Inventory Management

Stocks of manufactured products and

the material that make up the product.
Components:
 raw materials
 work-in-process
 finished goods
 stores and spares (supplies)

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Transaction motive
Precautionary motive
Speculative motive

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 Ensure a continuous supply of raw
materials to facilitate uninterrupted
production
 Maintain sufficient stock of raw materials
in periods of short supply and anticipate
price changes
 Maintain sufficient finished goods
inventory for smooth sales operations
and efficient customer service
 Minimise the inventory costs
 Control inventory investment by
maintaining optimum inventory

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Economic order quantity (EOQ)
 ordering costs: requisitioning, order placing,
transportation, receiving, inspecting and
storing, administration
 carrying costs: warehousing, handling,
clerical and staff, insurance, depreciation
and obsolescence
 ordering and carrying costs trade-off:
2AO
EOQ =
c

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 Determination of stock levels
 Determination of safety stock
 ABC analysis
 EOQ
 VED classification
 HML classification
 SDE classification
 FSN classification
 JIT technique
 Inventory turnover ratios
 Aging schedule of inventories
 Classification and codification of inventories
 Perpetual inventory system
 Minimum Level = Re-ordering level –
(Normal consumption * Normal re-order
period)
 Maximum Level = Re-ordering level + Re-
ordering quantity – (minimum
consumption * minimum re-order period)
 Reorder point under certainty
 lead time
 average usage
Reorder point = Lead time x average usage
 Reorder point under uncertainty
 safety stock
Reorder point = (Lead time x average usage) +
safety stock

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SAFETY STOCK
Safety stock =Maximum daily usage – average daily usage
x Maximum lead time x average lead time
ABC analysis
 classify inventory into three categories
according to value
 control by importance and exception:
maximum attention to “A” items

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 ABC analysis: Inventory control tool that categories inventory into three
groups – A, B, and C, in descending order of importance of control.

100
Value of items (%)

80 Item
C
60 Item Item B
40 A

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0
10 20 30 40 50 60 70 80 90 100

No of Items (%)
 Economic order quantity (EOQ)
EOQ is the quantity ordered at a time and for
which the total inventory cost (carrying and
ordering costs) is minimum.

It is the quantity ordered for which the carrying

cost is equal to ordering costs.
EOQ: The inventory control tool that determines optimum order
at which inventory cost is minimum.
Assumptions:
 Demand for the product is constant and uniform throughout the period.
 Lead time (time from ordering to receipt) is constant.
 Price per unit of product is constant.
 Inventory holding cost is based on average inventory.
 Ordering costs are constant, and
 All demand for the product will be satisfied (no back orders are allowed).
 INVENTORY COSTS
Ordering costs:
requisitioning,
order placing,
transportation,
receiving, inspecting and storing,
administration
Ordering costs vary in direct proportion to No. of
orders (and inversely to order size) and
inversely to size of inventory.
 INVENTORY COSTS
Carrying costs:
Warehousing(cost of storage space and of bins
and racks and cost of maintaining to avoid
deterioration eg refrigeration),
handling,
clerical and staff,
insurance,
interest on funds invested in inventories,
spoilage in storage and handling, and
obsolescence
 Costs
Total costs

Carrying costs

Ordering costs

Quantity ordered
Qty ordered should minimise carrying and ordering costs. Trade-off between ordering and carrying
costs is required
 Economic order quantity (EOQ)
2AO
EOQ=
Pc
EOQ = Economic Order Quantity
A = Annual demand in units
O = Cost per order
C = Carrying cost as a fixed percentage of the
average value of inventory
P = Purchase price per unit
• JIT aims at maintaining a minimal level of inventory
and rely on suppliers to provide parts and
components ‘just-in-time’ to meet its requirements.
• Objective – procure materials as required for use or
by a customer.
• Features:
– Minimum inventory
– Frequent and smaller orders
– Timely delivery by proven suppliers
– Aims for Zero defect - TQM
– Minimise lead time
VED Analysis – Vital, Essential and Desirable
 Items categorised based on the criticality
in patient care
SDE Analysis – Scarce, Difficult and Easy
 Items categorised based on the free availability
FSN Analysis – Fast, Slow and Normal
 Items categorised based on the quantity
and rate of consumption
HML Analysis – High, Medium and Low
 Items categorised based on the cost

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GOLF Analysis: Govt , ordinary, Local, Foreign
 Items categorised based on the source
of supply
 XYZ Analysis
 Items categorised based on the value of
the Inventory stored
 SOS Analysis
 Seasonal, Off seasonal

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