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1. Inventory Management
References:


Cost Management – Strategic for Business
Decisions – 3rd edition, Hilton, Maher & Selto
Operations Management – 5th edition
Robert Russell & Bernard W. Taylor

2. Lecture Outline
Objectives
 Categories of Inventory
 Importance of Accurate Forecasting
 Inventory Costs and examples
 EOQ Model and Computation
 Inventory Management Techniques


3. Objectives


The main objectives of inventory
management are to achieve maximum
efficiency in production and sales with the
minimum
investment in inventory.
It is very difficult to manage each element
of inventory properly due to the following
reasons,
forecasting of demands of
various products, abnormal situations like
strikes, other economic conditions and
different Government policies.

4. Categories of Inventory





Raw materials
Components
Work in process ( Partially completed products)
Finished products
Spares and parts

5. Importance of accurate
forecasting of inventory






Improve customer service in time
Economies of purchase
Economies and in time production
To continue the production in case of natural
disasters and strikes etc.
Reduction of various costs like carrying and
ordering costs
To maintain independence of supply chain

6. Inventory Costs

1.
2.
3.
Once inventory levels have been
established, they become an important input to
the budgeting system. Inventory decisions
involve a delicate balance between three
classes of costs:
Ordering costs
Holding costs
Shortage costs

7. Examples of Inventory Costs



Ordering costs : Time spent in finding
suppliers and expediting orders, Clerical costs
of preparing purchase orders, unloading and
inspection costs.
Holding costs: Costs of storage
space, Security, Insurance
Shortage costs: Lost sales and dissatisfied
customers, Loss of quantity discounts on
purchases, Idle workers.

8. EOQ model of Inventory
management
EOQ refers to the quantity to be purchased
every time so as to minimize the ordering and
holding costs.
EOQ = 2AO/ C
In Taylor Corporation,
A = Annual demand = 4500 units
O = Ordering cost per order = $60
C = Holding cost per unit per annum = $60 *
*( C = $ 1200* 5% = $60)

9. Computation of EOQ for Taylor
Corporation
So EOQ = 2 x 4,500 x 60
60
= 95 units
Annual demands = 4,500 units
Per order = 95 units
So number of orders per annum will be =
4,500/95 = 47.37 = 48 orders
So the Taylor Corporation has to purchase
95 units of distance measuring devices per
order
as per EOQ.

10. Inventory Management
Techniques
Various inventory management techniques are
as follows,
 ABC Analysis
 Determination of EOQ
 Setting of various stock levels
 Review of slow and non-moving items
 Use of control ratios
 Use of perpetual inventory records and
continuous stock verification

11. Prepared by:
END