INVENTORY

MANAGEMENT
 Types of inventory
2

Mainly inventory can be categorized as

three basic category which are as
follows:-
Raw material
Work in process
Finished goods

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 Inventory cost
3

Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales
when demand cannot be met

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 Inventory management
4
techniques
Generally, Economic order quantity
(EOQ) and ABC costing are two
techniques of inventory management.
These two techniques helps to reduce
the cost of inventory holding and
managing the inventory.

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 Economic order
5
quantity(EOQ)
EOQ is that quantity for which the total
cost is minimum. In determining the EOQ
it is assumed that the cost of managing
an inventory is made up solely of two
parts i.e. ordering cost and carrying cost.
At EOQ ordering cost must be equal to
ordering cost of the inventory.

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 Assumption of EOQ
6

Demand is known with certainty and is

constant over time
No shortages are allowed
Lead time for the receipt of orders is
constant
Order quantity is received all at once

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 EOQ Model
7
Annual
cost ($)
Total Cost
Slope = 0

Minimum Carrying Cost

total cost =

Ordering Cost =

Order Quantity, Q
Optimal order
Qopt
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 EOQ Formula
8

EOQ =2AO/C..(i)

Where,
EOQ=Economic order quantity
A=Annual demand
C=Carrying cost
O=Ordering cost

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 Ordering cost
9

Ordering cost is the cost of inventory

order. It can be calculated by multiplying
number of order with the ordering cost
per order.
Ordering cost= A/EOQ XO.(ii)
Where,
A=Annual demand
EOQ= Economic order quantity
O=Ordering cost per order
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 Carrying cost
10

Carrying cost is the cost associated with

the inventory carrying. Carrying cost is
the product of average inventory and
carrying cost per unit.
Carrying cost=EOQ/2 x C.(iii)
Where,
C=carrying cost per unit
EOQ/2= Average inventory

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 Re-order level or Re-order
11
point
The point of inventory where new order
must be placed is known as the re-order
point.
Re-order point=Lead time X Average
consumption..(iii)

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 Safety stock
12

The minimum stock that should be

maintained by the firm at any time to
prevent from uncertain disturbance of
production is known as the safety stock.

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