INVENTORY MANAGEMENT

Group #1
Buan, Dale Justine
Gozun, Jose Mari
Mabagos, Russel
Masiclat, Jarll EJ
Santiago, Giomer Paul
Santos, Jericho
Yabut, Joneil
INVENTORY DEFINITION
A stock of items held to meet future
demand

Inventory is a list for goods and

materials, or those goods and
materials themselves, held
available in stock by a business.
WHAT IS INVENTORY MANAGEMENT?
the practice of overseeing and controlling of the
ordering, storage and use of components that a
company uses in the production of the items it
sells.
the practice of overseeing and controlling of
quantities of finished products for sale.
Successful inventory management involves
creating a purchasing plan to ensure that items
are available when they are needed but that
neither too much nor too little is purchased
and keeping track of existing inventory and its
use.
OBJECTIVES OF INVENTORY MANAGEMENT
To maintain a optimum size of inventory for
efficient and smooth production and sales
operations
To maintain a minimum investment in
inventories to maximize the profitability
Effort should be made to place an order at the
right time with right source to acquire the
right quantity at the right price and right
quality
 receiving

goods
delivery

storage

raw material

manufacturing

shipping
finished products
RAW MATERIAL INVENTORIES:
There are raw materials and other supplies, parts
and components, which enter into the product during
the production process and generally form part of the
product.

WORK IN PROCESS INVENTORIES:

These are semi finished, work in progress and partly
finished products formed at the various stages of
production.
M.R.O INVENTORIES/ SPARE PART
INVENTORIES:
Maintenance, repairs and operating supplies which are
consumed during the production process and generally do not
form part of the product itself are referred to as spare part
inventories.
FINISHED INVENTORIES:
These are complete finished products ready for sales. In a
manufacturing unit, they are the
final output of the production process.
They can also be classified as:-
Movement inventories
Lot size inventories
Anticipation inventories
Fluctuation inventories
REASONS TO HOLD INVENTORY
Meet variations in customer demand:
Meet unexpected demand
Smooth seasonal or cyclical demand
Pricing related:
Temporary price discounts
Hedge against price increases
Take advantage of quantity discounts
Process & supply surprises
Internal upsets in parts of or our own
processes
External delays in incoming goods
AN EFFECTIVE INVENTORY
MANAGEMENT SHOULD

Ensure a continuous supply of raw materials to

facilitate uninterrupted production
Maintain sufficient stocks of raw materials in
periods of short supply and anticipate price
changes
Maintain sufficient finished goods inventory for
smooth sales operation, and efficient customer
service
Minimize the carrying cost and time

Control investment in inventories and keep it at

an optimum level
FUNCTIONS OF INVENTORY
MANAGEMENT
Track inventory
How much to order
When to order
TWO COMMON METHODS OF
INVENTORY MANAGEMENT
STRATEGIES
THE JIT METHOD

JIT means that manufacturers and retailers keep

only what they need to produce and sell products
in inventory, which reduces storage and
insurance costs, as well as the cost of liquidating
or discarding unused, unwanted inventory.
To balance this style of inventory management,
manufacturers and retailers must work together
to monitor the availability of resources on the
manufacturers end and consumer demand on the
retailers. Otherwise, JIT inventory management
can be risky.
THE MRP METHOD
This means that manufacturers must have
accurate sales records to enable accurate
planning of inventory
The MRP inventory management method is
sales-forecast defendant.
RISKS/DANGERS OF OVER INVESTMENT
Unnecessary tie-up of firms fund and loss of
profit involves opportunity cost
Excessive carrying cost

Risk of liquidity- difficult to convert into cash

Physical deterioration of inventories while in

storage due to mishandling and improper storage
facilities
RISKS/DANGERS OF UNDER
INVESTMENT

Production hold-ups loss of labor hours

Failure to meet delivery commitments

Customers may shift to competitors which will

amount to a permanent loss to the firm
May affect the goodwill and image of the firm
CLASSIFICATION OF INVENTORY

ABC Classification
HML Classification

XYZ Classification

VED Classification

FSN Classification

SDF Classification

GOLF Classification

SOS Classification
ABC CLASSIFICATION
ABC analysis is an inventory categorization
method which consists in dividing items into
three categories (A, B, C): A being the most
valuable items, C being the least valuable ones.
XYZ CLASSIFICATION
On the basis of value of inventory stored
Whereas ABC was on the basis of value of
consumption to value.
X High Value

Y Medium value

Z Least value

Aimed to identify items which are extensively

stocked.
HML CLASSIFICATION
On the basis of unit value of item
Aimed to control the purchase of raw materials.
H High, M- Medium, L - Low
VED CLASSIFICATION
Mainly for spare parts because their consumption
pattern is different from raw materials.
Raw materials on market demand

Spare parts on performance of plant and

machinery.
V Vital, E Essential, D Desirable

Therefore V items has to be stocked more

and D Items has to be less stocked

FSN CLASSIFICATION
According to the consumption pattern
To combat obsolete items

F Fast moving

S Slow moving

N Non Moving
SDF & GOLF CLASSIFICATION
Based on source of procurement
S Scarce, D- Difficult, E- Easy.

GOLF
G Government, O Ordinary, L Local, F
Foreign.
SOS CLASSIFICATION
Raw materials especially for agriculture units
S Seasonal

OS Off seasonal
BASIC EOQ(ECONOMIC ORDER
QUANTITY)MODEL
Assumption
Seasonal fluctuation in demand are ruled out

Zero lead time Time lapsed between purchase

order and inventory usage
Cost of placing an order and receiving are same
and independent of the units ordered
Annual cost of carrying the inventory is constant

Total inventory cost = Ordering cost + carrying

cost
EOQ THREE APPROACHES

Trial and Error method

Order-formula approach

Graphical approach
EOQ & RE-ORDER POINT
EOQ gives answer to question How much to
Order
Re-order point gives answer to question when
to order
TRIAL & ERROR METHOD
Assumptions:-
Annual requirement (C)=1200 units
Carrying cost (I) = Rs.1
Ordering cost (O) =Rs.37.5
Order size Q 1200 600 400 300 240 200 150 120 100

Average inventory Q/2 600 300 200 150 120 100 75 60 50

No. of orders C/Q 1 2 3 4 5 6 8 10 12

Annual carrying cost 600 300 200 150 120 100 75 60 50

I* Q/2
Annual ordering cost 37.5 75 112.5 150 187.5 225 300 375 450
O*C/Q
Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500

8/19/2017 27
ORDER- FORMULA APPROACH
1/2
EOQ =(2CO/I)
C = Annual demand
O = Ordering cost per order
I = Carrying cost per unit
1/2
EOQ =(2*1200*37.5/1) = 300 units

8/19/2017 28
 Certainty case of the inventory cycle

Q
level order
Inventory

quantity

Average inventory =
Q/2

0 T T T T
1 2 Time 3 4

1. Here the negative slope from Q to T1 represents

the inventory being used up
2. T1, T2, T3, T4 represents the replenishment
points
3. The inventory varies between 0 and Q
GRAPHICAL METHOD TO FIND EOQ
Cost in RS.

0 EOQ
Order quantity
EXTENSION OF BASIC EOQ MODEL

Thismodel can be extended to include

quantity discounts, were simple
calculation for quantity discount is added.

Non zero lead time

Non zero lead time

 EXTENSION OF BASIC EOQ MODEL
Non zero lead time
If the lead time is n then procurement must
be done prior to n days, i.e. T-n as shown in
the figure

Reorder
point
0 T1 - n T1 T2 - n T2 T3 - n T3 T4 - n T4

Time
Placement of a order
PROBABILISTIC INVENTORY MODEL

In practical inventory management

assumption may not be strictly correct.
1. Demand may fluctuate over time due
to seasonal, cyclical and random
influences.
2. Lead time may also fluctuate because
of transportation delay, strikes or
natural disaster. For such reason
most of the companies use safety
stock.
PROBABILISTIC INVENTORY MODEL
CONTD
But in some cases even the safety stock
becomes ineffective to combat stock out. Like:-

Reorder point

Safety stock

T1 T2 T3 T4 T5 T6
Lead
Placemen time
t of order
Stock
out
A REVIEW

So we have dealt with

1. EOQ model
2. Its extension
3. Probabilistic model

4. And now we will be dealing with special

inventory models
SPECIAL INVENTORY MODEL

Non Instantaneous
replenishment

Quantity Discount

One period decision

Special inventory model

NON INSTANTANEOUS REPLENISHMENT

Capacity 10 units

A B C D

Thus the inventory is replenished gradually than in lots

Particularly in situation were manufacturers use continues

production process
e.g. FACT makes Ammonium on a continual basis
Special inventory model

DISCOUNT QUANTITIES
If discount increases with the order quantity, then
the price of inventory is no more constant

Hence a new approach is needed to find the

best lot size

Total Annual holding Annual Annual cost of

cost = cost + ordering cost + materials
Special inventory model

ONE PERIOD DECISIONS

The newsboy problem

If a newspaper seller does not buy
enough papers to resell on the street
corner, sales opportunity is lost. If the
seller buys too many, the overage cannot
be sold because nobody wants
yesterdays newspaper.

Applicable to fashion goods, seasonal goods and

due to change in technology
INVENTORY MANAGEMENT UNDER
UNCERTAINTY

1. Option price model

2. Risk adjusted discount cash flow
(DFC) Model
3. Dynamic inventory model
OPTION PRICE MODEL

Option is a contract that

gives the holder a right to
acquire or sell certain things
at a predetermined price
without any obligation.
Calculated by integrating the
market information and
inventory control.
 RISK ADJUSTED DISCOUNT CASH FLOW
(DFC) MODEL
Inventory control problem is
converted to capital budget problem
Suppose
Beneficial foraprojects
television
like dealer decides
oil drilling were the
benefit is acquired
to hold only after
an additional a long time
inventory of but
once1000
oil istelevision
struck the per
additional
month. expanse is covered.
The cost
of holding inventory is spread
overtime.
Inflows = no: of units probability
present value
DYNAMIC INVENTORY MODEL

1. Uncertain variables are identified

2. Probability associated with them is
taken
3. Simulation techniques are applied
INVENTORY CONTROL RESPONSIBILITY

Purchasing naturally has vest interest in

inventories, even to the extend that in some
companies the purchasing and stores functions
areeffect
In combined.
the responsibility cannot be kept
Production looks
on one head after
since the workmanagement
inventory in progress
Logistics plays
is a aintegrated
major role in inventory control
effort
Inventories are economic importance to finance
department
The fact that materials must be moved from one
place to another is of importance to materials
department
EMERGING TRENDS IN INVENTORY
MANAGEMENT

Entering into log term contract at a fixed price to

reduce uncertainties
Kanbans Japanese technique (Only produce
when demand comes)
Internet based ordering system

Supply chain management

Investment in plant and machinery

VARIANCE INVENTORY
Difference between the actual number, amount,
or volume of an inventory item.
The balance shown in the inventory records.
END