Inventory Management

Inventory is stock or store of goods

Raw material
Work-in-process
Finished goods

Function of Inventory
To meet anticipated demand
To smooth production requirements seasonal
To protect against stockouts
To take advantages of quantity discounts
To permit operations about WIP
 Inventory Management
Inventory Costs
Holding cost
Ordering cost
Shortage cost

Material Classification

A Class A: 10-15% contributes 60-70% value

Cost

B Class B: 20-30% contributes 20-30% value

C Class C: 60-70% contributes 5-10% value

Quantity
 Inventory Management
Inventory ordering & usage occur in cycles
Quantity

ROP

Time
LT
 Inventory Management
Economic Order Quantity (EOQ)

EOQ is the order size that minimizes total cost

Assumptions

Only one product is involved

Annual demand requirements are known
Demand is spread evenly
Lead time does not vary
No quantity discount
 Inventory Management
Cost Curves
Annual Cost

Total cost

Holding cost

Material cost
Ordering cost
EOQ Order Quantity
 Inventory Management
Cost Calculations
Q
Annual holding cost = H
2
D
Annual ordering cost = S
Q
Q D
Total cost = TC H S
2 Q
Q D
Total cost (including material) = TC H S D * P
2 Q

2 DS
For minimum cost, Q
H
 Inventory Management
Quantity Discount TC is affected by the price
discount on order size

Total cost
Annual Cost

Holding cost

Material cost

Ordering cost
EOQ Order Quantity