Chapter 7
Inventory
Management
Types of Inventory
Inventory can be divided into 3
categories:
i) Raw materials
Basic raw materials
ii) Work-in process
Consist of partially finished goods
iii) Finished goods
Products that have been
processed completely & ready for
Objectives of inventory management
To maximize inventory
turnover
To carry sufficient inventories
to sustain operation at the
minimum cost
Techniques on Inventory
Management
4 common techniques
ABC system
Economic Order Quantity
(EOQ) model
Just-in-Time (JIT) system
Materials Requirement
Planning (MRP) system
EOQ model – to determine the
order size that will minimize
Assumptions on EOQ model
i. Constant demand
ii. Constant costs
iii. No delays in
order
Formula
1. EOQ, Q = 2SO
C
S = usage in units per period
O= Ordering costs – fixed cost of placing & receiving
orders
C = Carrying costs – variable costs per unit of
holding an item of inventory for a specific period of
time
SS = safety stock @extra inventory to prevent
stockout
* carrying costs include:
Storage cost
Insurance cost
Property taxes
Depreciation
FORMULA
2) Total Order Cost (TOC)= O x
S/Q
3 )Total Carrying Cost (TCC)= C x
Q/2
With Safety Stock
TCC = C x (Q/2 + SS)
4 )Total Inventory Cost (TIC) =
TOC + TCC
Reorder Point (ROP)
Reorder Point include lead time.
Lead time = how many days to place
& receive an order
5) ROP = (days / [Link] days in a year X
usage ) + SS
or = (weeks / no. of weeks in a year
X usage) + SS
6 ) Numbers of order = s / Q =
units
7) Average Inventory =( Q / 2 ) +
SS = units
MULTIPLE 100 AND 200
MULTIPLE 100 MULTIPLE 200
12370
8714
34288
25442
15590
88220
Solution: Asyraf Hadi Sdn Bhd
Dec 2018, Q3(a)
IOU Corporation has an annual
usage of 4,000 units. The cost of
placing an order is RM100 and the
firm’s carrying cost per unit for
each quarter is RM0.80. The firm
also maintains a safety stock of 20
units. Compute the total inventory
cost.
June 2018 (Q3-a)
Sports Mart, a chain of sporting goods
stores, sells 360,000 baseballs per
year. The baseballs purchase price
per unit is RM1.25 each. Total
carrying costs are 20 percent of
purchase price. The ordering costs is
RM72. Compute total inventory costs.
JULY 2017 ( Q3-a)
Danial Steel Corp. buys inventory of 40,000
units annually. The purchase price per unit is
RM3.00 and delivery time takes 2 weeks after
the order is placed. The ordering cost is RM40
per order. The storing and insurance cost of the
inventory per quarter is 20 percent of the
purchase price. Based on the sales records, it
normally maintains its safety stock of 4,500
units. Order should be placed in 100 units and
50 weeks is in year. Calculate:
i) The economic order quantity
ii) The total cost of holding inventory
iii) The inventory level should reorder be
made
JUNE 2016 (Q3-a)
Al Amin Sport World, a chain of sporting goods
stores, sells 360,000 tennis balls per year. The
tennis balls cost Al-Amin Sport World RM15 per
[Link] inventory carrying costs are 20
percent of inventory price. The cost of placing and
receiving an order are RM72. Assume the inventory
replenishment occurs virtually instantaneously.
Based on recent experience, Al-Amin Sport World
uses 7 days delivery time for planning purposes.
(assume 360 days in a year)
I ) Calculate the economic order quantity.
ii) Calculate the number of orders to be placed.
iii) Calculate the total annual inventory costs.
iv) Determine the reorder point.