The document discusses inventory management as a critical part of supply chain operations, emphasizing the balance between having enough inventory to meet customer demand without incurring excessive costs. It outlines various cost components, including holding, ordering, and setup costs, while introducing inventory models such as Economic Order Quantity (EOQ) and inventory control techniques like ABC analysis and FIFO/LIFO. Overall, effective inventory management is key to enhancing customer satisfaction while minimizing costs.

2. Inventory is the major source of cost in the supply
chain and also the basis for improving customer
service and enhancing customer satisfaction.
Inventory management refers to the process of storing,
ordering, and selling of goods and services. The discipline also
involves the management of various supplies and processes.
One of the most critical aspects of inventory management is
managing the flow of raw materials from their procurement to
finished products.

3. Excess inventory is a cost burden to industry in terms of
capital tied up, the cost of obsolescence and the cost of
servicing product in the supply chain. However, having the
right amount of inventory to meet customer requirements is
critical. Inventory management is about two things: not
running out, and not having too much.

4. Different Costs of Inventory

5. Inventory costs involve the expenses associated with
purchasing, storing, and managing inventory throughout the
ecommerce supply chain.
The heart of inventory decisions lies in the identification of
inventory costs and optimizing the costs relative to the
operations of the organization. Therefore, an analysis of
inventory is useful to determine the level of stocks. The
resultant stock keeping decision specifies:
•When items should be ordered.
• How large the order should be.
• “When” and “how many to deliver.”

6. Holding (or Carrying)
Costs
It costs money to hold inventory. Such costs are called inventory holding costs
or carrying costs. This broad category includes the costs for storage facilities,
handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and
the opportunity cost of capital. Obviously, high holding costs tend to favour
low inventory levels and frequent replenishment.
There is a differentiation between fixed and variable costs of holding inventory.
Some of the costs will not change by increase or decrease in inventory levels,
while some costs are dependent on the levels of inventory held. The general
break down for inventory holding costs has been Shown in Table 8.1.

8. Cost Of Ordering
Although it costs money to hold inventory, it also costs,
unfortunately, to replenish inventory. These costs are called
inventory ordering costs. Ordering costs have two components:
•One component that is relatively fixed
• Another component that will vary
It is good to be able to clearly differentiate between those ordering
costs that do not change much and those that are incurred each
time an order is placed. The general breakdown between fixed and
variable ordering costs is a follows:

10. Cost Of Ordering
One major component of cost associated with inventory is the cost
of replenishing it. If a part or raw material is ordered from outside
suppliers, and places orders for a given part with its
Supplier three times per year instead of six times per year, the
costs to the organization that would change are the variable costs,
and which would probably not are the fixed costs.

11. Setup (or Production Change) Costs
In the case of subassemblies, or finished products that may be produced
in-house, ordering cost is actually represented by the costs associated with
changing over equipment from producing one item to producing another.
This is usually referred to as setup costs.
Set-up costs reflect the costs involved in obtaining the necessary materials,
arranging specific equipment setups, filling out the required papers,
appropriately charging time and materials, and moving out the previous
stock of materials, in making each different product. If there were no costs
or loss of time associated in changing form one product to another, many
small lots would be produced, permitting reduction in inventory levels and
the resultant savings in costs.

12. The costs that are incurred as result of running out of stock are known
as stock out or shortage costs. As a result of shortages, production as
well as capacity can be lost, sales of goods may be lost, and finally
customers can be lost.
In manufacturing, inventory requirements are primarily derived from
dependent demand, however, in retailing the requirements are basically
dependent on independent demand
Shortage or Stock-out
Costs

13. Inventory Models

14. Inventory models deal with the time at which orders for certain goods
are to be placed, and the quantity of the order
Two Types Of Models
• Economic Order Quantity (EOQ)
• EOQ Model With Purchase Discount
Inventory Models

15. Economic Order Quantity
(EOQ)

16. EOQ is an important technique of inventory management. The EOQ
refers to the optimal order size that will result in the lowest total of
order and carrying cost for an item of inventory given its expected
usage, carrying cost and ordering cost.
By calculating an economic order quantity, The firm attempts to
determine the order size that will minimize the total inventory cost.
Economic Order Quantity

17. EOQ is simple to understand and use but it has several restrictive
assumptions, which are also disadvantages in practice. Even with this
weakness, EOQ is a good point to start understanding Inventory
systems. EOQ assumes:
1. Demand rate is constant, uniform, recurring, and known
2. Lead time is constant and known in advance
3. Price per unit of product is constant; no discounts are given for large
orders
4. Inventory holding cost is based on average inventory
5. Ordering or setup costs are constant
6. All demands will be satisfied; no stock outs are allowed
Economic Order Quantity

18. EOQ Model with Purchase
Discount

19. Because of the per-unit price of the items purchased changes as the
quantity changes, the purchase price must be included in the
calculation of total annual inventory management cost. As the
purchase price changes, the inventory-holding cost also may change
since the investment in inventory is different. Because each discount
category may represent a different inventory holding cost, we must
calculate the EOQ for each discount category.
Steps for calculating EOQ with purchase discount are:
Step 1: Calculate the EOQ using the lowest price. If this EOQ is
feasible, this is the best order quantity, so stop.
Step 2: Solve the EOQ for the next higher price. If this EOQ is
feasible, go to Step 4

20. Step 3: If the EOQ found in Step 2. is not feasible, repeat Step 2. for
the next higher price until a feasible EOQ is found.
Step 4: Calculate the total annual inventory management cost for the
(first) feasible EOQ (found in Step 2.) and for the minimum quantity in
all discount categories that are larger than the feasible EOQ.

21. Inventory Control
Techniques

22. Inventory control involves various techniques for
monitoring how stocks move in a warehouse.
Four popular inventory control methods include:
•ABC analysis;
•Last In, First Out (LIFO) and First In, First Out (FIFO);
•Batch tracking;
•Safety stock.

23. ABC analysis in inventory control classifies stocks based on their
importance, price, and sales volume. These criteria determine the
number of items a company will bring to the market.
Just as its name suggests, it consists of the following categories:
A class – expensive, high-class items with tight controls and small
inventories
B class – average-priced, mid-priority items with medium sales
volume and stocks
C class – low-value, low-cost items with high sales and huge
inventories
Applying the ABC analysis of inventory control allows businesses to
minimize the costs of carrying products while maximizing their stock
returns.
ABC Analysis

24. Both inventory control techniques organize how inventory items move
in and out of the warehouse based on their arrival date. Priority will
depend on the type of products available in the storage facility.
Using the LIFO method, the warehouse puts out the most recent batch
of items to the customers first. Doing so prevents products from going
bad when delivered to the market.
But with the FIFO technique, the warehouse prioritizes older stocks for
processing and shipping. This way, they can keep the products fresh
when the customer receives them.
LIFO and FIFO

25. Batch tracking is also a great way of organizing stock
items in a warehouse facility. In this method, goods of
the same production date and materials are grouped
together. Doing this helps warehouse managers keep
track of the following information:
•Where the items come from
•Where the goods are heading
•When the items might expire
Batch Tracking

26. Safety stock involves having an additional set of goods
on hand as a preventive measure for the market’s
volatility. The amount should be over the average
demand or use of the product.
It acts as a safety net, should customer demand go above
the projected amount. It also covers them for any
uncertainty in supply performance, such as shipping
delays.
Safety Stocks