
the total cost function and set the
derivative (slope) equal to zero and solve
for Q.
Q =
2DS
H
=
2(Annual Demand)(Order or Setup Cost)
Annual Holding Cost
OPT

15. 12-15
 Production done in batches or lots
 Capacity to produce a part exceeds the
part’s usage or demand rate
 Assumptions of EPQ are similar to EOQ
except orders are received
incrementally during production
Economic Production Quantity (EPQ)Economic Production Quantity (EPQ)

16. 12-16
 Only one item is involved
 Annual demand is known
 Usage rate is constant
 Usage occurs continually
 Production rate is constant
 Lead time does not vary
 No quantity discounts
Economic Production QuantityEconomic Production Quantity
AssumptionsAssumptions

17. 12-17
Economic Run SizeEconomic Run Size
Q
DS
H
p
p u
0
2
=
−

18. 12-18
Total Costs with Purchasing CostTotal Costs with Purchasing Cost
Annual
carrying
cost
Purchasing
costTC = +
Q
2
H
D
Q
STC = +
+
Annual
ordering
cost
PD+

19. 12-19
Total Costs with PDTotal Costs with PD
Cost
EOQ
TC with PD
TC without PD
PD
0 Quantity
Adding Purchasing cost
doesn’t change EOQ
Figure 12.7

20. 12-20
When to Reorder with EOQWhen to Reorder with EOQ
OrderingOrdering
 Reorder Point - When the quantity on
hand of an item drops to this amount,
the item is reordered
 Safety Stock - Stock that is held in
excess of expected demand due to
variable demand rate and/or lead time.
 Service Level - Probability that demand
will not exceed supply during lead time.

21.  Too much inventory
 Tends to hide problems
 Easier to live with problems than to
eliminate them
 Costly to maintain
 Wise strategy
 Reduce lot sizes
 Reduce safety stock
Operations StrategyOperations Strategy