Inventory Management

Inventory
An inventory is a stock or store of goods
Firms typically stock hundreds or even thousands of items in inventory, ranging
from small things such as pencils, paper clips, screws, nuts, and bolts to large
items such as machines, trucks, construction equipment, and airplanes.

 One of the most expensive assets of many companies

representing as much as 50% of total invested capital

 Operations managers must balance inventory

investment and customer service
 Functions of Inventory

1. To decouple or separate various

parts of the production process
2. To decouple the firm from
fluctuations in demand and
provide a stock of goods that will
provide a selection for
customers
3. To take advantage of quantity
discounts
4. To hedge against inflation
 Types of Inventory

 Raw material
 Purchased but not processed
 Work-in-process
 Undergone some change but not completed
 Maintenance/repair/operating (MRO)
 Necessary to keep machinery and processes
productive
 Finished goods
 Completed product awaiting shipment
 Inventory Management

 How inventory items can be classified

 How accurate inventory records can be maintained

 How much to Order

 When to Order

 From Where to Order

 How Much to keep

 Where to Keep
Terms Used in Inventory Management
 Inventory Models

There are three inventory models that address two

important questions:
when to order and how much to order . These independent
demand models are:

1. Basic economic order quantity (EOQ) model

2. Production order quantity model
3. Quantity discount model

* We will only Cover EOQ

 Economic Order Quantity (EOQ) Model

Q* & Q˳ are also being represented

as EOQ or Optimal Quantity
Important assumptions

1. Demand is known, constant, and independent

2. Lead time is known and constant

3. Receipt of inventory is instantaneous and complete

4. Quantity discounts are not possible
5. Only variable costs are setup and holding
6. Stockouts can be completely avoided
 EOQ Model
Objective is to minimize total costs

Annual cost
Curve for total
cost of holding
and setup

Minimum
total
cost
Holding cost
curve

Setup (or order)

cost curve
EOQ or Quantity
Optimal order
quantity
And EOQ or
 Inventory Cycle & Re-Order Point (ROP)

Usage rate
Order
quantity = Q
Inventory level

(maximum
inventory
level) ROP

Minimum

inventory

0 Time
Re-Order Point (ROP)
Summary
Example 1
Sharp, Inc., a company that markets painless hypodermic needles to
hospitals, would like to reduce its inventory cost by determining the
optimal number of hypodermic needles to obtain per order. The annual
demand is 1,000 units; the setup or ordering cost is $10 per order; and
the holding cost per unit per year is $.50.
Also Sharp, Inc. has a 250-day working year and wants to find the
number of orders ( N ) and the expected time between orders ( T ).

Answers
EOQ = 200 Unit

N= 5 Order/ year

T= 50 Days Between Order

Example 2
Example 3
The Warren W. Fisher Computer Corporation purchases 8,000
transistors each year as components in minicomputers. The unit
cost of each transistor is $10, and the cost of carrying one transistor in
inventory for a year is $3. Ordering cost is $30 per order.
What are (a) the optimal order quantity, (b) the expected
number of orders placed each year, and (c) the expected time
between orders? Assume that Fisher operates on a 200-day
working year.
Example 4

Number 2 pencils at the campus bookstore are sold at a fairly steady rate
of 60 per week. The pencils cost the bookstore 2 cents each and sell for
15 cents each. It costs $12 to initiate an order, and holding costs are
based on an annual interest rate of 25 percent. Determine the optimal
number of pencils for the bookstore to purchase and the time between
placement of orders.
3870 – 3120 = 750 /60
=12.5 WEEKS
*** In a year, there are 52 weeks12.5 WEEKS OR 3
*** Convert cents in to $ MONTHS
***Holding cost (H ) = i x C
Annual demand (D) = 60 x 52 weeks = 3120 pencils per year

Holding cost (h) = i x C= 25% x ($2/100) = $0.005 per pencil / year

Order cost (S) = $12 per order

EOQ or Q*=√ 2 ∗3120 *12 /0.005 = 3869.9 or 3870 pencils

Time between orders (T) = 3870/ 3120 = 1.24 years or 15months

Example 5

Solution:
Holding cost: H = i x C = 0.30(28) = $8:40 per battery per year
Example 6

Demand per day = 8000/250 = 32 ipods sold

each day

therefore, if delivery takes 3 days then

3 x 32 = 96 ipods left then place an order for
next delivery

And if delivery takes 4 days then

4 x 32 = 128 ipods left then place an order.
Example 7