Inventory models

• Economic lot size of an item depends on the

following:-
1. Possibility of placing the repeat orders
2. Nature of demand
3. Availability of discount
4. Single or multiple product manufacture.

Inventory models considering the above aspects can be

classified as under:-

A. Static Inventory Models

B. Dynamic Inventory Models
 1. Static Inventory Models
• Only one order placed to meet the demand
• Repeat orders are either impossible or too
expensive
• E.g.:-Perishable goods like bread, vegetables;
Seasonal Products like coolers, umbrellas,
crackers, sweaters, rain coats, etc.

2. Dynamic Inventory Models

• Applicable for items where repeat orders can be placed
 2.1 Deterministic Models

Based on following assumptions:-

• The demand & lead time of the item is known exactly for a given period
• The demand of the item occurs uniformly over a period of time
• Orders are received instantaneously
• The items can be purchased freely, i.e. ,there are no restrictions of any
kind
• The item has fairly long shelf life. There is no fear of deterioration or
spoilage
• The cost of placing an order is fixed. It does not vary with the lot size

2.2 Probabilistic Models

Take into account the variations in demand and lead time of an item
 Economic Order Quantity
• It is the size of the lot to be purchased which is
economically viable
• This is the quantity of materials which can be purchased
at minimum costs
• Generally, economic order quantity is the point at which
inventory carrying costs are equal to order costs
• In determining economic order quantity it is assumed
that cost of managing inventory is made up solely of two
parts i.e., ordering costs and carrying costs
 Assumptions of EOQ

• Demand is known with certainty and is constant over time

• No shortages are allowed
• Lead time for the receipt of orders is constant
• Order quantity is received all at once
• No safety stocks as average inventory is Q/2
A= Annual Usage in units (Quantity)
S= Cost of placing the order (Ordering Cost)
P= Price of material per unit (Price)
C= Cost of storage of material (Carrying Cost)

2AS
EOQ =
PC
 Limitations of EOQ models
• Erratic Usages
• Faulty basic Information
• Costly Calculations
• No formula Substitute for Commonsense
• EOQ Ordering must be tempered with
Judgment
 Inventory Control Techniques
ABC Classification
• Class A
– 5 – 15 % of units
– 70 – 80 % of value
• Class B
– 30 % of units
– 15 % of value
• Class C
– 50 – 60 % of units
– 5 – 10 % of value
 ABC Classification
• One of the most important considerations of control
is the value of annual consumption of inventory
items in a year.
• Only a small number of inventory items consume a
very large share of inventory consumption during the
year.
• A little larger number of inventory items covers a
moderate share of annual inventory consumption.
• A very large number of items just cover a very small
share of annual inventory consumption.
• These facts gave birth to the concept of ABC analysis.
 ABC Classification (ABC TABLE)
• It has been observed that in an industrial unit only 10% of
items have 70% of the annual inventory consumption,
• 20% of the items have 20% of annual inventory consumption,
and
• 70% of the items have only 10% of the annual inventory
consumption.
• Since 70% of the annual consumption of inventory is covered
by only 10% of the items in the inventory, these items deserve
highest attention and are classified as ‘A’ items.
• Similarly 20% of the items covering 20 % of the inventory
investment are B class items
• Balance 70% of the inventory items are termed as C class
items.