🎯 SLIDE 1: Role of Inventory (1 of 2)

🧑‍🏫 Start like this:

“Let’s start with a very basic question—

👉 Why do companies even keep inventory?”

Say:
“Today we’re entering one of the most practical topics in operations—
Inventory Management.
Think Amazon, Walmart, even your local pharmacy—everything depends on
managing inventory correctly.”

Ask students:
👉 “What happens if a store has too much inventory?”
👉 “What if they have too little?”

Explain:

 Too much → storage cost, waste

 Too little → lost sales, unhappy customers

Transition:
“Today we’ll learn how businesses decide how much to order and when to
order.”

(Pause… let students answer)

💡 Explain line by line

1. Inventory = stock kept to meet demand

“Inventory simply means items stored in advance so customers don’t have

to wait.”

👉 Example:

 Amazon → keeps products before you order

 Restaurant → keeps ingredients ready

2. Maintain level to meet anticipated demand

“Companies don’t randomly store items—they predict demand.”

👉 Ask:
“Does Amazon know what you’ll order tomorrow?”
(Expected: No, but they predict)

👉 Explain:
“They use data, past trends, seasonality.”

3. Safety stock (IMPORTANT)

“Now real life—demand is uncertain.”

👉 Write on board:
Safety Stock = Extra inventory for uncertainty

👉 Example:

 COVID → sudden demand for masks

 Black Friday → spike in demand

👉 Ask:
“Why not keep exact inventory?”
(Expected: uncertainty)

4. Seasonal / cyclical demand

👉 Examples:

 Winter → jackets

 Summer → ACs

 Diwali → lights

👉 Say:
“Companies build inventory before demand peaks.”

5. Bulk purchase for discounts

👉 Example:

 Costco

 Wholesale stores

👉 Ask:
“Why buy more than needed?”
(Expected: cheaper per unit)

🧠 Mini Summary to say

“So inventory is not just storage—

👉 it’s a strategy decision.”

Say:
“Inventory simply means stock kept to meet demand.”

Give examples:

 Amazon warehouse → finished goods

 Factory → raw materials

 McDonald’s → ingredients

Explain key roles:

 Handle uncertain demand → safety stock

 Seasonal demand → extra inventory

 Bulk buying → discounts

Interactive:
👉 “Why do you think Costco sells in bulk?”
(Wait → cost saving)

Key concept:
👉 Inventory helps decouple operations (one process doesn’t stop another)

🎯 SLIDE 2: Role of Inventory (2 of 2)

🧑‍🏫 Start with a question

“Imagine a factory where one machine stops—

👉 should the whole production stop?”

💡 Explain each point

1. In-process inventory

“Items between stages of production.”

👉 Example:

 Car manufacturing → half-built cars

👉 Key idea:
👉 Helps independence between operations

2. Raw material inventory

“Stored to avoid supplier delays.”

👉 Example:

 Apple stores chips in advance

👉 Ask:
“What if supplier delays?”
(Expected: production stops)

3. Finished goods inventory

👉 Example:

 Ready phones in warehouse

👉 Purpose:
👉 Meet demand even if production stops

4. Decoupling (VERY IMPORTANT)

👉 Write on board:
Decouple = Separate processes

👉 Explain:
“One process doesn’t depend on another immediately.”

Decouple = separate the dependency between two steps

Explain simply:
“In a process, one step usually depends on the previous step. But inventory
reduces that dependency.”

Example: Restaurant
“Think about a restaurant. The kitchen prepares some ingredients before
customers arrive. Because of that, the chef does not have to start from zero
for every order. Preparation inventory decouples cooking from serving.”

👉 Real-life:

 Kitchen prep vs serving

 Factory stages

🧠 Say this clearly

“Inventory acts like a buffer between processes.”

🎯 SLIDE 3: Demand

🧑‍🏫 Start

“Inventory exists only because of one thing—

👉 DEMAND.”

“Inventory exists because of demand. Without demand, no inventory.”

Explain clearly:

 Independent demand → customer demand (e.g., iPhone)

 Dependent demand → parts needed (e.g., iPhone battery)

💡 Explain

1. External vs Internal customers

👉 External → you & me

👉 Internal → employees using materials

👉 Example:

 Factory worker = internal customer

2. Forecasting demand

👉 Ask:
“How does Netflix know what to recommend?”

👉 Connect:
“Same idea—prediction using data.”

3. Dependent demand

👉 Example:

 Car → needs tires

👉 Say:
“This depends on production.”

4. Independent demand

👉 Example:

 Car sales

👉 Say:
“This comes from customers.”

🎯 Important exam concept

👉 Dependent = derived
👉 Independent = customer driven

🎯 SLIDE 4: Inventory Costs (Carrying Cost)

🧑‍🏫 Start with hook

“Keeping inventory is NOT free.”

💡 Explain

Carrying cost = cost of holding inventory

👉 Includes:

 Rent

 Electricity

 Insurance

 Damage risk

👉 Ask:
“If I keep more inventory, what happens to cost?”

(Expected: increases)

🧠 Key concept

👉 Usually 10%–40% of inventory value

👉 Example:
$100 product → $10–$40/year cost

🔥 Real-life insight

“Amazon spends billions just storing items.”

🎯 SLIDE 5: Ordering Cost

🧑‍🏫 Start

“costs of restroring the stock of inventory.

Every time you order inventory—you pay a cost.”

2️⃣ Ordering Cost

 Cost per order (not per unit)

 Example: shipping, paperwork

💡 Explain

👉 Includes:

 Shipping

 Paperwork

 Inspection

👉 Key point:
👉 Independent of order size

🧠 Ask

“If I order 100 times vs 5 times—cost?”

(Expected: higher for more orders)

🔁 Important relationship

👉 More orders → higher ordering cost

👉 Larger orders → fewer orders
🎯 SLIDE 6: Shortage Cost

🧑‍🏫 Start

“Now the most painful cost…”

3️⃣ Shortage Cost

 Lost sales, unhappy customers

 Example: “Out of stock” on Amazon

💡 Explain

👉 Stockout = no inventory

👉 Results:

 Lost sales

 Angry customers

 Brand damage

👉 Example:

 iPhone out of stock → customer buys Samsung

🧠 Ask

“Which is worse—extra inventory or no inventory?”

(Discussion → great engagement)

🎯 SLIDE 7: Inventory Control Systems

🧑‍🏫 Start
“Now the big decision—
👉 How much to order?
👉 When to order?”

💡 Explain

Two systems:

🔹 Continuous

👉 Monitor continuously
👉 Order at reorder point

🔹 Continuous System

 Monitor inventory all the time

 Order when level hits reorder point

👉 Example:
Amazon

🔹 Periodic

 Check inventory at fixed intervals

 Order after checking

👉 Check after fixed time

👉 Example:
Local store

🧠 Ask

“Which is cheaper?” → Periodic

“Which is more accurate?” → Continuous

🎯 SLIDE 8: Continuous Inventory System

🧑‍🏫 Explain clearly

“Inventory is tracked in real-time.”

💡 Key points

👉 When inventory hits reorder point → order

👉 Fixed order size = EOQ

🧠 Real example

👉 Amazon warehouse scanning system

⚠️Important

👉 Accurate but expensive

🎯 SLIDE 9: Periodic Inventory System

🧑‍🏫 Start

“Now simpler system.”

💡 Explain

👉 Inventory checked weekly/monthly

👉 Order placed to refill

🧠 Key differences

Continuo
Feature Periodic
us

Monitorin Constant Occasion

 Continuo
Feature Periodic
us

g al

Cost High Low

Accuracy High Lower

🧠 EOQ

“It is a formula that tells us the best order size—

so that the total cost is minimum.”

Total Cost = Carrying Cost + Ordering Cost

👉 Say:

“EOQ finds the value of Q (order size) where this total cost is the lowest.”

🔹 Assumption 1: Demand is known and constant

🔹 Assumption 2: No shortages allowed: “We never run out of stock.”

🔹 Assumption 3: Lead time is constant: “Lead time = time between placing

order and receiving it.”

👉 Example:
“If delivery always takes 5 days → constant lead time”

🔹 Assumption 4: Instantaneous replenishment

👉 Say:

“When order arrives, inventory jumps immediately.”

👉 Explain:

 Not gradual

 All units arrive at once

👉 Example:
“You order 500 units → all 500 come together”

“Imagine you run a small store selling notebooks.

 You order 100 notebooks

 Customers keep buying every day

 Slowly your stock goes down

 When it reaches a certain level… you order again”

👉 “This entire process is what this graph is showing.”

📊 Step 1: Explain the Axes

👉 Point to graph:

 Y-axis → Inventory Level (stock you have)

 X-axis → Time

👉 Say:
“As time passes, inventory changes.”

📉 Step 2: Downward Sloping Line (Demand Rate)

👉 Point to the slanted line going down

“See this line going down?”

👉 Explain:
  This shows inventory decreasing

 Why? → customers are buying

👉 Write on board:
Demand rate = speed at which inventory is used

🔺 Step 3: Sudden Jump Up (Order Received)

👉 Point to vertical jump

“Now suddenly inventory jumps up—why?”

👉 Answer:
“Because new stock arrives!”

🔁 Step 4: Cycle Repeats

👉 Say:
“This pattern repeats again and again.”

 Down → usage

 Up → replenishment

👉 “This is called the inventory cycle.”

🚨 Step 5: Reorder Point (VERY IMPORTANT)

👉 Point to horizontal line

“This is the most critical concept—Reorder Point (R)”

👉 Say:
“When inventory reaches this level → we place an order”

🔍 Why not order at zero?

👉 Ask students:
“If I order when inventory = 0, what happens?”

(Expected: stockout)

⏳ Step 6: Lead Time

👉 Point to gap between “order placed” and “order received”

“This gap is called Lead Time”

📊 Step 1: Understand Axes

👉 Point to graph:

 X-axis → Order Quantity (Q)

 Y-axis → Annual Cost ($)

👉 Say:
“As order size changes, costs change.”

🔵 Step 2: Ordering Cost Curve (Downward)

👉 Point to downward curve

“Let’s start with ordering cost.”

👉 Write on board:

Ordering\ Cost = C_o \frac{D}{Q}

👉 Explain:

 If Q is small → many orders → high cost

 If Q is large → fewer orders → low cost

👉 Ask:
“If I order 1 unit at a time vs 1000 units?”
🔺 Step 3: Carrying Cost Curve (Upward)

👉 Point to upward line

“Now the opposite—carrying cost.”

👉 Show formula:

Carrying\ Cost = C_c \frac{Q}{2}

👉 Explain:

 Large Q → more inventory → high holding cost

 Small Q → less inventory → low holding cost

⚔️Step 4: The Trade-Off (Core Concept)

👉 Say dramatically:

“These two costs are fighting each other.”

If you Resul
increase Q t

Ordering cost
Good
↓

Carrying cost
Bad
↑

👉 “If you decrease Q”

Result

Ordering cost
↑

Carrying cost
↓

📉 Step 5: Total Cost Curve (U-shaped)

👉 Point to curved line

“This is total cost = ordering + carrying.”

👉 Say:
“At first, total cost decreases…
then it increases again.”

👉 Why?
Because one cost decreases, other increases.

🎯 Step 6: Optimal Point (EOQ)

👉 Point to lowest point

“This point is EVERYTHING.”

👉 Say clearly:

👉 “This is EOQ = Economic Order Quantity”

🧠 Golden Rule (VERY IMPORTANT)

👉 At EOQ:

👉 Ordering Cost = Carrying Cost

👉 Say slowly:

“At the optimal point, both costs are equal.”

📍 Slope = 0 (Explain Simply)

👉 Point to “slope = 0”

“This means cost is minimum—no increase or decrease possible.”: “We’ve

reached the best balance.”

🧠 Key Interpretation

👉 If you choose Q smaller than EOQ:

  Ordering cost dominates

👉 If you choose Q larger than EOQ:

 Carrying cost dominates

Slide 1: Non-Instantaneous Receipt Description

Say:

“This model relaxes one assumption of basic EOQ.”

In basic EOQ:

“All inventory arrives at once.”

In this model:

“Inventory arrives slowly over time.”

Example:

“Suppose we need 2,000 yards of carpet. The factory does not produce all
2,000 yards in one second. It may produce 150 yards per day. But while
production is happening, customers are also demanding 32.2 yards per day.”

“So inventory is being added and removed at the same time.”

Slide 2: Graph Explanation

Explain the graph carefully:

“Look at the graph. It is different from the basic EOQ graph.”

In basic EOQ, inventory jumps straight up immediately.

Here, inventory rises gradually because production is happening gradually.

During order receipt period:

“Inventory increases because production rate is higher than demand rate.”

But it does not increase by the full production rate.

Why?

Because some inventory is being used at the same time.

EOQ WITH SHORTAGE

“In this model, we ALLOW shortages.”

But important:

👉 “Shortages are NOT lost sales”

👉 They are backorders

🧠 What is Backordering?
👉 Explain:

“Customer waits, and the order is fulfilled later.”

Example:

 You order a product → delivery delayed → you still get it later

Step 1: Define Shortage (in simple words)

“Shortage means you don’t have inventory right now,

but you will fulfill the demand later.”

👉 Example:

 Amazon says ‘Delivery in 5 days’ → shortage but accepted

 Restaurant says ‘15 min wait’ → shortage

📊 Step 2: Explain the Difference from Basic EOQ

“In basic EOQ, we assume stock never becomes zero.”

👉 But here:

 Stock can go to zero

 And even below zero (backorders)

🔁 Step 3: Explain the Cycle (VERY IMPORTANT)

Say this step-by-step:

1. Inventory starts at Q−S

2. Inventory decreases to 0

3. Demand continues → shortage builds up to S

4. New order arrives

5. First, shortage is fulfilled

6. Remaining inventory becomes Q−S again

❓ Important Question to Explain

👉 “Why does it start from Q−S ?”

Answer:

“Because S units are already promised to customers, so only Q−S is left as

actual inventory.”

💡 Step 4: What Costs are Involved?

Say clearly:

“In this model, we consider 3 costs:”

1. Ordering cost → placing orders

2. Carrying cost → storing inventory

3. Shortage cost → penalty for delay/backorders

⚖️Step 5: Core Idea (MOST IMPORTANT)

👉 Say slowly:

“We are balancing three costs now.”

 If we keep more inventory → high carrying cost

 If we allow shortages → low carrying cost but shortage cost

Step 6: Why do we allow shortage?

 👉 Say:
 “Because sometimes it is cheaper to let customers wait
instead of storing too much inventory.”

📊 Graph Understanding (Figure 16.7)

🔄 Inventory Behavior Now

👉 Walk through cycle:

1. Inventory starts at Q − S

2. Inventory decreases to 0

3. Then it goes negative → shortage (S)

4. New order arrives → inventory jumps up

This is the best order size when shortages are allowed

 If shortage cost C sis very high

→ you avoid shortages
→ model becomes like basic EOQ
 If shortage cost is low
→ you allow shortages
→ order size increases
QUANTITY DISCOUNTS
“Imagine a supplier tells you:

👉 Buy 50 units → price drops

👉 Buy 100 units → price drops even more

💡 Core Idea

👉 Say:

“Earlier, EOQ considered only ordering cost + carrying cost.”

👉 Now we add:

👉 Purchase cost
Step 1: Compute EOQ (ignore discounts)

“First, we calculate EOQ using the basic EOQ formula, without considering
discounts.”

👉 In this example: EOQ = 72.5 units

🔹 Step 2: Identify price for EOQ

“Now we check which price range this EOQ falls into.”

👉 72.5 lies in:

50–89 → price = $1100

🔹 Step 3: Compute total cost at EOQ

“We calculate total cost using EOQ and its corresponding price.”

👉 TC = $233,784

🔹 Step 4: Check discount levels

“Now we check if taking a discount gives a lower total cost.”

👉 Discount requires:
Minimum 90 units → price = $900

Since the discount option gives a lower total cost, we choose the discount
and order 90 units.

2nd way: % CARRYING COST

“We are solving a discount problem where the storage cost depends on
the price.”
🧠 Think like this (real-life)

If a product is:

 Expensive → costly to store

 Cheap → cheaper to store

👉 So when price changes, carrying cost also changes

💡 What is different here?

👉 Earlier case:

 Carrying cost was fixed

 EOQ was same

👉 Now:

 Carrying cost changes with price

 So EOQ also changes

How did we get carrying cost?

👉 We use this formula:

C c =i× P

🧠 What does this mean?

 C c= carrying cost per unit

 i = holding cost % (given as 15% here → 0.15)

 P= price per unit

🔍 Apply to your table

🔹 For price = $1400

C c =0.15 ×1400=210

👉 So carrying cost = $210 per unit per year

Expensive item → higher holding cost
👉 Cheaper item → lower holding cost

Key line:
“New price → new carrying cost → new EOQ.”

Case 1: Price = $1400 (Range: 1–49)

We calculated:
👉 EOQ = 69

🚫 Problem

👉 69 units is NOT allowed in this price range

Supplier rule:
👉 “To get $1400, you must order ≤ 49 units”

🤔 Can we adjust it?

👉 No. Why?

Because:

👉 If you reduce from 69 → 49

You are moving away from optimal

👉 That means:

 Ordering cost ↑

 Total cost ↑

👉 And also:

 This is the highest price (worst price)

💡 Real-world logic

“If I already know this is the most expensive option,

why would I force myself to buy less just to stay in this expensive category?”

👉 So we ignore it completely
🟢 Case 2: Price = $1100 (Range: 50-89)

We calculated:

👉 EOQ = 77.8

Valid (77.8 lies in range)

👉 Keep this as candidate solution

🟢 Case 3: Price = $900 (Range: 90+)

We calculated:

👉 EOQ = 86.1

🚫 Problem

👉 86.1 is not enough to qualify

Supplier rule:
👉 “You need at least 90 units”

🔄 Can we adjust?

👉 YES

👉 Why?
Because:

👉 If you increase from 86 → 90:

 You become eligible for BIG discount

 Price drops from 1100 → 900

💡 Real-world logic

“If I am very close to getting a huge discount,

I can buy a little extra to qualify.”