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Module 4

Inventory management involves managing accumulations of materials, customers, or information as they flow through processes or networks. This includes inventory held in operations, processes, or supply networks. Inventory is created to compensate for differences in timing between supply and demand. Managing inventory levels optimally requires considering inventory costs like ordering costs, stock-out costs, working capital costs, and storage costs. The economic order quantity (EOQ) model can be used to determine the optimal order quantity that minimizes total inventory costs.

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90 views42 pages

Module 4

Inventory management involves managing accumulations of materials, customers, or information as they flow through processes or networks. This includes inventory held in operations, processes, or supply networks. Inventory is created to compensate for differences in timing between supply and demand. Managing inventory levels optimally requires considering inventory costs like ordering costs, stock-out costs, working capital costs, and storage costs. The economic order quantity (EOQ) model can be used to determine the optimal order quantity that minimizes total inventory costs.

Uploaded by

Gagan Deep Singh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Inventory management

Inventory is a term we use to describe the accumulations of


materials, customers or information as they flow through
processes or networks.

Managing these accumulations is what we call


‘inventory management’.
Examples of inventory held in processes, operations or supply networks
Examples of inventory held in processes, operations or supply networks
Examples of inventory held in processes, operations or supply networks
Examples of inventory held in processes, operations or supply networks
Inventory is created to compensate for the differences in timing between
supply and demand
Inventory costs
1 Cost of placing the order. ( Ordering Cost )
Every time that an order is placed to replenish stock, a
number of transactions are needed which incur costs to the
company.

These include preparing the order, communicating with


suppliers, arranging for delivery, making payment, and
maintaining internal records of the transaction.
Inventory costs
Stock-out costs.
If we misjudge the order-quantity decision and our inventory
runs out of stock, there will be lost revenue (opportunity
costs) of failing to supply customers.

External customers may take their business elsewhere,


internal customers will suffer process inefficiencies.
Inventory costs
Working capital costs.
There will probably be a lag between paying our suppliers and
receiving payment from our customers.

During this time we will have to fund the costs of inventory.

This is called the working capital of inventory. The costs associated


with it are the interest we pay the bank for borrowing it, or the
opportunity costs of not investing it elsewhere.
Inventory costs
Storage costs.

These are the costs associated with physically storing


the goods.

Renting, heating and lighting the warehouse, as well as


insuring the inventory
Inventory profiles

Every time
an order is
Q Q Q Q
placed,

Q items are
ordered
Inventory profiles Demand for the item is then steady and
perfectly predictable at a
rate of D units per month.

D D D D
Inventory profiles The average inventory = Q/2
(because the two shaded areas in Figure
are equal)

Shaded area are equal


Or
(0+Q )/2 = Q/2
Inventory profiles The time interval between deliveries = Q/D
Ex : Q=100 & D=50 ➔ 100/50 = 2 period interval

time interval between deliveries


Inventory profiles : Case-2
The economic order quantity (EOQ)
EOQ ➔ minimizes the total cost of stocking
the item,

Holding cost one


unit in stock for a period of time ( C h )

Order costs of placing an order ( C o ).

Holding costs include :


• working capital costs
• storage costs
Ch➔ Increase constantly

C0➔Decrease as Order Q increases


EOQ Formula

Where :
D = Demand
Co = Ordering Cost
Ch = Holding Cost
Case : AK Cement
A building materials supplier obtains its bagged cement from a
single supplier.

Demand is reasonably constant throughout the year, and last year


the company sold 2,000 tons of this product.

It estimates the costs of placing an order at around £25 each time


an order is placed, and calculates that the annual cost of holding
inventory is 20 per cent of purchase cost.
The company purchases the cement at £60 per ton.

How much should the company order at a time?


Case : AK Cement

Given :

Co = 25
the annual cost of holding inventory
D = 2000
is 20 per cent of purchase cost.
Ch = ? The company purchases the cement
at £60 per ton.
Case : AK Cement

Given :

Co = 25
the annual cost of holding inventory
D = 2000
is 20 per cent of purchase cost.
Ch = 0.2 x 60 The company purchases the cement
at £60 per ton.
Case : AK Cement

Given :

Co = 25
D = 2000
Ch = 0.2 x 60
Case : AK Cement

Given :

Co = 25
D = 2000
Ch = 0.2 x 60
Case : AK Cement

Given :

Co = 25
D = 2000
Ch = 0.2 x 60
CASE : MyTire
A local distributor for a national tire company
expects to sell approximately 9,600 steel-
belted radial tires of a certain size and tread
design next year.

Annual carrying cost is $16 per tire,


and ordering cost is $75.
CASE : MyTire
a. What is the EOQ?

b. How many times per year does the store


reorder?

c. What is the total annual cost if the EOQ


quantity is ordered?
CASE : MyTire

Given :

Co = $75
D = 9600 2 𝑥 9600 𝑥 75
Ch = $16 𝐸𝑂𝑄 =
16

EOQ = 300 tires


CASE : MyTire
b. How many times per year does the store reorder?

Given : EOQ = 300 tires per order

Co = $75 No.of orders per year = 9600 / 300


D = 9600/year
= 32 orders
Ch = $16
CASE : MyTire
b. How many times per year does the store reorder?

Given : EOQ = 300 tires per order

Co = $75 No.of orders per year = 9600 / 300


D = 9600/year
= 32 orders
Ch = $16
CASE : MyTire
b. How many times per year does the store reorder?

Given : EOQ = 300 tires per order

Co = $75 No.of orders per year = 9600 / 300


D = 9600/year
= 32 orders
Ch = $16
c. What is the total annual cost if the EOQ quantity is ordered?
Given : EOQ = 300 = Q
Total cost = Holding cost + Ordering cost
Co = $75
D = 9600/year Total cost = (Q/2)Ch + (D/Q)C0
Ch = $16
Total cost = (300/2)x16 + (9600/300)x75

Total cost = 2400 + 2400


Total cost = $ 4800
c. What is the total annual cost if the EOQ quantity is ordered?
Given : EOQ = 300 = Q
Total cost = Holding cost + Ordering cost
Co = $75
D = 9600/year Total cost = (Q/2)Ch + (No.of orders)C0
Ch = $16
Q/2 = Average inventory held during one period
Total cost = (300/2)x16 + (9600/300)x75

Total cost = 2400 + 2400


Total cost = $ 4800
c. What is the total annual cost if the EOQ quantity is ordered?
Given : EOQ = 300 = Q
Total cost = Holding cost + Ordering cost
Co = $75
D = 9600/year Total cost = (Q/2)Ch + (No.of orders)C0
Ch = $16
Total cost = (300/2)x16 + (32)x75

Total cost = 2400 + 2400


Total cost = $ 4800
c. What is the total annual cost if the EOQ quantity is ordered?
Given : EOQ = 300 = Q
Total cost = Holding cost + Ordering cost
Co = $75
D = 9600/year Total cost = (Q/2)Ch + (No.of orders)C0
Ch = $16
Total cost = (300/2)x16 + (32)x75

Total cost = 2400 + 2400


Total cost = $ 4800
c. What is the total annual cost if the EOQ quantity is ordered?
Given : EOQ = 300 = Q
Total cost = Holding cost + Ordering cost
Co = $75
D = 9600/year Total cost = (Q/2)Ch + (No.of orders)C0
Ch = $16
Total cost = (300/2)x16 + (32)x75

Total cost = 2400 + 2400


Total cost = $ 4800
ABC INVENTORY CLASSIFICATION
Pareto’s law
It implies that roughly 10
to 20 percent of a
company’s inventory
items account for
approximately 60 to 80
percent of its inventory
costs.
These relatively few high-
dollar-volume items are
classified as A items.
ABC INVENTORY CLASSIFICATION
Pareto’s chart : Also known as 80/20 rule
“Fast/Slow/Non moving” (FSN) INVENTORY CLASSIFICATION
“Vital / Essential / Desirable” (VED) INVENTORY CLASSIFICATION
Vendor-managed inventory (VMI) is an inventory
management technique in which a supplier of goods, usually
the manufacturer, is responsible for optimizing the inventory
held by a distributor.

Wal-Mart has mastered VMI and is the company against which


many other organizations benchmark themselves
Introduction to Supply Chain Management ( SCM)
Introduction to Supply Chain Management ( SCM)
Introduction to Supply Chain Management ( SCM)

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