Inventory

Management
Janoras, N.
 “Effective inventory management enables
a company to meet or exceed customers’
expectations of product availability with
the amount of each item that will
maximize net profits or minimize your
inventory investment.”

©Effective Inventory Management, Inc.

 The Inventory Triangle of
Cooperation
Replenishment

Sales Warehouse

Good information is usually less expensive than additional inventory

©Effective Inventory Management, Inc.
Inventory
 Quantities of goods in stock
 Service Inventory
 Involves all activities carried out in
advance of the customer’s arrival
 Manufacturing Inventory
 Raw materials
 Component parts
 Work-in-process (WIP)
 Finished goods
www.google.ph
Increased Inventory

Advantage
 The firm is flexible
Disadvantages
 The costs tied up in inventory
 Danger of obsolescence
 Inventories should be increased as long as
the resulting savings exceed the total cost of
holding the added inventory.
 The balance depends on the estimates of
actual savings, the cost of carrying
additional inventory, and the efficiency of
inventory control.
 It requires coordination of the production,
marketing, and finance areas of the firm
 Inventories are the least liquid current asset
so, it should provide the highest yield to
justify the investment
 The Inventory Decision Model
 Carrying costs
 Includeinterest on funds tied up in inventory
and the costs of warehouse space, insurance
premiums, and material handling expenses
 The larger the order, the higher the carrying
costs
 Ordering costs
 Ordering and processing inventory into stock
 Reduced order size, constant reordering is
needed
Economic Order Quantity
(EOQ)
 The most advantageous amount for the firm
to order each time

 S = total sales in units

 O = ordering cost for each order
 C = Carrying cost per unit
 Economic Order Quantity
(EOQ)
 Let us assume that we anticipate selling 2,000
units; it will cost us ₽8.00 to place each order;
and the price per unit is ₽1.00 , with a 20%
carrying cost to maintain the average inventory,
resulting in a carrying charge per unit of ₽0.20.

= √2 x 2,000 x ₽8
₽0.20
= √ ₽ 32,000 = √ 160,000 = 400 units
₽ 0.20
Economic Order Quantity
(EOQ)
 400 units is the optimum order size
 Average inventory = 200 units (EOQ/2)
𝑈𝑛𝑖𝑡𝑠 2,000
 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 = = =
𝑂𝑟𝑑𝑒𝑟 𝑠𝑖𝑧𝑒 400
5 𝑜𝑟𝑑𝑒𝑟𝑠
 Carrying costs = Average inventory in units X
carrying cost per unit = 200 X P0.20 = P40.00
Order Cost P40
Carrying cost +40
Total Cost P80
 Safety Stock and Stockouts
 Stockout occurs when a firm is out of stock of a
specific inventory item and is unable to sell or
deliver the product
 Safety stock guards against late deliveries
𝐸𝑂𝑄
 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = + Safety Stock
2
400
 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = + 50 = 200 + 50 = 250
2
If 50 units were maintained, the average inventory
would be 250.
 Safety Stock and Stockouts
 Carrying costs = Average inventory in units X
Carrying cost per unit = 250 X P0.20 = P50
 The inventory carrying cost will now
increase to P50
 The amount of safety stock is likely to be
influenced by the predictability of inventory
usage and time period necessary to fill
inventory orders.
 How to reduce safety stocks?
Just-In-Time Inventory
Management

 Designedfor Toyota by Shigeo Shingo

which then found its way to US
 Requirements:
 Quality production that continually
satisfies customer requirements
 Close
ties between suppliers,
manufacturers, and customers
 Minimization of the level of inventory
How Toyota JIT works
 EOQ model helps determine the optimum
average inventory size that minimizes the
total cost of ordering and carrying inventory
 JIT focuses on the minimization of holding
inventory through quality production
techniques and close ties between
manufacturers and suppliers
 Both EOQ and JIT models are compatible and
can work together in the management of
inventory
Thank you!
