M

INVENTORY
MANAGEMENT
GROUP VII
AC2A - FINANCIAL MANAGEMENT
OUR TEAM
 OUR TEAM

DIANALYN V. BACALLA
Introduction of Inventory Management
(Definition, Types, and Importance of Inventory Management)

ERICKA DENISSE L.
ZARA
Inventory Cost (Ordering Cost)
OUR TEAM
 OUR TEAM

SOPHIA JANE N. CUSTODIO

Inventory Cost (Carrying Cost)

JANE V. RECIO
Inventory Cost (Stock-Out Cost)
OUR TEAM
 OUR TEAM

LEALYN H. LACERNA
Inventory Control Systems (Economic Order Quantity Model)

KARYLLE MAE V. LUNA

Inventory Control Systems (Safety Stock)
OUR TEAM
 OUR TEAM

MOREL MANIGBAS
Inventory Control Systems (Reorder Point)
01
 01

INTRODUCTION
INVENTORY MANAGEMENT – DIANALYN V.
BACALLA

INVENTORY
Refers to all the items, goods,
merchandise, and materials held
01 by a business for selling in the 02
market to earn a profit.
MANAGEME
NT
Administration of an organization,
whether it is a business, a non-
profit organization, or a
government body
WHAT IS INVENTORY?
01
Tangible or intangible

02
Can be realized for revenue generation or
has a value for exchange

03
In process but is meant for sale in the
market
 TYPES OF INVENTORIES

01 02 03
Raw Work In Finished
Materials Progress Goods
 INVENTORY
MANAGEMENT
 INVENTORY
MANAGEMENT
Inventory management is an approach for keeping track of the
flow of inventory. It starts right from the procurement of goods and
its warehousing and continues to the outflow of the raw material or
stock to reach the manufacturing units or to the market,
respectively.
 HOW DOES IT WORK?

HAVE THE RIGHT INVENTORY IN

THE RIGHT PLACE AT THE RIGHT
TIME
FLOW OF INVENTORY MANAGEMENT
 INVENTORY MANAGEMENT OBJECTIVES

01 02 03
Enhancing Cash Maintaining Sufficient Optimizing Storage
Flow Stock Cost

04 05
Reducing Purchase Preventing Dead
Cost of Goods Stock or Perishability
IMPORTANCE OF INVENTORY MANAGEMENT

Enables Enterprise Resource

01
Planning (ERP)

02 Proper Warehouse Management

03 Efficient Inventory Valuation

Supports Supply Chain

04
Management

05 Manages Sales Operations

CHALLENGES IN INVENTORY
MANAGEMENT
MAIN CATEGORIES OF
INVENTORY COSTS
ORDERING COST

CARRYING COST

STOCK-OUT COST
02
 02
ORDERING
COST
INVENTORY COST – ERICKA DENISSE L. ZARA
WHAT IS INVENTORY COSTS?

INVENTORY COST
Are the costs associated with the procurement, storage and
management of inventory

INVENTORY COST
Calculations and tracking of these inventory costs are very important
(ongoing) practice, since these costs directly affect the company’s
profits and profit margins.

INVENTORY COST
It is examined by management as part of its evaluation of how
much inventory to keep on hand at any given time.
 TYPES OF INVENTORY COSTS

01 02 03

ORDERING CARRYING STOCK-OUT

COST COST COST
 KEEPING TRACK OF YOUR
INVENTORY COST IS This can be done in
IMPORTANT several ways, including:

Proper inventory forecasting to

Keeping track of inventory costs is one of the optimize inventory levels
most important expenses to track. When too
much capital is tied up in inventory, it can Implementing strategies to
negatively impact your bottom line. save on storage and
warehousing costs (e.g.,
Having an accurate idea of how much you’re warehouse slotting
spending on inventory will help you understand
how to manage this important expense more
Executing consistent inventory
strategically to keep your overall costs low and
valuation methods to track
your profits high. inventory discrepancies
02
01
 WHAT IS ORDERING COST?

ORDERING COST
01 Also known as setup costs, these are costs related to the
preparation of a supplier’s order, including the cost of placing an
order, inspection costs, documentation costs, and others.

ORDERING COST
02 These costs are irrelevant from the size of the order and are
incurred every time a firm places an order.
COSTS ASSOCIATED WITH ORDERING
INVENTORY
Receiving Cost Clerical
These include costs of unloading Costs
Includes invoice processing,
goods at the warehouse and
accounting, and communication
inspecting them to make sure
costs
they are the correct items and
free of defects

Cost of finding suppliers

Transportation Costs
The costs of moving the goods to
the warehouse or store. These
costs are highly variable across
different industries and items
and expediting orders
Costs spent on these will likely be
inconsistent, but they are important
expenses for the business
 SAMPLE PROBLEM

Company ABC produces handbag for the US and European

markets, however, most of the materials are imported from
South East Asia. The company usually modified the
composition of the material to reflect new fashion trending.
Moreover, for every order makes, the company requires the
purchase officer and designer to travel and check the
sample to ensure that they meet the company criteria.
 The company usually spend around $
50,000 for staffs cost to work on material REQUIRED:
modification, travel to the supplier, and
work on sample quality. They will
Which cost is not
responsible for transportation from the port part of inventory
of shipment (supplier uses FOB as their ordering costs?
incoterm), it usually costs $ 40,000 plus the
insurance $ 10,000. The company spends Calculate the
$ 30,000 per month to rent the warehouse inventory ordering
to store the material, and it will take around cost
3 months before they are used
 ANSWER
Ordering Costs = staffs cost + transportation + insurance
Ordering Costs = 50,000 + 40,000 + 10,000
Ordering Costs = $ 100,000

Factory rental is not part of ordering cost, it is the holding cost.

FORMULA FOR ORDERING COST:
Total Ordering Costs = Cost Per Order x No. of
Orders
No. of Orders = Annual Demand
Order Size
Cost Per Order = Total Ordering Cost
No. of Orders
 SAMPLE PROBLEM

Lime Corporation expects to use REQUIRED:

10,000 units of materials XPO per Determine the
month in 2021. Last year, the total expected ordering
ordering costs amounted to P200,000 costs in 2021 if the
for a total of 40 orders. It is expected company orders in
that prices in 2021 would be 10% batch of 12,000 units
higher than that of last year. or 24,000 units
 SOLUTION:
The total ordering costs based on the 12,000-unit and 24,000 unit
order sizes are:

ORDER SIZE 12,000 units 24,000 units

ANNUAL DEMAND
120,000 units 120,000 units
(10,000 units x 12 months)

NUMBER OR ORDERS
(120,000 x 12,000) 10 5
(120,000 x 24,000)

COST PER ORDER

P 5,500 P 5,500
(P200,000/40 orders x 110%)

TOTAL ORDERING COSTS

P 55,000 P 27,500
(Cost Per Order x No. of Orders)

It should be observed that the lower the number of orders means lower total ordering costs. The higher the number of
orders, the higher the total ordering costs
 TO REDUCE INVENTORY
W A Y S ORDERING COSTS

Set the order point

Clear the obsolete stock

Use JIT System

Use a Perpetual Inventory System

Proper Planning
03
 03
CARRYING
COST
INVENTORY COST – SOPHIA JANE N. CUSTODIO
 CARRYING COST
01
Also known as holding costs, these are costs involved
with storing inventory before it is sold.

02
Carrying costs are usually 15% to 30% of the value of
a company’s inventory.

03
Inventory carrying costs can be sorted into four
categories: capital costs, storage costs, service costs
and inventory risk costs.
CARRYING COST FORMULA
 SAMPLE PROBLEM
GIVEN:
In 2020, Fit Company incurred a total of Total Carrying Cost
P800,000 for inventory carrying cost with = 800,000
an average inventory of 200,000 units.
What would be the total carrying costs in Average Inventory
2021 if the order size is 500,000 units or = 200,000 units
900,000 units, assuming the company Order Size
does not maintain safety stock quantity. = 500,000 units
= 900,000 units
 The total carrying cost are determined as follows:

Order Size 500,000 units 900,000 units

CARRYING COST PER

UNIT 4 4
(800,000/200,000 units)

AVERAGE INVENTORY
(500,000/2) 250,000 units 450,000 units
(900,000/2)

TOTAL CARRYING
COST
1,000,000 1,800,000
(CCPU X AVERAGE
INVENTORY)

The large the volume of inventory, the higher will be the inventory carrying cost and vice versa.
 TRADE-OFF BETWEEN ORDERING
COST AND CARRYING COST

Total Cost

Holding Cost

Ordering Cost

EOQ

At the EOQ level, the carrying cost and the holding cost are at a minimum.
 SAMPLE PROBLEM
GIVEN:
Brew Core Company assume an annual
requirement of 24,000 units, a cost per Annual Demand
= 24,000 units
unit of ₱20, a cost per order of ₱750 and a
carrying cost percentage of 20%. Cost per Unit
Considering order sizes of 1,200, 1,500, = 20
2,000, 3,000, 4,000, 6,000 12,000, and Cost per Order
24,000, determine the total ordering costs = 750
and total carrying costs. CC Ratio
= 20%
 FORMULAS:
No. of Orders = Annual Demand / Order Size
Total Ordering Cost = No. of Orders x Total Cost per Order
Average Inventory = Order Size / 2
Carrying Cost per Unit = Cost per Unit x Carrying Cost
Ratio
Total Carrying Costs = Carrying Cost per Unit x Average
Inventory
Total Inventory Costs = Total Ordering Costs + Total
Carrying Cost
 SOLUTION:
Total Carrying Total Total
No. of Total Cost Average
Order Size Ordering Cost per Carrying Inventory
Orders per Order Inventory
Cost Unit Costs Cost

1,200 20 P750 P15,000 600 P4 2,400 17,400

1,500 16 750 12,000 750 4 3,000 15,000

2,000 12 750 9,000 1,000 4 4,000 13,000

3,000 8 750 6,000 1,500 4 6,000 12,000

4,000 6 750 4,500 2,000 4 8,000 12,500

6,000 4 750 3,000 3,000 4 12,000 15,000

12,000 2 750 1,500 6,000 4 24,000 25,500

24,000 1 750 750 12,000 4 48,000 48,750

EOQ (TOC = TCC)

 SOLUTION:

As order sizes increase,

ORDERING CARRYING total ordering costs
ORDER SIZE
COSTS COST decrease while total
carrying costs increase.
INCREASES DECREASES INCREASES

At 3,000 units, total

DECREASES INCREASES DECREASES ordering costs and total
carrying costs are equal.
04
 04
STOCKOUT
COST
INVENTORY COST – JANE V. RECIO
A stockout is when inventory becomes unavailable, preventing
an item from being purchased or shipped, resulting in a loss in
sales. The costs of a stockout can impact a business both in
the short term and the long term

WHAT IS STOCKOUT?
 WHAT IS STOCKOUT COST?

STOCKOUT COST
01 (also called shortage costs) is the lost income and expense associated with a
shortage of inventory. They may be an effect of wrong forecasting, supplier-
retailer communication and/or logistics management

STOCKOUT COST
02 Is the capital lost from inventory that has become unavailable for the
customer to purchase. When a customer cannot buy something because it is
not in stock, the business loses money. This is especially detrimental to a
business if there is no indication on when the item will be back in stock and
available for purchase
 TYPES OF STOCKOUTS
SALES RELATED
STOCKOUTS
When a customer wants to place an
order and there is no inventory
available to sell to the customer, the
company loses the gross margin
related to the sale
INTERNAL PROCESS-
RELATED STOCKOUTS
When a company needs inventory
for a production run and the
inventory is not available, it must
incur costs to acquire the needed
inventory on short notice
 HOW STOCKS AFFECT BUSINESS
Stockouts may result in:

01 02 03
LOST CLIENTS EXTRA PAYMENTS NEGATIVE REVIEWS
FOR CANCELING
ORDERS
 HOW CAN BUSINESS AVOID STOCKOUTS

Here’s what you can do to keep stockouts from affecting your business’s
profitability:

01 02 03 04
Calculate your Forecast Future Invest in your data Optimize your
safety stock Demand science inventory
management
FORMULA IN CALCULATING STOCKOUT COST:

Cost of Carrying SSQ = SSQ x Carrying Cost per Unit

Expected Stockout per year = No. of Orders per year x

Probability of Stockout on Occurrence

Cost of Stockout Occurrences = Expected Stockout

per year x Stockout Cost per Occurrence

Total Stockout Costs = Cost Carrying SSQ + Cost of

Stockout
 SAMPLE PROBLEM
Safety Stocks Probability of
(in units) Stockout Brew Core Company uses as
inventory where it places 12 orders
0 60% per year, the cost of the stockout is
P200 per occurrence, the carrying
100 50% cost per unit is P2 per year, and the
probabilities of stockouts have been
200 40% estimated for various levels of
safety stocks as follows:
400 20%

600 10%
 SOLUTION:
Expected Cost of
Safety Stocks Probability of Cost Carrying Total Stockout
Stockout per Stockout
(in units) Stockout SSQ Costs
year Occurrence

(0+1,440)=
0 60% (0*2)= 0 (12*60%)= 7.2 (7.2*200)= 1,440
1,440

(200+1,200)=
100 50% (100*2)= 200 (12*50%)= 6 (6*200)= 1,200
1,400

(400+960)=
200 40% (200*2)= 400 (12*40%)= 4.8 (4.8*200)= 960
1,360

(800+480)=
400 20% (400*2)= 800 (12*20%)= 2.4 (2.4*200)= 480
1,280

(1,200+240)=
600 10% (600*2)= 1,200 (12*10%)= 1.2 (1.2*200)= 240
1,440

OPTIMAL SSQ The analysis above shows the optimum level of safety stock at 400 units. It has the lowest stockout costs
05
 05
ECONOMIC ORDER
QUANTITY
INVENTORY CONTROL SYSTEM – LEALYN H.
LACERNA
 WHAT IS ECONOMIC ORDER QUANTITY

ECONOMIC ORDER QUANTITY

01 Refers to the units of materials that should be purchased to
minimize total relevant inventory costs

ECONOMIC ORDER QUANTITY

02 Overall goal: decrease spending and identify the greatest number
of units needed (per order) to reduce buying
FORMULA OF ECONOMIC ORDER QUANTITY:

Economic Order Quantity

2 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
= 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
SAMPLE PROBLEM NO.1 (BASIC EOQ)

Assume an annual requirement of 24,000 units, a

cost unit of P20, a cost per order of P750 and a
carrying cost percentage of 20%. Applying the
formula to these data, the EOQ is:
SAMPLE PROBLEM NO.1 (BASIC EOQ)

Table 1: Given 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

2 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

24,000 Annual Demand =
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

P20 Cost per Unit 2 𝑥 24,000 𝑥 750

=
4
20% Carrying Cost
Percentage 36,000,000
=
P750 Ordering Cost per 4
Unit = 𝟑, 𝟎𝟎𝟎 𝒖𝒏𝒊𝒕𝒔
 SAMPLE PROBLEM NO.2

PROBLEM: Required. Compute

Lito Corporation has the following:
been buying product A in
lots of 1,200 units which Economic Order
represents a four month’s Quantity
supply. The cost per unit
is 220. The order cost is Number of orders in
P200 per order, and the a year
annual inventory carrying
cost per one unit is P25. Average inventory
Assume that the units will based in economic
be required evenly order quantity
throughout the year.
 SAMPLE PROBLEM NO.2

(a) Solution for EOQ

Table 1: Given 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
2 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
1,200 Units in 4 =
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
month’s supply
2 𝑥 3,600 𝑥 200
P200 Order Cost =
25
P25 Carrying Cost per
1,440,000
Unit =
25
= 𝟐𝟒𝟎 𝒖𝒏𝒊𝒕𝒔
 Table2:
(b) Solution the no. of orders in a year
𝑁𝑜. 𝑜𝑓 𝑂𝑟𝑑𝑒𝑟𝑠 𝑖𝑛 𝑎 𝑌𝑒𝑎𝑟
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 3,600
Table 1: Given = =
𝐸𝑂𝑄 240
= 𝟏𝟓 𝒕𝒊𝒎𝒆𝒔
24,000 Annual Demand

P20 Cost per Unit (c) Solution for average inventory based in
economic order quantity
20% Carrying Cost
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Percentage
𝐸𝑂𝑄 240
P750 Ordering Cost per = =
2 2
Unit
= 𝟏𝟐𝟎 𝒖𝒏𝒊𝒕𝒔
06
 06

SAFETY STOCK
INVENTORY CONTROL SYSTEM – KARYLLE MAE
V. LUNA
 SAFETY
STOCK
Is an extra quantity of a product which
is stored in the warehouse to prevent
an out-of-stock situation. It serves as
insurance against fluctuations in
demand
 SAFETY STOCK
Safety stock implies extra inventories that can be drawn down
when actual lead time and/ or usage rates are greater than
expected. Safety stocks are determined by opportunity cost
and carrying cost of inventories. If the business concerns
maintain low level of safety stock, it will lead to larger
opportunity cost and the larger quantity of safety stock
involves higher carrying costs.
IMPORTANCE OF SAFETY STOCK

Safety stock helps eliminate the hassle of

running out of stock. If you hold sufficient
safety stock, you needn’t rely on your
suppliers to deliver quickly or turn away
customers because of depleted inventory
levels. Safety stock covers you until your
next batch of ordered stock arrives.
HOW TO CALCULATE SAFETY STOCK
 SAMPLE CALCULATION OF SAFETY STOCK
Max Lead Avg Lead
SKU Max Daily Use Avg Daily use Safety Stock
Time Time

TS90567824 20 15 10 7 95

TS90567825 220 150 5 4 500

TS90567826 27 20 25 20 (27*25)-(20*20)= 275

TS90567827 500 220 12 9 4,020

TS90567828 125 85 5 3 370

TS90567829 63 50 12 8 356

TS90567830 86 55 5 4 210

TS90567831 1,200 1,150 25 21 5,850

TS90567832 6 5 5 5 5
07
 07

REORDER POINT
INVENTORY CONTROL SYSTEM – MOREL A.
MANIGBAS
WHAT IS REORDER POINT?

REORDER POINT
Refers to the inventory level where a
purchase order should be placed.

REORDER POINT
It is the level of inventory which triggers an
action to replenish the stock item.

REORDER POINT
Equal to the sum of lead time and safety
stock quantity.
 LEAD TIME
Refers to the waiting time from the data the order is
placed until the date the delivery is received.
LEAD TIME
RepresentsQUANTITY
the normal usage during the lead time
period.

NORMAL USAGE
The average usage of inventory during a period.
 SAFETY STOCK
It is set to serve as a margin in case of variations in
normal usage and normal lead time.

MAXIMUM
INVENTORY LEVEL
Is the sum of the safety stock quantity and the order
size.
( The minimum inventory = safety stock quantity )
 FORMULAS

WHERE:
FORMULA:
Lead Time Quantity =normal usage x normal
lead time
Reorder Point
Safe Stock =safety stock ( in usage) + safe = Lead Time Quantity +
stock (in time) Safety Stock Quantity
(LTQ+SSQ)
Safety Stock ( in usage) = (max. usage –
normal usage) x normal lead time Maximum Inv. Level
=Safety Stock Quantity
Safety Stock (in time) = (max. lead time – + Order Size (SSQ+OS)
normal lead time) x normal usage
 SAMPLE
PROBLEM
Kurdapyo Corporation has the following data :
Annual Requirement 40,000 units
Number of working Days 320 days
Normal Lead time 10 days
Maximum Lead Time 16 days
Maximum Usage 150 units
Economic Order Quantity 5,000 units
Determine the lead time quantity, safety stock quantities, reorder point and
maximum inv. levels.
 FORMULAS

WHERE:
FORMULA:
Lead Time Quantity =normal usage x normal
lead time
Reorder Point
Safe Stock =safety stock ( in usage) + safe = Lead Time Quantity +
stock (in time) Safety Stock Quantity
(LTQ+SSQ)
Safety Stock ( in usage) = (max. usage –
normal usage) x normal lead time Maximum Inv. Level
=Safety Stock Quantity
Safety Stock (in time) = (max. lead time – + Order Size (SSQ+OS)
normal lead time) x normal usage
 SOLUTION:
Normal daily usage = 125 units
computed as 40,000 units
divided by 320 days
SSQ (in usage)=(150 units – 125 units) x 10 days = 250 units
SSQ (in time)=(16 days – 10 days) x125 units = 750 units
Total SSQ = 1,000 units

LTQ = normal usage x normal

lead time Maximum Inventory Level = SSQ + OS
(125 units x 10 days) = 1,250 (1,000 units + 5,000 units) = 6,000 units
units
Minimum Inventory Level = 1,000 units (SSQ)
SSQ = SSQ (in usage) + SSQ
(in time)
(250 units +750 units) = 1,000 ROP = LTQ + SSQ = 2,250 units
units
GRAPH PRESENTATION
THANK
YOU!
DO YOU HAVE ANY QUESTIONS?