INVENTORY MANAGEMENT
property taxes, depreciation
 Overseeing inventory and uses
control system to manage the
benefits against the cost of carrying
inventory.
 Limits the risk of stockouts and
inaccurate records.
Objectives:
Optimal level of inventory = balanced
actual savings, cost of carrying inventory
and efficiency of inventory control.
Production (Operations) Manager
 controls the operating decisions
regarding inventory management;
Financial Manager
 concerned with the total investment
in inventory and the related flow of
funds (including managing the risk
aspect of inventories)
INVENTORY MANAGEMENT
APPROACHES
 Inventory Planning –determination
of the quality, quantity, and location
of inventory, as well as the time
ordering to meet future business
requirements.
 Economic Order Quantity (EOQ) –
order size which minimizes the total
inventory related costs:
 Carrying Costs
(Holding Costs) - includes
opportunity costs, storage and
handling costs, insurance,
(deterioration), spoilage and
obsolescence.
 Ordering Costs –
the cost of placing orders
(processing), shipping
(transportation), and handling
costs (unloading and
inspection).
Q
Carrying Costs = 2 (C )
T
Ordering Costs = Q (O)
 T = total (annual) inventory
requirement
T
 = # of purchase orders
Q
 Q = quantity per order
 C = carrying cost per unit
Q
 = average quantity held as stock
2
 O = cost per order transaction
Order size = volume/quantity of goods per
purchase order
↓ Order Size = ↓ Ave Inv
↓ Order Size = ↓ Carrying Costs
↓ Order Size = ↑ Ordering Costs
↓ Order Size = ↑ Cost of Running Short
↑ Order Size = Excessive Inv
↑ Order Size = ↑ Carrying Costs
↑ Order Size = ↓ Ordering Costs
↑ Order Size = ↓ ROE
↑ Order Size = ↑ WC Req
↑ Order Size = ↓ EVA.
EOQ =
√ 2 OT
C
Assumptions of the EOQ Model  + inventory
 avoid shortages
1. Demand occurs at constant rate
 demand > expectations
throughout the year.
 shipping delays
2. Lead time on the receipt of orders is
constant.  Safety Stock = (Maximum lead time
3. The entire quantity ordered is - Normal lead time) x daily usage
received at one time. SS = (mLT – nLT)(DU)
4. The unit costs of the items ordered Reorder Point –
for constant, thus, there is no  inventory level at which new
quantity discount. inventories must be ordered
5. There are no limitations on the size  when to order
of inventory. RP = DU(nLT) + SS
D D
RP = ( nLT )+(mLT −nLT )( )
Limitations of EOQ 365 365
Derived Formula:
1. All the related components (O, T, C)
D
are mere estimates. RP = 365 (mLT )
2. Usage rate is assumed to be constant
over time.
In practice, usage fluctuates
depending in the demand of
customers.
3. Ignores the possible purchase
discounts for large volume of
purchase.
4. It is built within the following
additional assumptions:
 Inventory is used up
continuously over time;
 Suppliers can fill the
purchase orders without any
delay.
EOQ Extensions
1. Quantity Discount –
should the company deviate from the
EOQ to avail discount or not?
(incremental approach of cost-benefit
analysis)
2. Safety stock, Reorder point, Lead
time
Safety stock –
JUST IN TIME (JIT) System –
all resources - materials, personnel and
facilities - are acquired and used only as
needed
“Toyota Production System”
(Taichii Ohno and Shigeo Shingo)
Objectives:
↑ productivity, ↑ product quality
↓ waste, ↓ costs
minimum inventory levels –
system virtually eliminates inventory stock
requirements
Advantages
1. Inventory cost savings –
↓ inv level = ↓ carrying cost
2. Release of facilities –
areas previously used to store
inventories are made available for
other more productive uses
3. ↓ Throughput time = ↑ potential
output
4. ↓ defective output = ↓ wastes;
↑customer satisfaction
Characteristics
1. Good relationship to a supplier who
is willing and able to provide at the
right time the volume of goods
needed for production.
2. Technology to efficiently convert the
raw materials into finished goods at
the right (needed) time.
INVENTORY CONTROL
 Regulation of inventory within
predetermined level.
 Adequate stocks should be available
to meet business requirements; ↓
investment in inventory.
1. Fixed Order Quantity System -
placed when the inventory level
reaches the reorder point
2. Fixed Reorder Cycle System
(periodic review or replacement
system) –
made after a review of inventory
levels has been done at regular
intervals.
3. ABC System –
approach in tracking inventories
wherein the inventories are classified
according to their degree of
significance.
 A items –
most valuable items; receive
the strictest inventory control;
usually specialized and kept
under locks (vault)
 B items –
medium-cost items; normal
controls
 C items –
least valuable items; receive
the least inventory control;
kept in a bin which is
accessible to anyone
Inventory Related Problems
1. Stock outs –
lost contribution margin on the sales
opportunities;
loss of customer goodwill;
disruption of production schedules
“costs of running short”
(third type of inventory cost)
2. Overstocks –
unnecessary carrying costs
INVENTORY MANAGEMENT 15. Safety Stock
BENEFITS 16. Six Sigma –
1. Saves Money eliminates non-value adding
2. Improves Cash Flow activities
3. Satisfies Customers 17. Lean Six Sigma –
Lean Management + Six Sigma
CHALLENGES
1. Getting accurate stock details
2. Poor processes
3. Changing customer demand
4. Common types
5. Using warehouse space well

Common Types
1. Raw Materials
2. Work-in-process
3. Finished goods inventory

TECHNIQUES
1. ABC Analysis –
↑ class = ↑ stocks
2. Batch Tracking –
groups similar items to track
3. Bulk Shipments –
↓ costs incurred
4. Consignment
5. Cross-docking –
supplier to delivery truck
6. Dropshipping –
supplier to buyer
7. EOQ
8. FIFO & LIFO
9. Just-in-Time –
lowest stock possible before a refill
10. Lean Manufacturing –
value adding (remain);
non-value adding (reduced)
11. Materials Requirement Planning
12. Minimum Order Quantity
13. Reorder Point
14. Perpetual Inventory Management