Inventory Management
Importance
To meet anticipated customer demand
To smooth production requirements
To reduce the risk of stockouts
To take advantage of order cycles
To permit operations
Inventory Counting Systems
Periodic System
Perpetual inventory system (also known as a
continuous review system)
Universal product code (UPC)
Point-of-sale (POS) systems
Inventory Costs
Purchase cost is the amount paid to a vendor
or supplier to buy the inventory. It is typically
the largest of all inventory costs.
Holding, or carrying, costs relate to
physically having items in storage. Costs
include interest, insurance, taxes (in some
states), depreciation, obsolescence,
deterioration, spoilage etc.
Ordering costs are the costs of ordering and
receiving inventory. They are the costs that
occur with the actual placement of an order.
Inventory Costs
When a firm produces its own inventory
instead of ordering it from a supplier,
machine setup costs are incurred(e.g.,
preparing equipment for the job by adjusting
the machine, changing cutting tools).
Shortage costs result when demand exceeds
the supply of inventory on hand. These costs
can include the opportunity cost of not
making a sale, loss of customer goodwill, late
charges, backorder costs, and similar costs.
Classification System
ABC System
Typically, three classes of items are used: A
(very important), B (moderately important),
and C (least important). However, the actual
number of categories may vary from
organization to organization.
ABC Problem
Item No Annual Unit Cost
Demand ( $)
1 25 360
2 10 70
3 24 500
4 15 100
5 7 70
6 10 1000
7 2 210
8 10 4000
9 80 10
10 5 200
V-E-D Analysis
VED (Vital, Essential, and Desirable) Analysis is a classification
method of inventory management used to categorize inventory
items based on their criticality or importance for business.
Vital (V): These are the most critical or most important items
you can say. Without them, a system or business can’t work. So
It’s necessary to always have them in stock. Examples are raw
materials, components, oxygen tanks, motors, etc.
Essential (E): These items are important but not as critical as
vital items. If they are unavailable, the system can still
function for a short time. but it will eventually face problems if
it stays unavailable for a long time. Examples are surgical
gloves, safety gear, spare parts, office supplies, etc.
Desirable (D): These are the least important items.
Economic Order Quantity (EOQ)
The basic EOQ model is the simplest of the
three models.
It is used to identify a fixed order size that
will minimize the sum of the annual costs of
holding inventory and ordering inventory.
EOQ Chart
EOQ Assumptions
1. Only one product is involved.
2. Annual demand requirements are known.
3. Demand is spread evenly throughout the
year so that the demand rate is reasonably
constant.
4. Lead time is known and constant.
5. Each order is received in a single delivery.
6. There are no quantity discounts.
EOQ Formula
Other Formulas
Number of Orders Per Year= Demand/EOQ
Length of order cycle= (EOQ/Demand) * no of operating
days
Total Ordering Cost Formula = (D/Q)×S
Total Carrying Cost Formula = (Q/2)×H
Total Cost=Total Ordering Cost+ Total Carrying Cost
Where
D = Annual demand in units
Q = EOQ or quantity per order
S = Ordering cost per order
H = Holding cost per unit per year
Problem