PADUA, ALYSSA MAE M.

INVENTORY MANAGEMENT TECHNIQUES

NICE TO KNOW

 There are 5 types of items in inventories: Raw materials, Components, Work in process,
Finished goods, and Supplies.

NEED TO DO

In order to minimize the total inventory cost and avoid the three basic problems (overinvestment
in inventories, underinvestment, and unbalanced inventory), inventory managers must address four
specific costs:

 Ordering, or setup, costs- the costs, usually fixed, of placing an order or setting up machines for
a production run.
 Acquisition costs- the total costs of all units bought to fill an order, usually varying with the size
of the order.
 Inventory-holding (carrying) costs- all the costs associated with carrying parts or materials in
inventory.
 Stockout costs- the cost associated with running out of raw materials, parts, or finished-goods
inventory.

NICE TO EXPAND

 Many quantitative and nonquantitative systems available for managing inventory but the ABC and
EOQ systems are two of the most popular.
 ABC Inventory Management- also known as ABC analysis. It determines the value of
inventory items based on their importance to the business. Also, it identifies the most and
least popular types of stocks.
 Economic Order Quantity (EOQ)- an inventory management system based on a simple
formula that is used to determine the most economic quantity to order so that the total of
inventory and set-up costs is minimized. Furthermore, EOQ is the best known and
probably the oldest inventory system.
2 US
Formula: Q=√
CI
 The Economic Order Quantity Model – when order size up, ordering costs per order go down,
but carrying costs go up because more items are left longer in inventory.

NEED TO END

 Inventory management is valuable and effective in achieving business growth because it helps
to make sure that there are enough goods or materials to meet demand, limiting the risk of
stockouts and inaccurate records.

“The more inventory a company has, the less likely they will have what they need”
– Taiichi Ohno 
(Father of the Toyota Production System)