CHAPTER 8

INVENTORY MANAGEMENT
Inventory Management
 Types Of Inventory
 Raw material – basic input of production
 Work-in-progress – semi - finished goods
 Finished goods – good that ready for Sell

 Investment in Inventories also involve Risk-

Return Trade-off (i.e. Low Return)
INVENTORY MANAGEMENT (CONT..)
Objective:
To carry sufficient inventories – to support
sales and demand
To maximize inventory turnover – minimize
the investment in Inventories
INVENTORY MANAGEMENT (CONT..)
Cost of Handling Inventories
 Carrying costs - associated with holding or
“carrying” inventory over time; e.g.
obsolescence, insurance, extra staffing,
interest, pilferage, damage, warehousing, etc.
 Ordering costs - associated with costs of
placing order and receiving goods; e.g..
Supplies, forms, order processing, clerical
support, etc.
 Total Inventory Costs - Carrying costs
plus Ordering costs
INVENTORY MANAGEMENT (CONT..)
Economic Order Quantity (EOQ)
Method use to control Inventory

Purpose:
 To Minimize cost
 How much to order
EOQ Model
How Much to Order?

Annual Cost

Minimum
total cost

Order (Setup) Cost Curve

Optimal Order
Order Quantity (Q*) quantity
 EOQ Model Equations
Optimal Order Quantity 2 ×D ×O
= Q* =
C
D
Expected Number of Orders =N =
Q*
Expected Time Between Orders Working Days / Year
=T =
N
D D = Demand per year
d =
Working Days / Year S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days
SS = safety stock
O = Ordering cost
C = carrying cost
EOQ METHOD CONTINUE…
 TOC = (D/Q) X O
 TCC = [(Q/2) + SS] x C

 ROP = (d x l) +SS

 TIC = TOC + TCC

 Average inventory = [ Q/2] + SS

 Frequency of orders = (360) x Q / D

 Minimum inventory = SS

 Maximum inventory = Q + SS
INVENTORY MANAGEMENT (CONT..)
Total Ordering Cost
TOC = (D/Q) X O

Total Carrying Cost

TCC = [(Q/2) + SS] X C, where SS is Safety Stock

Reorder Point (ROP)

ROP = (d X l) + SS, where d is daily demand, and
l is the lead time
INVENTORY MANAGEMENT (CONT..)
Example of EOQ Model
DEF Corp has an annual usage of 4,000 units. The
ordering cost is RM 100 per order while the
carrying cost is RM 0.80 per unit. The company
holds 17 units as safety stocks. It takes 7 days for
the shipment to arrive. Calculate:
i. EOQ
ii. Re-Order Point
iii. Total inventory Cost
INVENTORY MANAGEMENT (CONT..)
Solution:
EOQ = √[(2DO)/C]
= √ [(2 X 4,000 X 100)/ 0.80], 1,000 units
ROP = (d X l) + SS
= (11 X 7) + 17, 95 days
TOC = (D/Q) X O
= (4,000/1000) X 100, RM 400
TCC = [(Q/2) + SS] X C
= [(1,000/2) + 17] X 0.80, RM 413.6
 The end…..