INVENTORY

MANAGEMENT AND
SCHEDULING
REPORTERS

SHERA MAE G. GWYNETH K. SHIELA MARRIE Q.

TAJANLANGIT PEÑARANDA CATUBIG
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
LEARNING OBJECTIVES
LEARNING OBJECTIVES
• Define the term inventory and list the major • Describe the economic production quantity model
reasons for holding inventories and solve typical problems

• List the main requirements for effective inventory
management
• Discuss periodic and perpetual review system
• Discuss the objectives of inventory management
• Describe the quantity discount model and solve
typical problems
• Describe reorder point models and solve typical
problems

• Describe the Basic EOQ model and its • Describe situations in which the single-period model
assumption and solve typical problems would be appropriate, and solve typical problems
THE NATURE AND IMPORTANCE OF INVENTORIES
THE NATURE AND IMPORTANCE OF INVENTORIES
THE NATURE AND IMPORTANCE OF INVENTORIES
THE NATURE AND IMPORTANCE OF INVENTORIES
INVENTORY

• Inventory is a stock or store of foods

INVENTORY MANAGEMENT • Refers to the process of ordering, storing, selling of

goods and services

• The main purpose of inventory management is to

ensure that there is enough goods or materials to meet
demand without creating overstock, or excess
inventory
TYPES OF INVENTORY
TYPES OF INVENTORY
TYPES OF INVENTORY
TYPES OF INVENTORY
RAW WORK IN FINISHED
CONSUMABLES SPARES
MATERIALS PROCESS GOODS

Are the base WIP refers to the These are the These are the Refers to a list of
materials used in direct materials goods ready for materials which are stock items that
manufacturing used in the process consumption or needed to maintenance
process to make which are under sales smoothen the technicians use to
the finished goods unfinished form process of replace failed
production equipment parts
FUNCTIONS OF INVENTORY
1. To meet anticipated customer demand.
A customer can be a person who walks in off the street to buy a new stereo system, a mechanic who requests a
tool at a tool crib, or a manufacturing operation. These inventories are referred to as anticipation stocks because they are
held to satisfy expected demand.

2. To smooth production requirements.

Firms that experience seasonal patterns in demand often build up inventories during off-season periods to
meet overly high requirements during certain seasonal periods. These inventories are aptly named seasonal inventories.
Companies that process fresh fruits and vegetables deal with seasonal inventories.

3. To decouple operations.
companies have taken a closer look at buffer inventories, recognizing the cost and space they require, and
realizing that finding and eliminating sources of disruptions can greatly decrease the need for decoupling operations.
FUNCTIONS OF INVENTORY
4. To protect against stockouts.
The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of average demand
to compensate for variabilities in demand and lead time.

5. To take advantage of order cycles.

it is usually economical to produce in large rather than small quantities. Again, the excess output must be
stored for later use.

6. To hedge against price increases.

Occasionally a firm will suspect that a substantial price increase is about to be made and purchase larger-
than-normal amounts to avoid the increase.

7. To permit operations.
The fact that production operations take a certain amount of time (i.e., they are not instantaneous) means
that there will generally be some work-in- process inventory.
OBJECTIVES OF INVENTORY

• Inventory management has two main concerns. One is the level of customer service, that is, to have the right
goods, in sufficient quantities, in the right place, at the right time. The other is the costs of ordering and carrying
inventories.

• The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping
inventory costs within reasonable bounds.

• Measures of performance they can use to judge the effectiveness of inventory management.

• Customer satisfaction, which they might measure by the number and quantity of backorders and/or customer
complaints.

• Inventory turnover
REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
Management has two basic functions concerning inventory. One is to establish system of keeping track of items in inventory,
and the other is to make decisions about how much and when to order. To be effective, management must have the following:

• A system to keep track of inventory on hand and on order.

• A reliable forecast of demand that includes an indication of possible forecast error

• Knowledge of lead times and lead time variability

• Reasonable estimates of inventory, Holding costs, Ordering costs,Shortage costs

• A classification system for inventory items

CLASSIFICATION SYSTEM ITEMS
INVENTORY COUNTING SYSTEM
• Inventory counting systems can be periodic or perpetual

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

• a physical count of items in inventory is made at • also (known as continual system) keeps track of
periodic intervals (e.g. weekly, monthly) in order to removals from inventory on a continuous basis, so the
decide how much to order the item system can provide information on current level of
inventory for each item.
DEMAND FORECASTS AND LEAD-TIME
INFORMATION

• Inventories are used to satisfy demand requirements, so it is essential to

have reliable, estimates of the amount and timing of demand. Similarly,

it is essential to know how long it will take for orders to be delivered

COST INFORMATION
1 2
H olding
• Cost to carry an item in
inventory for a length of
time, usually a year
• Holding costs are stated in
either of two ways: as a
percentage of unit price or
as a dollar amount per unit.
3
Transaction (ordering) Shortage costs
• Results when demand
• Costs of ordering and exceeds the supply of
receiving inventory. inventory on hand
• Ordering costs are • Shortage costs are
generally expressed as a sometimes difficult to
fixed dollar amount per measure, and they may be
order, regardless of order subjectively estimated.
size.
CLASSIFICATION
SYSTEM
ABC Classification (ABC approach)
is used by inventory management
teams to help identify the most
important stock items in their
portfolio and ensure they focus on
managing them above those less
valuable.
ABC APPROACH

Using the ABC approach, inventory is divided into three

classes, A (very important), B (moderately important),
and C (least important).

A items should receive close attention through frequent

reviews of amounts on hand and control over
withdrawals, where possible, to make sure that customer
service levels are attained. The C items should receive
only loose control (two-bin system, bulk orders), and the
B items should have controls that lie between the two
extremes.
CYCLE COUNTING
A physical count of items in inventory. The purpose of
cycle counting is to reduce discrepancies between the
amounts indicated by inventory records and the actual
quantities of inventory on hand.

The key questions concerning cycle counting for

management are:

How much accuracy is needed?

When should cycle counting be
performed?
Who should do it?
ECONOMIC ORDER
QUANTITY MODELS
EOQ models identify the optimal order quantity by
minimizing the sum of certain annual costs that vary with
order size.

Three order size models are described here:

The basic economic order quantity

model.
The economic production quantity
model.
The quantity discount model.
BASIC ECONOMIC
ORDER QUANTITY
(EOQ) MODEL
It is used to identify the order size that
will minimize the sum of annual costs
of holding inventory and ordering
inventory. The economic order quantity
formula assumes that demand, ordering,
and holding costs all remain constant.
 Only one product is
1
involved

Annual demand Each order is received

ASSUMPTIONS 2
requirements are known 5 in a single delivery

OF THE BASIC Demand is spread

There are no quantity
EOQ MODEL 3
evenly throughout the
year so that the demand
6 discounts

rate is reasonably
3 constant

4 Lead time does not vary

EOQ MODEL
​

where:
Q=EOQ units
D=Demand in units (typically on an annual basis)
S=Order cost (per purchase order)
H=Holding costs (per unit, per year)​
EOQ MODEL
​
Assume, for example, a retail clothing shop carries a
line of men’s jeans, and the shop sells 1,000 pairs of
jeans each year. It costs the company $5 per year to
hold a pair of jeans in inventory, and the fixed cost to
place an order is $2.

The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding cost) or
28.3 with rounding. The ideal order size to minimize costs and meet customer demand is
slightly more than 28 pairs of jeans.
ECONOMIC
PRODUCTION
QUANTITY (EPQ)
• Determines the quantity a company or retailer
should order to minimize the total inventory costs
by balancing the inventory holding cost and
average fixed ordering cost.
• As long as production continues, inventory will
continue to grow. In such instances, it makes sense
to periodically produce such items in batches, or
lots.
 Only one item is The production rate is
1 5
involved constant

ASSUMPTIONS 2 Annual demand is

known
6 Lead time does not vary

OF EPQ MODEL
There are no quantity
3 The usage rate is 7 discounts
constant

Usage occurs
continually, but
4
production occurs
periodically
4
EPQ MODEL
​
EPQ MODEL
​
SOLUTION:
SOLUTION:
QUANTITY DISCOUNTS

• Quantity discounts are price reductions for

large orders offered to customers to
induce them to buy large quantities.

• The buyer's goal with quantity disounts is

to select the order quantity that will
minimize total cost.
FIXED
FIXED ORDER-INTERVAL
ORDER-INTERVALMODEL
model
HOW MUCH TO ORDER: FIXED ORDER-INTERVAL
HOW MUCH TO ORDER: FIXED ORDER-INTERVAL
MODEL
model
FIXED ORDER-INTERVAL MODEL

• a.k.a fixed reorder cycle inventory model

• involves a regular check of the inventory so as to develop
an interval of reordering.
• used when orders must be placed at fixed time intervals
(weekly, twice a month, etc.).
• widely used in retail businesses (e.g., drugstores, small
grocery stores).
HOW MUCH TO ORDER: FIXED ORDER-INTERVAL
HOW MUCH TO ORDER: FIXED ORDER-INTERVAL
MODEL
model

REASONS OF USING FOI MODEL

Supplier's policy might encourage orders at fixed intervals

Grouping orders for items from the same supplier can produce savings in shipping costs

Some situations do not require continuous monitoring of inventory levels

Only periodic check is needed

FIXED ORDER-INTERVAL
fixed order-interval MODEL : DETERMINING
model : Determining THE
the amount to order
AMOUNT TO ORDER
Order sized in the fixed order-interval model is determined by the following computation:

Amount Expected demand during Safety Stock Amount on Hand at

= + _
to Order protection interval Reorder Time

WHERE:
d = demand in a time unit (e.g., 200 units per day)
OI = Order Interval (length of time between orders; e.g., 10 days)
LT = Lead Time (e.g., 3 days)
σd = standard deviation of the demand (e.g., 30 units)
z = z score for a desired service level (e.g., 2.33 for a 99% service level)
A = Amount on hand at reorder time
FIXED ORDER-INTERVAL
fixed order-interval MODEL : DETERMINING
model : Determining THE
the amount to order
AMOUNT TO ORDER
EXAMPLE

Given:
d = 30 units per day
OI = 7 days
LT = 2 days
σd = 3 units per day
Desired service level = 99% z = 2.33 (by looking up the z table)
A = 71 units

= 30(7 + 2) + 2.33(3)√ 7 +2 - 71
= 220 units
BENEFITS AND DISADVANTAGES OF FIXED
ORDER-INTERVAL MODEL
BENEFITS DISADVANTAGES

• Tight control of inventory items • Requires a larger safety stock

• Possible savings in: • Increases carrying cost
⚬ shipping costs • Cost of periodic reviews
⚬ packaging
⚬ ordering
• May be practical when inventories
cannot be closely monitored
SINGLE-PERIOD
SINGLE-PERIOD MODEL
MODEL
SINGLE-PERIOD MODEL
SINGLE-PERIOD MODEL

WHAT IS THE SINGLE-PERIOD MODEL?

• sometimes referred to as "newsboy problem"

• used to handle ordering of products that are highly perishables
(fresh fruits, vegetables. seafood, cut flowers) and items that have
limited useful life (magazines, newspapers, spare parts for
specialized equipment).
• GOAL: identify the order quantity, or stocking level, that will
minimize the long-run excess and shortage costs.
ANALYSIS OF SINGLE-PERIOD MODEL
SHORTAGE COST
Shortage cost may include a change for loss of customer goodwill as well as the opportunity cost of lost sales.
Generally, shortage cost is simply unrealized profit per unit.

If a shortage or stockout relates to an item used in production or to a spare part for a machine, then
shortage cost refers to the actual cost of lost production

EXCESS COST
• Excess cost refers to the items left over at the end of the period.
• Difference between purchase cost and salvage value of items left over at the end of a period

If there is cost associated with disposing of excess items, the salvage will be negative and will
therefore increase the excess cost per unit.
SINGLE-PERIOD MODEL
2 CATEGORIES OF PROBLEMS:
• Demand can be approximated using a continuous distribution.
• Demand can be approximated using a discrete distribution.

CONTINUOUS STOCKING LEVELS

• Continuous stocking level is when the demand for goods is
uniform.
• Identifies optimal stocking levels.
• Optimal stocking level balances unit shortage and excess
cost.

DISCRETE STOCKING LEVELS

• Service levels are discrete rather than continuous.
• Desired service level is equaled or exceeded
SINGLE-PERIOD MODEL
CONTINUOUS STOCKING LEVELS
Service Level
• probability that demand will not exceed the stocking
level (S).

NOTE:
• If actual demand exceeds optimum stocking level;
hence, Cs is on the right end of the distribution.
• If demand is less than the optimum stocking level,
there is an excess, so Ce is on the left end of the
distribution.
• Ce = Cs, the optimal stocking level is halfway
between the endpoints of the distributions.
• If one cost is greater than the other, So will be
closer to the larger cost.
CONTINUOUS STOCKING LEVELS
EXAMPLE

Sweet cider is delivered weekly to Cindy's SOLUTION:

Cider Bar. Demand varies uniformly between
300 liters and 500 liters per week. Cindy pays
20 cents per liter for the cider and charges 80
cents per liter for it. Unsold cider has no
salvage value and cannot be carried over into
the next week due to spoilage. Find the
optimal stocking level and its stock out risk for
that quantity.

Thus, the optimal stocking level must

satisfy demand 75 % of the time.
CONTINUOUS STOCKING LEVELS
CONTINUATION:

Sweet cider is delivered weekly to Cindy's For the uniform distribution:

Cider Bar. Demand varies uniformly between
300 liters and 500 liters per week. Cindy pays
20 cents per liter for the cider and charges 80
cents per liter for it. Unsold cider has no
salvage value and cannot be carried over into
the next week due to spoilage. Find the
optimal stocking level and its stock out risk for
that quantity.
DISCRETE STOCKING LEVELS
Sevice level achievement must equal or exceed the ratio:
DISCRETE STOCKING LEVELS
EXAMPLE
Historical records on the use of spare parts for several large hydraulic presses are to serve as an estimate of usage
for spares of a newly installed press. Stockout or shortage costs involve down-time expenses and special ordering
costs. These average $4,200 per unit short. Spares cost $800 each, and unused parts have zero salvage.
Determinine the optimal stocking level.

Looking 0.84 in the cumulative frequency

column of the table, it lied between 0.60
and 0.90. Thus, the feasible level will be
at next higher value which is 0.90.
REFERENCES
• W. Stevenson. Operations Management (Seventh Edition)
• https://www.oreilly.com/library/view/operations-management-an/9781118122679/ch12-
sec035.html
• https://www.slideshare.net/JubayerAlamShoikat/inventory-management-176317766
• https://www.investopedia.com/terms/e/economicorderquantity.asp#:~:text=Economic
%20order%20quantity%20(EOQ)%20is,has%20been%20refined%20over%20time.
• https://www.eazystock.com/uk/blog-uk/abc-classification-calculation-inventory-
management/amp/
THANK YOU!