Batangas State University The National Engineering University -
ARASOF Nasugbu Campus
Chapter 5:
Inventory
Management
Prepared by:
Mr. Alessandro A. Pasague, CHP, COMS, CGSP
Chapter Objectives
By the end of this chapter, the students should be able to:
[Link] and explain inventory management.
[Link] and understand the Annual Stock Turnover, Re-Order
point, and the Economic Order Quantity.
[Link] the Distribution Strategies of hospitality industry.
Chapter Outcome
Apply key inventory management techniques, such as stock control,
reorder planning, and transportation coordination.
Inventory Management for
Hospitality
Inventory management is a critical
aspect of the supply chain in the
hospitality industry, which includes
hotels, restaurants, and other related
services. It involves practices that
help companies place orders
accurately, maintain different
assortments of products, create
reports, track costs, and reconcile
inventory after physical counts.
Role and Aspects
The Role of Inventory
Component Explanation
(The "Buffer")
It is unpredictable Inventory acts as a
of Inventory
(e.g., a sudden buffer against
increase in hotel unexpected demand
bookings, a bus tour surges. Having extra
Demand (Customer
unexpectedly (safety stock) ensures
Orders)
Role of Inventory ordering lunch, or you can serve the
seasonal spikes like unexpected crowd
Inventory plays a fundamental and salient role in Christmas or without running out
supply chains: holidays). (a "stockout").
1. To Supply and Support the Balance of Demand Inventory acts as a
It is unreliable (e.g., a buffer against
and Supply supplier's truck unexpected supply
In a perfect world, a hotel kitchen would order breaks down, a delays or failures. If
Supply (Supplier shipment of linens is your supplier is late,
exactly 50 steaks on Monday, and exactly 50 Deliveries) delayed due to port your existing
customers would order a steak that same day. No issues, or the quality inventory prevents
of a raw ingredient is your restaurant/hotel
waste, no shortages. low). from halting
Inventory exists because the world is not operations.
perfect.
The Balance: Inventory Management's goal is to find the "sweet spot" between:
Too much inventory: This wastes money on storage, spoilage (especially in food service), and ties up cash
(high carrying costs).
Too little inventory: This leads to stockouts, lost sales, customer dissatisfaction, and potential reputational
damage.
By maintaining the right inventory level (using tools like the Reorder Point and EOQ), you support the balance,
ensuring product availability while minimizing cost.
Role and Aspects of Inventory
Role of Inventory
Inventory plays a fundamental and salient role in supply chains:
2. To Effectively Cope with the Forward and Reverse Flows in the Supply Chain
The "flows" refer to the movement of goods, money, and information. Inventory management is key to handling
the physical movement of products.
A. Forward Flow (The Normal Process)
This is the traditional, one-way movement of goods from the source to the customer.
Inventory's Role in Forward Flow:
Smoothing Production/Operations: A kitchen can't wait for a delivery truck for every meal. Inventory (raw
materials, prepared items) allows the kitchen to operate smoothly without constant interruption.
Decoupling Stages: Inventory allows different parts of the chain to operate independently. If the linen
supplier increases their prices, the hotel can rely on its stored inventory for a few weeks while negotiating a
new contract or finding a new supplier.
Role and Aspects of Inventory
B. Reverse Flow (The Exception Process)
This is the movement of goods backwards from the customer or end-use point, often referred to as Reverse
Logistics.
Inventory's Role in Reverse Flow:
Returns Management (e.g., defective goods): If a batch of cleaning supplies or a new electronic lock
system for hotel rooms is defective, the hotel sends it back. Inventory management tracks this return and
processes the replacement or credit.
Recycling/Disposal: Tracking and returning reusable assets like beer kegs, pallets, or empty chemical
containers for recycling or proper disposal to recapture value.
Damage/Obsolescence: If food spoils, or seasonal decorations/promotional items are outdated, inventory
systems track these items as "write-offs" to account for the financial loss and ensure they are removed from
usable stock.
Managing the upstream supplier exchanges and downstream customer demands is key. Inventory helps a
company maintain a balance by fulfilling the demands of customers and maintaining an adequate supply of
materials and goods.
Four Aspects of Inventory
Management
Companies ideally want to carry just enough finished goods inventory to satisfy market demands, at the right time and right
quantity. This requires entrepreneurial decisions regarding the right stock quantities to maintain. The four primary aspects are:
Stock Turnover When to order (Re-order point)
How much to order (Economic
Warehousing
Order Quantity or EOQ)
Stock
Turnovers
Stock Turnover is the balance between sales and the inventory
you have on hand. It's expressed as the number of times during a
specified period that the average inventory on hand is sold.
Analogy for a Restaurant
Imagine a pastry shelf in a café.
If you completely sell all the pastries on the shelf and restock
them 10 times in a day, your inventory turnover for that shelf is
high (10x). This means your inventory is moving fast.
If you only sell and restock the pastries once a day (1x), your
inventory turnover is low. This means your inventory is moving
slowly and might be getting stale.
In short: A high turnover is a sign of good sales and efficient
inventory management, while a low turnover suggests poor sales,
excessive inventory, or potential waste.
Stock Turnovers
Advantages of high inventory turnover:
1. Inventory investments are productive.
2. Merchandise is fresh.
3. Losses from changes in styles and packaging are reduced.
4. Cost of maintaining inventory is lessened to the minimum.
Formula (in Units)
Formula (in Pesos)
Example Calculation (in Pesos):
Cost of Goods Sold: ₱525,000.
Average Inventory on Hand (Pesos): ₱52,500.
Interpretation: Within a year, the company tends to turn over its inventory 10 times.
When to Reorder Inventory
(Reorder Point)
The reorder point establishes an inventory level at which new sales orders must be placed. It is determined by the need to cover usage during the
order lead time and to hold a buffer against unexpected events.
Term Definition
Order Lead Time The period from the date a sales order is placed until the date the goods are ready for sale or use (received, checked,
and altered if necessary).
Usage Rate The average sales in units per day or the rate at which a product is used in a production process.
Safety Stock Extra merchandise kept on hand to protect against out-of-stock conditions resulting from unexpectedly high
demand, greater-than-anticipated production volume, and delivery delays.
Reorder Point
Example Calculation:
A fast-food restaurant has the following data:
Average usage (Usage Rate): 600 units per day
Average Lead time (Order Lead Time): 17 days
Safety Stock: 253 units
EOQ: 35,000 units (Note: EOQ is not used in the Reorder Point formula)
Interpretation: The company should re-order another set of inventory when the level of inventory is at 10,453 units.
How Much to Reorder
(Economic Order Quantity - EOQ)
Economic Order Quantity (EOQ) is the order volume corresponding
to the lowest sum of ordering cost and inventory holding or carrying
costs. This is the optimal level of inventory to be maintained that
will put total inventory cost at a minimum.
Inventory-Related Costs
Carrying Cost (C): The cost of bringing one unit of inventory
into stock, including expenses like rent, equipment, labor,
insurance, and security, directly proportional to stock quantity.
Ordering Cost (O): The cost of placing an order for an item.
Including vendor fees and labor, is inversely related to inventory
levels, with higher inventory resulting in fewer, larger orders and
lower costs.
The EOQ is where the carrying cost and ordering cost are equal,
minimizing the total inventory cost.
Economic Order Quantity - EOQ
Where Meaning
EOQ Economic Order Quantity
Economic Order Quantity Formula
Demand or requirement
D
units for the period
Ordering cost (fixed cost
O
per order)
Example Calculation:
A product at a restaurant has the following: Carrying cost (cost of
C carrying one unit for the
period)
Demand (D): 9,000 servings per year.
Fixed Ordering Cost (O): ₱50.00 each time an order is placed.
Carrying Cost (C): ₱10.00 per unit of a product per year.
Economic Order Quantity - EOQ
Economic Order Quantity - EOQ
Economic Order Quantity - EOQ
Warehousing Warehousing is the set of activities involved in receiving, storing,
protecting, and shipping the inventory that is tracked by your
management system (Stock Turnover, ROP, EOQ). For a hospitality
business (hotel, restaurant), this involves managing everything
from refrigerated food items to linens, uniforms, cleaning supplies,
and guest amenities.
The main objective of good warehousing is to ensure that products
are kept in optimal condition and can be accessed quickly, directly
impacting a business's efficiency and profitability.
Key Functions of Warehousing in Hospitality Industry
Function Description Impact on Hospitality Operations
Ensures suppliers deliver the correct
Checking in deliveries, verifying quantities against purchase orders, and amount and quality. Prevents
1. Receiving
inspecting items for damage or spoilage (especially perishable food). financial loss from accepting bad
inventory.
Minimizes spoilage and
obsolescence. For food, FIFO is
Physically placing items in designated locations (shelves, freezers, racks).
2. Storage mandatory to ensure the oldest
This includes using proper techniques like FIFO (First-In, First-Out).
ingredients are used first, reducing
waste.
Ensures records match physical stock
Physically counting, organizing, and tracking inventory location. Includes
3. Inventory Control (accuracy). Prevents costly shortages
security measures to prevent theft.
or surpluses.
Improves speed and efficiency of
Retrieving requested items from storage to be sent to the point of use (e.g., operations. A well-organized
4. Order Picking
pulling linens for housekeeping or ingredients for the kitchen). warehouse means less downtime
waiting for supplies.
Meets hygiene and safety standards
(critical for food storage). A clean,
5. Housekeeping Maintaining cleanliness and organization of the storage area.
organized area prevents accidents
and pests.
Importance of Warehousing
For a hospitality manager, the warehouse (or storeroom) is a direct source of cost and
efficiency:
Cost Control Product Quality Space Utilization
A disorganized or poorly managed Proper storage (correct temperature, Warehousing dictates how efficiently
storeroom leads to waste (expired food, humidity) ensures that raw materials and limited space is used. Using vertical
lost items), which directly increases the supplies maintain their quality, leading to shelving or appropriate racks can
Cost of Goods Sold (COGS) and lowers a better final product for the guest (e.g., maximize storage capacity without
profit margins. fresh food, clean and intact linens). expanding the physical footprint.
Warehousing is the practical application of the abstract inventory calculations. EOQ tells
you how much to order, but warehousing determines where and how you will manage that
quantity until it is used.
Transportation and
Distribution in Hospitality
Transportation Modes
Low cost for shipping bulky, low-value, and non-perishable products, but the slowest
Waterways
and significantly affected by weather.
One of the most cost-effective models for shipping large amounts of bulk products over
Railroads
long distances. They typically carry heavy, low-value-to-weight items.
Truck / Motor Highly flexible in routing and time schedules. They are efficient in hauling high-value merchandise over short
distances and can readily deliver to the customer's door. Trucks are generally faster than rail for short
Carriers
distances.
05
The fastest but the air freights are much higher than rail or truck rates. This mode is
Airways
common for perishables and high-value, low-bulk items.
Distribution Channels of the
Hospitality Industry
Distribution channels are vital for hotels to increase and enhance sales. They
allow the hotels to increase their visibility on the internet among online users.
Importance of Online Reservations and Technology:
Technology is the only medium through which a hotel can really solve
problems, gain new customers, and facilitate seamless activities.
Online systems help in attracting guests and customers.
An effective management of distribution channel for hotels requires an eye
on the reviews and optimization of the hotel on the internet.
Direct Sales: Distribution channels allow hoteliers to earn from direct
sales by having a better management system for online channels.
Digitalization: Helps in the long-run strategy and planning. The digital
revolution allows guests to book rooms using devices like an iPad or
mobile phone in advance or while moving.
Advanced
Inventory
Management
Strategies
Optimization Models
Optimization models of the supply chain
codify real-life issues into mathematical
models. The main objective is to maximize
or minimize an objective function subject to
constraints. Various optimization models
include:
Mixed Integer Linear
Programming (MILP)
A mathematical modeling
approach used to get the best
outcome of a system with some
restrictions. It's used in
optimization areas such as
production planning,
transportation, and network
design. MILP involves a linear
objective function along with
continuous and integer variables.
Stochastic Modeling
A mathematical approach for
representing data or predicting
outcomes in situations where there
is randomness or unpredictability
to some extent (e.g., quality of input
materials, reliability of machines).
This strategy helps in predicting the
result of a process with some
defined error rate by considering the
unpredictability of these factors.
Uncertainty Modeling
Evaluates the uncertainty in a
system where characteristics
are modeled with a probabilistic
nature. It takes dependencies
into account, often using
methods like a Markov chain or
queuing theory for modeling
systems where waiting is an
essential role.
Bi-level Optimization
This issue arises when a
decentralized or hierarchical
decision needs to be made, and
multiple parties make decisions
one after the other, influencing
their respective profit. Current
solutions are through heuristic
methods for realistic sizes.
Learning
Highlights
Balances unpredictable customer demand with
unreliable supplier delivery.
Involves four critical decisions: stock turnover, re-
order point, economic order quantity,
warehousing.
Technology and logistics drive efficiency.
Advanced strategies optimize for uncertainty.
End of Chapter 5
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