SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.

DISCIPLINE…ACCOUNTABILITY…PROFESSIONALISM…HUMILITY
NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO
Contact Nos.: +63917-127-8500 | +63912-448-6518

OPERATIONS
MANAGEMENT

MODULE 2
 SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.
DISCIPLINE…ACCOUNTABILITY…PROFESSIONALISM…HUMILITY
NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO
Contact Nos.: +63917-127-8500 | +63912-448-6518

Prepared by:

Ms. Gissele Joy Jarabe

Inventory Management and Control:

Introduction to Inventory Management

All organizations hold stocks. These are the stores of materials they
keep until needed. A shop, for example, buys goods from a wholesaler and
keeps them in stock until it sells them to customers; a factory keeps a stock
of raw materials for its products, a television company has a stock of
recorded programmes. Whenever an organization has materials that it does
not use immediately, it put them in stock.

Inventory refers to the goods or materials that a business holds for the
ultimate goal of resale or production.

Inventory management is the function responsible for all decisions about

stock in an organization.

Types of Inventory:

 Raw Materials: Basic materials needed to produce finished goods.

 Work-in-Progress (WIP): Items that are in the production process but
are not yet completed.
 Finished Goods: Products that are ready to be sold to customers.
 Maintenance, Repair, and Operations (MRO): Supplies that support the
production process but aren’t part of the finished product (e.g., tools,
lubricants).

Example:
A furniture manufacturer may have raw materials like wood and screws, WIP
such as partially assembled furniture, and finished goods ready for shipment.

The Importance of Inventory Management

 Customer Satisfaction
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Having the right amount of inventory ensures that customer

demands are met without delay.
 Cost Control
Proper inventory management minimizes storage costs, wastage,
and the need for emergency orders, leading to better cost control.
 Cash Flow Management
Efficient inventory management frees up working capital and
improves cash flow by ensuring that excess capital isn’t tied up in unsold
stock.

 Prevention of Stockouts
Stockouts can result in lost sales and damage to brand reputation,
so inventory management ensures product availability.
 Risk Reduction
Helps reduce the risk of spoilage, obsolescence, and theft by
maintaining optimal inventory levels.
Example: A retailer might lose customers to competitors if it repeatedly runs
out of popular products, damaging its reputation and profitability.

Requirements for an effective inventory management.

Inventory control system objective is to optimize levels of inventory
and reduce costs.
Here are the requirements for an effective inventory management:
 Just-In-Time (JIT)
Minimizes inventory by ordering goods only as they are needed
in production or to meet customer demand.
 Economic Order Quantity (EOQ)
A formula that determines the optimal order quantity to minimize
the total costs of inventory.
 ABC Analysis
Prioritizes inventory management based on the value and
importance of items (e.g., “A” items are high-value, “B” are medium,
and “C” are low-value).
 Perpetual Inventory System
Continuously tracks inventory through technology like barcodes
or RFID.
 Periodic Inventory System
Involves physical counts of inventory at regular intervals (e.g.,
monthly or yearly).
Example: A small electronics retailer uses JIT inventory to reduce storage
costs by only stocking products that are in immediate demand.
 SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.
DISCIPLINE…ACCOUNTABILITY…PROFESSIONALISM…HUMILITY
NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO
Contact Nos.: +63917-127-8500 | +63912-448-6518

Radio Frequency Identification Tags (RFID)

These are small devices that uses radio waves in order to transfer data
between a tag and a reader. Techniques which commonly used for tracking
and identifying objects. By the used of this method the inventory
management has been more reliable because it provides real- time tracking
and automated data collection.

 Real-Time Tracking
RFID readers can scan multiple tags at once, providing instant
updates to inventory systems without manual scanning. This is much
faster than barcode systems, which require line-of-sight scanning.
Since RFID tags don’t need to be visible to be scanned, inventory
counts are more accurate and less prone to human error. This improves
stock levels, reduces discrepancies, and prevents stockouts or overstock
situations.
 Inventory Control
RFID enables businesses to know exactly what’s in stock at any
given moment, leading to better decision-making for restocking, order
fulfillment, and inventory rotation.
By integrating RFID with inventory management systems,
businesses can set up automatic replenishment processes when stock
levels fall below a set threshold.
 Reduction of Labor Costs
RFID eliminates the need for workers to manually scan each item
during stock checks, saving significant time and labor costs. Entire pallets
of goods can be scanned simultaneously.
Periodic stock audits are much faster, reducing the need for physical
counts and minimizing the time inventory is unavailable.
 SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.
DISCIPLINE…ACCOUNTABILITY…PROFESSIONALISM…HUMILITY
NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO
Contact Nos.: +63917-127-8500 | +63912-448-6518

Example Use Cases

 Retail
Large chains like Walmart use RFID to track inventory on shelves
and in warehouses, optimizing supply chain operations and ensuring that
products are always available to customers.
 Manufacturing
Factories use RFID to track raw materials and finished goods as
they move through production lines.

 Healthcare
Hospitals use RFID to track medical supplies and expensive
equipment, ensuring that critical items are always in stock.

Economic Order Quantity (EOQ) Models

A key inventory management tool that helps businesses minimize their
total inventory costs by determining the optimal order quantity. EOQ models
are widely used in supply chain and inventory management to reduce
holding costs, ordering costs, and ensure efficient operations.
EOQ is the optimal order quantity that minimizes the total cost of
inventory, including ordering and holding costs.
Its purpose is to balance the trade-off between inventory ordering
costs and carrying (holding) costs to ensure efficient inventory management.
Example:
A company uses EOQ to determine the optimal number of units to
order to minimize costs while ensuring enough stock to meet demand.

The basic EOQ Formula:

EOQ = √2DS/H

 D-Annual demand for the product (in units).

 S- Ordering cost per order (fixed cost of placing an order).
 H- Holding cost per unit per year (cost of storing one unit for a year).

Variables:
D (Demand)- The total quantity of units required over a year.
S (Ordering Costs)- Includes all costs involved in placing and receiving
orders, such as purchase order creation, shipping, and handling.
 SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.
DISCIPLINE…ACCOUNTABILITY…PROFESSIONALISM…HUMILITY
NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO
Contact Nos.: +63917-127-8500 | +63912-448-6518

H (Holding Costs)- Includes all expenses for storing, managing, and

maintaining inventory, such as rent, utilities, insurance, and obsolescence
risk.

Example Calculation:
Annual Demand (D): 10,000 units
Ordering Cost per Order (S): P50
Holding Cost per Unit per Year (H): P2

EOQ =√2×10,000×50/2 = √1,000,000/2 = √500,000 ~ 707 units

EOQ with Quantity Discounts

In some cases, suppliers offer discounts for larger orders. The EOQ
model needs to be adjusted to account for these potential savings. The
Modified EOQ considers the lower purchase cost due to discounts and
compares it with the increase in holding costs to determine the most cost-
effective order size.
Quantity discounts reduce per-unit costs but increase holding costs. In
this method the business must compare the savings from discounts against
the extra costs incurred from holding more inventory.
Process for EOQ with discounts:
1. Calculate EOQ for each price tier offered by the supplier.
2. Evaluate total costs for each option, incorporating both the discounted
purchase price and the resulting holding and ordering costs.
3. Choose the order quantity that results in the lowest total costs.

EOQ with Backordering

The EOQ with backordering model allows for a situation where a
company might temporarily run out of stock (backorders) but still fulfill
customer orders once the inventory is replenished. This model is particularly
useful for businesses that face variability in demand and want to avoid
keeping excessive stock. It helps balance the costs of stockouts (penalty
costs) with holding costs.

EOQ with Backordering Formula:

EOQ backorder = √2DS/H(1–B/H)

Variables:
B = Backordering cost per unit per year (penalty cost)
H = Holding cost per unit per year
D = Annual demand
 SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.
DISCIPLINE…ACCOUNTABILITY…PROFESSIONALISM…HUMILITY
NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO
Contact Nos.: +63917-127-8500 | +63912-448-6518

S = Ordering cost per order

End of module 3