The document covers inventory management as a crucial aspect of operations management, detailing its importance for business success and customer satisfaction. It discusses different types of inventory, their functions, objectives, and the necessary systems for effective inventory management, including periodic and perpetual inventory systems. Additionally, it presents economic order quantity models to optimize order sizes and describes associated inventory costs.

1. PURCHASE AND MATERIAL
MANAGEMENT ASSIGNMENT
Topic:- Inventory Management
Submitted to :- Dr. Piyush
Kendurkar Sir
Submitted by :- Nancy Tiwari
Roll no :- 74934

2. INTRODUCTION
Inventory management is a core operations
management activity. Good inventory
management is important for the successful
operation of most businesses and their supply
chains. Operations marketing, and finance have
interests in good inventory management.

3. INVENTORY
A stock or store of goods. Firms typically stock
hundreds or even thousands of items in
inventory, ranging from small things such as
pencils, paper clips, screws, nuts, and bolts
to large items such as machines, trucks,
construction equipment, and airplanes,

4. INDEPENDENT VS.
DEPENDENT DEMAND
Independent-demand/items - Items that
are ready to be sold or used. Example:
computers
Dependent-demand items- these are
components of finished products, rather than
the finished products themselves. Example:
Computer components

5. Nature and Importance of
Inventories
• Inventories are a vital part of business.
Not only are necessary for operations,
but they also contribute to customer
satisfaction.
• Inventory decisions in service
organizations can be especially critical.
Hospitals, for example, carry an array of
drugs and blood supplies that might be
needed on short notice.

6. • Raw materials and purchased parts
› Partially completed goods, called work-In-
process (WIP) Example: Body parts of cars.
• Finished—goods inventories (manufacturing
firms) or merchandise (retail stores)
• Tools and supplies
› Maintenance and repairs (MRO) inventory
• Goods—in—transit to warehouses, distributors,
or customers (pipeline inventory)
Different kinds of
inventories

7. Functions of inventory
• To meet anticipated customer demand.
• To smooth production requirements.
• To decouple operations.
• To protect against stockouts. (safety stocks)
• To take advantage of order cycles. (to
minimize purchasing and inventory costs)
• To hedge against price increases.
• To permit operations.
• To take advantage of quantity discounts.

8. Objectives of inventory
control
• To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds.
• Measuresof performance managers can use
to judge the effectiveness of inventory
management:
• Customer satisfaction
• Inventory turnover ( ratio of annual cost of goods
sold to average inventory investment)

9. Requirements for effective
inventory management
• A system to keep track of the inventory on
hand and on order.
• A reliable Forecast ofdemand that includes an
indication of possible Forecast error.
• Knowledge of lead time variability.
• Reasonable estimates of inventory holding cost
and shortage cost.
• A classification system for inventory items.

10. Inventory Counting System
l Periodic Inventory System - a physical count
of items in inventory is made at periodic
intervals (e.g. Weekly, monthly) in order to
decide how much to order of each item.
Perpetual Inventory System —(also known
as a continual system) keeps trackif
removals from inventory on a continuous
basis, so the system cam provide information
on the current level of inventory for each
item.
2

11. Perpetual inventory system
• This system can range from very simple to
very sophisticated.
• A two—bin system, a very elementary system,
which uses two containers for inventory. Batch or
online.
• Batch systems, inventory records are collected
periodically and entered into the system.
• Online systems, the transactions are recorded
immediately.

12. • Supermarkets, discount stores, and
department stores have always been major
users of periodic counting systems.
• Universal product code (UPC) or bar code - bar
code printed on a label that has information about
the item to which is attached.
• RFID (Radio frequency identification tags) are also
used to keep track of inventory in certain
applications
Periodic inventory system

13. Inventory costs
1. Holding or carrying cost
2. Ordering cost
3. Shortage cost

14. • Holding, or carrying cost -Cost to carry
an item in inventory for a length of time,
usually a year.
• Costs include interest, insurance, taxes,
depreciation, obsolescence, deterioration,
spoilage, pilferage, breakage, and
warehousing costs (heat, light, rent,
security), opportunity costs.

15. Ordering Costs
• Ordering costs - Costs of ordering and
receiving inventory.
• They are the costs that vary with the actual
placement of an order. Besides shipping
costs, they include determining how much is
needed, preparing invoices, inspecting goods
upon arrival for quality and quantity, and
moving the goods to temporary storage.

16. Shortage cost
• Shortage costs- Costs resulting when
demand exceeds the supply of inventory;
often unrealized profit per unit.
• These costs can include the opportunity
cost of not making a sale, loss of
customer goodwill, late charges, and
similar costs. Furthermore, if the
shortage occurs in an item carried for
internal use (e.g., to supply an assembly
line), the cost of lost production or
downtime is considered shortage cost.

17. How Much to Order : Economic
Order Quantity Models
1. The basic economic order quantity
model.
2. The economic production quantity
model.
3. The quantity discount model.

18. Basic Economic Order
quantity (EOQ) model
This is the simplest of the three models. It is
used to identify fixed order size that will
minimize the sum of the annual costs of
holding inventory and ordering inventory.

19. Assumptions of the basic
EOQ model
• Only one product is involved.
• Annual demand requirements are known.
• Demand is spread evenly throughout the
year so that the demand rate is reasonably
constant.
• Lead time does not vary.
• Each order is received in a single delivery
• There are no quantity discounts.

20. Economic Production
Quantity (EPQ)
Assumptions of EPQ model:
1. Only oneitem is involved.
2. Annual demand is known.
3. The usage rate is constant.
4. Usage occurs continually, but production
occurs periodically.
5. The production rate is constant.
6. Lead time does not vary.
7. There are no quantity discounts.

21. Quantity Discounts
• These are price reductions for large orders
offered to customers to induce them to buy in
large quantities

22. When to reorder with EOQ
ordering
There are four determinants of the reorder
point quantity:
1. The rate of demand (usually based on a
forecast)
2. The lead time
3. The extent of demand and/or lead time
variability.
4. The degree of stockout risk acceptable to
management.

23. Definition of terms
• 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
and/or lead time.
• Lead time —
time interval between ordering
and receiving the order.
• Point–of–sale (POS) systems— record items at
time of sale.