1 _________________ 3 __________________

___________________ ___________________
E0015 E0015

Inventory Inventory Counting

___________________ Systems ___________________
a stock or store of goods ___________________ Periodic System ___________________
___________________ items in inventory are physically counted at
periodic intervals such as weekly, monthly, ___________________
___________________ ___________________
etc. to determine how much to order
Types of inventories that
manufacturing firms carry: Advantage:

___________________ items are ordered at the same time

resulting to decrease in cost in
___________________
___________________ ___________________
Raw materials processing and shipping orders.
Work-in-process

___________________ ___________________
Finished products Disadvantages:
Replacement parts, tools, and supplies lack of control between inspections;

___________________ ___________________
Goods in transit to warehouse or extra stocks should always be in hand
customers to protect against stock outs
the need to make decisions on the

___________________ quantities to be ordered at each

inspection. ___________________
Inventory Management * Property of STI
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___________________

2 _________________ 4 __________________
___________________ ___________________
E0015 E0015

Inventory Management Inventory Counting

Requirements
___________________ Systems ___________________
1. A system to keep track of the ___________________ Perpetual system ___________________
___________________ ___________________
inventory in hand and on order. removal of items in inventory is monitored
2. A reliable forecast of demand that on a continuous basis so that the system

___________________ ___________________
can provide information on the current level
includes an indication of possible of inventory of each item
forecast error.
3. Knowledge of lead times and lead
time variability.
___________________ batch system
inventory records are collected
___________________
4. Reasonable estimates of
inventory holding costs,
___________________ periodically and then entered into the
system ___________________
ordering costs, and shortage
costs.
___________________ on-line system ___________________
___________________ ___________________
transactions are recorded
instantaneously
5. A classification system for
all items have universal

___________________ ___________________
inventory items. product code or
bar code

Inventory Management * Property of STI

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 5 _________________ 7 __________________
___________________ ___________________
E0015 E0015

Inventory Counting Classification System

Systems ___________________ ___________________
Perpetual system ___________________ A-B-C Approach
a qualitative technique of inventory ___________________
___________________ ___________________
monitoring that aims to divide all of a
Advantage: companys inventories into 3 groups (A, B,
C) based on the overall inventory value of

___________________ ___________________
there is control due to continuous
monitoring the items
the quantity to be ordered is fixed

Disadvantages:
___________________
added costs on record keeping
physical count of the items must still be
___________________
done to verify records
___________________
___________________
___________________
Group A
items account for a major portion of the
___________________
inventory costs
Group B
___________________
represent the moderately important
items
___________________
Group C ___________________
___________________
very low-cost items and need only a
very simple inventory policy

Inventory Management * Property of STI

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___________________

6 _________________ 8 __________________
___________________ ___________________
E0015 E0015

Costs Information Economic Order

___________________ Quantity ___________________
Holding or Carrying Costs
costs incurred in carrying the items in
___________________ ___________________

inventory for a period of time
examples:
___________________ Basic assumptions:
___________________
depreciation
deterioration
- obsolescence
- pilferage
___________________

Demand is known and constant.
Lead time is known and constant.
___________________
spoilage - utilities ___________________ Receipt of inventory is instantaneous. ___________________
___________________ ___________________
rent - security Quantity discounts are not possible.
There must be a single product involved.

___________________ ___________________
Ordering costs
costs incurred in the ordering and receiving
of inventory
___________________ ___________________
___________________ ___________________
Shortage costs
incurred when demand exceeds the supply

___________________ ___________________
of inventory

Inventory Management * Property of STI Inventory Management * Property of STI

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 9 _________________ 11 _________________
___________________ ___________________
E0015 E0015

Inventory Usage Over

Developing the EOQ
Time ___________________ ___________________
___________________ ___________________
___________________ Total annual cost (TC) =
Q
2
D
H+ S
Q
___________________
___________________ ___________________
___________________ Optimum / economic order
=
2DS ___________________
___________________ ___________________
quantity (Qo) H

___________________ =
Qo ___________________
___________________ ___________________
Length of order cycle
D

___________________ ___________________
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10 ________________ 12 _________________
___________________ ___________________
E0015 E0015

Developing the EOQ Developing the EOQ

___________________ ___________________
Annual carrying cost =
Q
H ___________________ Annual
Cost
___________________
___________________ ___________________
2
Where:

Q = order quantity in units ___________________ Total Cost Curve

___________________
___________________ ___________________
H = holding (carrying) cost per unit
Minimum
Cost Carrying (holding)

___________________ ___________________
D Cost Curve
Annual ordering cost = S
Q

Where:
___________________ Ordering (set-up)
___________________
D = demand, usually in units per year
S = ordering costs
___________________ Cost Curve
___________________
Q = order quantity in units
___________________ Optimum Order Quantity ___________________
Inventory Management * Property of STI
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 13 ________________ 15 _________________
___________________ ___________________
E0015 E0015

Developing the EOQ ROP in EOQ

___________________ ___________________
Example 1:
___________________ Example 2: ___________________
The local distributor of Philippine made ___________________ The office of Mr. Diaz ___________________
___________________ ___________________
furniture plan to sell 540 rattan chairs of a Consumes 4 reams of paper
certain design. Annual carrying cost is P150
per unit, and ordering cost is P1,450. The in a month. The reams of paper are

___________________ ___________________
distributor operates 288 days a year. delivered to his office by the supplier 2
weeks after the order is called in. At

___________________ ___________________
a. Determine the EOQ. what point should Mr. Diaz reorder?
b. Find how many times per year does the
store reorder.
c. Find the length of an order cycle. ___________________ ___________________
d. Calculate the total annual cost
if the EOQ quantity is ordered. ___________________ ___________________
___________________ ___________________
Inventory Management * Property of STI
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14 ________________ 16 _________________
___________________ ___________________
E0015 E0015

ROP in EOQ ROP in EOQ

___________________ ___________________
Four determinants of the ROP quantity: ___________________ ___________________
1. The rate of demand based from forecast. ___________________ Optimal
order ___________________
___________________ ___________________
2. The lead time. quantity Usage rate (D)
3. The lead time variability. = Units/Day

Inventory Level (Units)

4. The degree of stockout risk acceptable to
management. ___________________ ___________________
ROP quantity when demand and lead time
___________________ ROP ___________________
___________________ ___________________
are constant (Units)

___________________ ___________________
ROP = d x LT

Where:

___________________ ___________________
L
d = demand rate (per day or week) Lead Time (Days)

___________________ ___________________
LT = lead time in days or weeks

Inventory Management * Property of STI Inventory Management * Property of STI

Page 14 of 36 Page 16 of 36
 17 ________________ 19 _________________
___________________ ___________________
E0015 E0015

Production Run Model Production Run Model

___________________ ___________________
Minimum Total I D
= max H +

S
___________________ Example 3:
___________________

Annual Cost (Tcmin) 2 Qo
___________________ A toy manufacturer uses 63,000 rubber
wheels per year for its popular convertible ___________________
___________________ ___________________
Where: series. The firm makes its own wheels which it
can produce at a rate of 500 per day. The toy
Imax = maximum inventory convertibles are assembled uniformly over the

___________________ entire year. Carrying cost is P20.00 per wheel

a year. Setup cost for a production run of ___________________
___________________ ___________________
wheels is P2,500.00. The firm operates 315
Economic Run 2DS p
= days per year. Determine the:
Quantity (Qo) H p u

Where:
___________________ a. Optimal run size
b. Minimum total annual cost for carrying and
___________________
p = production or delivery rate
u = usage rate
___________________ setup
c. Cycle time for the optimal run size ___________________
___________________ d. Run time
___________________
Inventory Management * Property of STI
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18 ________________ 20 _________________
___________________ ___________________
E0015 E0015

Production Run Model Quantity Discount Model

___________________ ___________________
Cycle Time =
Qo ___________________ Quantity discount
a curtailment in price for large orders offered
___________________
u
___________________ to customers to encourage them to buy in
large quantities ___________________
___________________ ___________________
Qo
Run Time =
p TC = Carrying cost + Ordering cost

___________________ ___________________
+ Purchasing cost

Q D
Maximum and average inventory
levels: ___________________ TC = H + S + PD
2 Q ___________________
___________________ Where:
___________________
___________________ P = Unit price ___________________
___________________ ___________________
Inventory Management * Property of STI
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 21 ________________ 23 _________________
___________________ ___________________
E0015 E0015

Quantity Discount Model Quantity Discount Model

___________________ ___________________
To solve for the overall EOQ when carrying
costs are constant: ___________________ To solve for the overall EOQ when carrying
costs are expressed as a percentage of price: ___________________
1. Compute for the common EOQ.
___________________ 1. Beginning with the lowest unit price, compute
the EOQs for each price range until you find
___________________
2. Only one of the unit prices will have the
EOQ in its feasible range since the ranges
___________________ an EOQ that falls in the quantity range for its
price. ___________________
do not overlap. Identify the range.
___________________ 2. If the feasible EOQ is on the lowest price ___________________
___________________ ___________________
a. If the feasible EOQ is on the lowest range, that is the optimal order quantity. If the
price range, that is the optimal order EOQ is not feasible in the lowest price range,
quantity. compare the total cost at the price break for

b. If the feasible EOQ is in any other

range, compute the total cost for the
___________________ all lower prices with the total cost of the
largest feasible EOQ. The quantity that yields ___________________
___________________ ___________________
the lowest cost is the optimum.
EOQ and for the price breaks of all
lower unit cost. The quantity that yields

___________________ ___________________
the lowest total cost is the optimal order
quantity.

Inventory Management * Property of STI

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22 ________________ 24 _________________
___________________ ___________________
E0015 E0015

Quantity Discount Model Quantity Discount Model

___________________ ___________________
Example 4:
___________________ Example 5:
___________________
The housekeeping department of a certain hotel
consumes 715 cases of liquid laundry detergent ___________________ The Playhouse Toys Manufacturing Company
uses 4,500 toggle keys for its musical toy piano
per year. The price of the toggle keys are given
___________________
___________________ ___________________
annually. Ordering costs are P540 and carrying
costs are P180 per case a year. Given the below. It costs approximately P345 to prepare an
following information, determine the optimal order and receive it, and carrying costs are 35

___________________ ___________________
order quantity and the total cost. percent of purchase price per unit on an annual
basis. Determine the optimal order quantity and
the total annual cost.

___________________ ___________________
Range Price
1 to 49 900 Range Unit Price H
50 to 79 810 1 to 399 15 .35(15) = 5.25
80 to 99
100 or more
765
720
___________________ 400 to 699
700 to 999
1000 or more
13
12
10
.35(13)
.35(12)
.35(10)
=
=
=
4.55
4.2
3.5
___________________
___________________ ___________________
___________________ ___________________
Inventory Management * Property of STI
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 25 ________________ 27 _________________
___________________ ___________________
E0015 E0015

Safety Stock Safety Stock

___________________ ___________________
an extra stock kept on hand for emergency
purposes such as when there is variability in ___________________ First model:
standard deviation and an estimate of
___________________
___________________ ___________________
demand and lead time
demand during lead time are present

ROP = Expected demand + Safety

during lead time stock
___________________ ROP =
Expected demand + z
dLT
___________________
___________________ ___________________
during lead time

Order cycle service level: ___________________ Where:

___________________
___________________ ___________________
z = number of standard deviations
dLT
= the standard deviation of lead
Service level = 100 % Stockout risk time demand

___________________ ___________________
___________________ ___________________
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26 ________________ 28 _________________
___________________ ___________________
E0015 E0015

Safety Stock Safety Stock

___________________ ___________________
___________________ Example 6:
___________________
___________________ ___________________
Inventory on

Suppose that a manager of a textile company

Hand

determined from earlier records that demand for

printed silk fabrics during lead time averages

___________________ 4,500 yards. Moreover, the manager also found

that the standard deviation during lead time is ___________________
___________________ ___________________
450 yards. Answer the following questions
Time
assuming that the manager is willing to accept a
stockout risk of no more than 4 percent.

___________________ ___________________
Stockout

1. What value of z is appropriate?

___________________ ___________________
Inventory on

2. How much safety stock should

Hand

the company have?

___________________ 3. What reorder point should

be used? ___________________
Safety Stock Stockout
is avoided
___________________ ___________________
Inventory Management
Time
* Property of STI
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 29 ________________ 31 _________________
___________________ ___________________
E0015 E0015

Safety Stock Safety Stock

___________________ ___________________
Second model:
lead time demand is not readily
___________________ c. If both demand and lead time are ___________________
available
___________________ variable
___________________
___________________ ___________________
2
a. If only demand is variable, let dLT = LT d2 + d LT
2

dLT = LT d
___________________ ___________________
ROP = d LT + z LT d
___________________ ___________________
2
ROP = d LT + z LT d2 + d LT
2

Where: ___________________ ___________________

d
d = average daily or weekly demand
= standard deviation of demand ___________________ ___________________
___________________ ___________________
per day or week
LT = lead time in days or
weeks

Inventory Management * Property of STI

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30 ________________ 32 _________________
___________________ ___________________
E0015 E0015

Safety Stock Safety Stock

___________________ ___________________
b. If only lead time is variable, let
dLT = dLT ___________________ Example 7:
___________________
ROP = d LT + zdLT
___________________ A car wash shop uses an average of 20 bottles of
spray glaze each week. Weekly usage of spray
glaze gives a standard deviation of 4 bottles of
___________________
___________________ spray glaze. The manager is willing to accept a
15 percent stockout risk during lead time, which ___________________
___________________ ___________________
is 7 days. The distribution of usage is assumed to
Where: be normal.

d = daily or weekly demand

LT= standard deviation of lead time
in days or weeks
LT = average lead time in days or
weeks
Inventory Management
___________________ a. Which formula is appropriate
to use for this situation?
___________________
___________________ b. What is the value of z?
c. What is the ROP?
___________________
___________________ ___________________
___________________ ___________________
* Property of STI
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 33 ________________ 35 _________________
___________________ ___________________
E0015 E0015

Single-Period Model Single-Period Model

___________________ ___________________
used to handle ordering of perishables such
as fruits, vegetables, flowers, etc. and items ___________________ Example 8: ___________________
___________________ ___________________
that have limited shelf life such as
newspapers, magazines, etc. Shrimps are delivered daily to Sheilas
Seafood Stall. Demand varies uniformly
focuses on two costs: shortage and excess
___________________ from 10 kg to 20 kg of shrimps daily. Sheila
pays P30 per kilogram to her supplier and ___________________
___________________ ___________________
sells them for P65 per kilogram. Unsold
Shortage cost: unrealized profit per unit
shrimps have no salvage value and cannot

___________________ ___________________
be carried over into the next day due to
Cshortage = Price per unit Cost per unit spoilage. Find the optimal stocking level
and its stockout risk for that quantity.
Excess cost: items left over at the end of the
period
___________________ ___________________
Original cost Salvage value
___________________ ___________________
___________________ ___________________
Cexcess = -
per unit per unit

Inventory Management * Property of STI

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34 ________________ 36 _________________
___________________ ___________________
E0015 E0015

Single-Period Model Discrete Stocking Levels

___________________ ___________________
Continuous stocking levels: ___________________ Example 9: ___________________
Service level (SL) =
Cs
Cs + Ce
___________________ There is newly installed equipment in Candies
Galore Factory. Data from historical records will ___________________
___________________ ___________________
be used to estimate the usage of spare parts for
the new machine. Downtime expenses and
special ordering costs are included in stockout
Optimal stocking level: ___________________ costs. The costs average P54,000 per unit.
Spares cost P3,500 each, and used parts have ___________________
___________________ ___________________
no salvage value. Determine the optimal
So = Minimum + SL
(max demand min demand)
stocking level.
Demand

___________________ ___________________
No. of
Relative Cumulative
Spares
Frequency Frequency
Used

___________________ ___________________
0 0.30 0.30
1 0.20 0.50
2 0.40 0.90

___________________ ___________________
3 0.10 1.00
4 or more 0.00
1.00

Inventory Management * Property of STI

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