INVENTORY

MANAGEMENT
INVENTORY
• In business, it means a detailed list of things in stock for a
period of time.

• Proper Inventory Mngt

• could mean great savings for the company

• would maximize the company’s profit

• should be maintained in order to bring down the total

annual cost of inventory
SKU

• Stock keeping unit

• Term used by companies instead of referring to items

What function does inventory perform?
• SMOOTHING OUT IRREGULARITIES IN SUPPLY

• BUYING OR PRODUCING IN LOTS OR BATCHES

• ALLOWING ORGANIZATIONS TO COPE WITH

PERISHABLE MATERIALS

• STORING LABOR
Two categories of inventory / basic
inventory decisions managers must make
• HOW MUCH TO ORDER
• the proper quantity

• WHEN TO ORDER
• the proper time to order the quantity
Two types of costs involved in annual
inventory
• ORDERING COSTS

• CARRYING COSTS
Annual inventory cost

• Is the sum of the annual ordering cost and the annual

carrying cost
CARRYING COSTS
• Sometimes referred to as holding cost
• It increases when the size of the inventory
increases
• Firms-borrow money to finance the
inventory-interest on the borrowings is a
major carrying cost
• Storage cost
• Rent of space
• Heat
CARRYING COSTS
• Lights
• Refrigeration
• Wages of personnel – needed to protect & keep
the records
• Taxes, Insurances, Pilferage
• Deterioration of goods
• Usually expressed on an annual basis as a %age
of the average annual inventory
• If the rate of inventory usage is constant, average
inventory will be half of the amount ordered
ORDERING COSTS
• Include costs associated with getting an
item into the firm’s inventory
• Total ordering costs is composed of:
• Purchase order
• Shipping costs
• Receiving & setting up of equipment
• It increases as the number of orders
increases
ORDERING COSTS
• Start with the requisition sent to the purchasing office

• Costs in issuing the purchase order and follow up

• Receiving the goods & placing in inventory

• Ends with the buying firm’s paying the supplier

• Salaries

• stationeries
EOQ –Economic Order Quantity
• This is used to determine the minimum sum
of ordering costs and carrying costs

• It is the order size that minimizes the sum

of both costs

• quantity for the company to produced

where they can save or cut down on costs
thereby giving positive results
Two ways of finding the EOQ
A. By the use of tables showing various lot sizes of quantity
orders

B. By the use of the formula EOQ =

____________________
√ 2(annual invty)(cost per order)
(%age of carrying cost) (per unit cost)
 PROBLEM 1
• MARGAN FURNITURES REQUIRES 576,000
BOARD FEET OF WOOD PER YEAR. THE COST
PER DELIVERY IS P112.00, NO MATTER HOW
MUCH WOOD IS ORDERED. THE COMPANY
PAYS P.70 PER BOARD FOOT OF WOOD. IT IS
ESTIMATED THAT THE CARRYING COST IS 18%
OF THE INVENTORY. FIND THE 1.ORDERING
COST, 2.CARRYING COST AND 3. THE OPTIMUM
ANNUAL COST OF INVENTORY.
TO SOLVE USING THE EOQ FORMULA
• _____________

• EOQ = √2(576,000)(112)
• .70(.18)

• = 32,000 no. of board ft. to order

• Or
• annual requirement / no. of orders(N) = EOQ
N = number of orders per year
• ________________________________
• N = √ annual requirement (cost/unit) (%ccost)
• 2(cost/order)
• ________________
• N = √(576,000) (.70)(.18)
• 2(112)
• N = 18

• or

• annual requirement / EOQ = N

576,000/32,000 = 18
• AOC = (N) (COST PER ORDER)
• = 18 (112)
• AOC = 2016
• OR
• AOC = (AI/EOQ) (COST PER ORDER)
• = 567,000/32,000 (112)
• = 2016
• ACC = (SP) (EOQ/2) (%OF CC)
• = (.70) (32,000/2) (18%)
• ACC = 2016

• TAIC = AOC + ACC

• = 2016 + 2016
• TAIC = 4032
• EOQ FORMULAS
• EOQ = √(2 (AI)(C/O)/(% of CC)(SP) EOQ = AR / N

• N= √(AR)(SP)(%OF CC)/ (2)(OC) N = AR / EOQ

• AOC
• AOC = (AI/EOQ) (C/O)
• AOC = (N) (C/O)

• ACC
• ACC = (SP) (EOQ/2) (%OF CC)

• TAIC
• TAIC = AOC + ACC
 PROBLEM 2
• THE ROBINA COMPANY SELLS ELECTRIC IRONS.
ANNUAL REQUIREMENTS ARE 6,400 UNITS. PRICE IS
P200.00 PER UNIT. THE COMPANY ESTIMATES
ORDERING COSTS TO BE P500 PER ORDER, AND THE
CARRYING COST IS 20% OF AVERAGE INVENTORY.
CALCULATE THE ANNUAL ORDERING COSTS, ANNUAL
CARRYING COSTS AND TOTAL ANNUAL INVENTORY
COST FOR THE PROPER ORDER QUANTITY.
PROBLEM 3
• THE ASV COMPANY MANUFACTURES LARGE
INDUSTRIAL DRYERS. EXPECTED ANNUAL
DEMAND IS 100 UNITS. SET UP COST IS P5,000.
THE COMPANY MANUFACTURES AT A COST OF
P2,000 PER UNIT. CARRYING COST IS 20% OF
AVERAGE INVENTORY.