INVENTORY

MANAGEMENT
Presented by Jomary Brequillo
 TOPICS:

IMPORTANCE OF INVENTORY

INVENTORY MANAGEMENT TECHNIQUES

INVENTORY MODELS FOR INDEPENDENT DEMAND

PROBABILISTIC AND SAFETY STOCK

SINGLE PERIOD MODEL AND FIXED PERIOD SYSTEM

I. Importance of
Inventory
 IMPORTANCE OF INVENTORY

Inventory consists of the goods that a company creates to sell to customers in

the future or stocks to sell to them today.

Inventory Management is crucial for businesses because it impacts

production, warehouse costs, and order fulfillment
 FUNCTIONS OF
INVENTORY
1.To provide a selection of goods for anticipated customer demand and to
separate the firm from fluctuations in that demand.
2. To decouple various parts of the production process.
3. To take advantage of quantity discounts.
4. To hedge against inflation and upward price changes
Merchandising & Manufacturing
Company

Raw Materials
Goods and materials on
hand but not yet placed into
production
TYPES OF INVENTORY
Work in MRO Finished
Progress Goods
The raw material on which Maintenance, repair, and An end item ready to be
production has been started operating materials
but not completed
sold
II. Inventory
Management
Techniques
 Inventory Management Techniques

In this section, we briefly examine two ingredients of such systems:

(1) how inventory items can be classified and
(2) how accurate inventory records can be maintained.
 ABC ANALYSIS
 RECORD ACCURACY
 CYCLE COUNTING
 CONTROL OF SERVICE INVENTORIES
 ABC
ANALYSIS

ABC or “Always Better Control”

ABC analysis is a method for managing inventory by evaluating the

importance of each item based on demand, cost, and risk factors. They
categorize items into classes, such as A, B, or C.
 ABC ANALYSIS

Annual dollar usage is a term 80%

used in inventory management
to describe the revenue
generated by a particular
product over the course of a
year.
15%
5%
15% 30%
55%
ABC ANALYSIS
Annual dollar volume = annual demand of
each inventory item X cost per unit .

Policies that may be based on ABC

analysis include the following:
1. Purchasing resources should be
higher for Class A compared to
Class C
2. Class A requires tighter inventory
control and more accurate records.
3. Forecasting A items may warrant
more care than forecasting other
items.
 RECORD
ACCURACY

Record accuracy is a prerequisite to inventory management, production

scheduling, and, ultimately, sales.

Periodic System Perpetual System

Requires regular (periodic) Continuously updates
checks of inventory to inventory records based on
determine quantity on hand. electronic records of
purchases and sales
 CYCLE
COUNTING

Even though an organization may have made substantial efforts to record

inventory accurately, these records must be verified through a continuing
audit. Such audits are known as cycle counting.
CYCLE COUNTING
Number of Items to be
counted/day
=Quantity / cycle counting policy

Advantages of Cycle Counting:

1. Eliminates the shutdown and
interruption of production necessary for
annual physical
inventories.
2. Eliminates annual inventory
adjustments.
3. Trained personnel audit the accuracy
of inventory.
4. Allows the cause of the errors to be
identified and remedial action to be
taken.
5. Maintains accurate inventory
records.
 Control of
Service Inventories

Control of service inventories is the process of managing the resources and

activities involved in providing services to customers. It aims to ensure that
the service delivery is efficient, effective, and meets customer expectations.
 Techniques to control service
inventories

1. Good personnel selection, training, and discipline

2. Tight control of incoming shipments.

3. Effective control of all goods leaving the facility

 INVENTORY MODELS
FOR
INDEPENDENT DEMAND
 INDEPENDENT
VS DEPENDENT DEMAND

Independent demand is the demand for a finished product or service that is

not influenced by the demand for another product or service.

Dependent demand is the demand for a component or subassembly that is

derived from the demand for a finished product or service.
 Definition of Terms

• Holding Costs - are the costs associated with storing unsold inventory,
such as storage space, labor, and insurance.
• Ordering Costs – is the cost of placing an order for inventory from a
supplier.
• Set up Costs - are the costs incurred to prepare a machine, equipment, or
process for a production run.
 INVENTORY MODELS

BASIC PRODUCTION QUANTITY

ECONOMIC ORDER DISCOUNT
ORDER QUANTITY MODEL
QUANTITY MODEL
MODEL
 Basic Economic Order Quantity
Model

The basic economic order quantity model is a simplified version of the

economic order quantity (EOQ) model, which determines the optimal order
quantity that minimizes the total inventory costs.
 Assumptions under
Basic EOQ Model
This technique is relatively easy to use but is based on several assumptions:
1. Demand for an item is known, reasonably constant, and independent of decisions for other items.
2. Lead time—that is, the time between placement and receipt of the order—is known and consistent.
3. Receipt of inventory is instantaneous and complete.
4. Quantity discounts are not possible.
5. The only variable costs are the cost of setting up or placing an order (setup or ordering cost) and the cost of
holding or storing inventory over time (holding or carrying cost).
6. Stockouts (shortages) can be completely avoided if orders are placed at the right time.
Basic EOQ Model

Demand is instantenous.

Because demand is constant over time,

inventory drops at a uniform rate over
time
500

Average Inventory on hand = (Q +

0) ÷ 2
=(500 units + 0) ÷ 2
=250 units
 Minimizing
Costs
The objective of most inventory models is to minimize total costs. With the assumptions just
given, significant costs are setup (or ordering) cost and holding (or carrying) cost. All other
Q* = Total setup costs =
costs, such as the cost of the inventory itself, are constant. Thus, Total Holdingthe
if we minimize costs
sum of
setup and holding costs, we will also be minimizing total costs.
Minimizing Costs
Develop an expression for setup or
ordering cost.

Q = Number of units per order

Q* = Optimum
Develop number
an expression of units cost
for holding per order
(EOQ)
D = Annual demand in units for the
inventory item
S = Setup or ordering cost for each order
H Set setup (order)
= Holding cost equal
or carrying to holding
cost per unit percost.
year

Solve the equation for the optimal order

quantity.
OPTIMAL ORDER SIZE
Number of Orders and Time
Total Cost
 EOQ IS A ROBUST MODEL
A robust model is a model that maintains
EOQ
its accuracy and performance even if the
EOQ=assumptions
underlying 244.9 or data are
changed or violated.
 REORDER POINT
When to order?
ROP = The inventory level
Demand
(point) at during lead time
which action is taken
and
to lead time
replenish theitself are item.
stocked
constant.

Lead Time = In purchasing systems, the time between

placing an order and receiving it; in production
systems, the wait, move, queue, setup, and run times
for each component produced.
REORDER POINT

ROP =Expected demand +Safety stock

=96 units + 32 units
=128 units
 Production Order Quantity

This model is applicable under two

situations:
(1) when inventory continuously flows or
builds up over a period of time after an
order has been placed or
(2) when units are produced and sold
simultaneously

This model is especially suitable for

the production environment
Production Order Quantity
Holding Cost will be reduced because
the order does not arrive at once.

Because your inventory

continuously flows or builds up
over a period of time
Production Order Quantity
Production Order Quantity

From 200 to 283

Because of the reduction in

Holding Cost
 Quantity Discount Model
This model takes into account quantity
discounts.
A quantity discount is simply a reduced
price ( P ) for an item when it is purchased
in larger
quantities.
Price-break Quantity represent the first
order amount that would lead to a new
lower price
 Quantity Discount Model

D= 5,200
S=200
I=28%
P=96

EOQ
EOQ
EOQ= 278 Units

278 < 1500, $96 is not feasible

 Quantity Discount Model

OC+HC+PC=TOTAL ANNUAL
COST

PRODUCT COST = PD
Probabilistic Models and Safety
Stock
 Probabilistic Models and Safety
Stock

A statistical model applicable when product demand or any

other variable is not known but can be specified by means of a probability
distribution.

Probabilistic models are a real-world adjustment because demand and lead

time won’t always be known and constant.
 Probabilistic Models and Safety Stock

Demand- ROP
60-50=10 FRAMES SHORTAGE

70-50=20 FRAMES SHORTAGE

Probabilistic Models and Safety Stock
Probabilistic Models and Safety Stock
 Other Probabilistic Models

When data on lead time demand are not available, the preceding formulas
cannot be applied. However, three other models are available.

We need to determine which model to use for three situations:

1. Demand is variable and lead time is constant
2. Lead time is variable and demand is constant
3. Both demand and lead time are variable
 Demand is variable and lead time is constant

SS= D-ROP
=30- 39
=9
Lead time is variable and demand is constant
Both demand and lead time are variable
 Single-Period Model

A single-period inventory model describes a

situation in which one order is placed for a
product.
 Fixed-Period ( P ) Systems
Fixed-period ( P ) system
A system in which inventory
orders are made at regular time
intervals.
To use Fixed Period
system, inventory must be
continuously monitored
Fixed-period systems have several of the same
assumptions as the basic EOQ fixed- quantity system:
◆ The only relevant costs are the
ordering and holding costs.
◆ Lead times are known and constant.
◆ Items are independent of one another.
Fixed-Period ( P ) Systems
ON HAND INV LVL
 REFERENCES

1. Heizer, J., Render, B., & Munson, C. (2017). Operations Management: Sustainability

and Supply Chain Management (12th ed., pp. 487-515). Pearson Education.

2. INVENTORY. (2024, January 22). In Wikipedia. https://en.wikipedia.org/wiki/Inventory

3. Conrad, S., CPA (n.d.). Inventory. My Accounting Course.

https://www.myaccountingcourse.com/inventory#:~:text=Inventory%20is%20typically

%20one%20of%20the

4. Smirti (n.d.). Functions of Inventory. Management Notes.

https://www.managementnote.com/functions-of-inventory/
 REFERENCES

4.(n.d.). Classification of Inventory. Accounting Explanation.

https://accountingexplanation.com/classifications_of_inventory.htm#:~:text=The

%20investment%20in%20inventories%20is%20frequently

5.Jenkins, A. (n.d.). ABC Inventory Analysis & Management. Oracle Netsuite.

https://www.netsuite.com/portal/resource/articles/inventory-management/abc-inventory-

analysis.shtml
 A WARM
THANK YOU
TO ALL OF YOU!