Prepared BY:

Group 6
Jayesh Mhatre

85

Mayank Jhawar

93

Mukesh Agrawal

94

Naman Mahansaria

119

Nikesh Mishra

97

Pooja Jaiswal

101

Introduction
An inventory is the stock of idle resources in a firm for
future use.

Types of Inventory

Uses of Inventory

To satisfy the
expected
customer demand
(Anticipation
Inventory)
To protect
against price
increases and
to take
advantage of
Quantity
Discounts

To avoid stock
outs (Safety
Stock or Buffer
Stock)

Inventory

To minimize the
total cost by
ordering the
Economic
Order Quantity
(Cycle Stock)

To provide buffer
between successive
operations (Decoupling
Inventory or Work-inprocess Inventory)

To satisfy periods of
seasonal high demand
(Seasonal Inventory)

To act as a buffer between

various elements of the
Supply-Chain (SuppliersProducers-DistributorsWholesalers-RetailersCustomers) (Pipeline or
Transit Stock)

Roles of Other Functional Departments

Finance Department

Demand forecast of
finished goods so
that raw materials
can be procured
accordingly

Marketing
department
Information
regarding changes
made in the
materials quality to
enhance the quality
of finished goods

Salaries &
wages of
employees
in the
materials
department

Formulation
of annual
budget for

Feedback
regarding quality
requirements of
finished goods
and thus the
materials used

Installation
of ERP or
other
software in
the materials
department

materials

Information
regarding
payments to
be made to
suppliers

Materials
Department

Training of
employees in
the materials
department
regarding use of
ERP and other
software

Information
systems
department

Information
regarding the
ordering cost
and carrying
cost figures to
be used in
order size
calculations

Recruitment
of
employees
in the
Materials
Department

Performance
appraisal of
employees in
the materials
department
Human
resources
department

Training &
development of
employees in
the materials
department
Requirement
of suitable
software in
the materials
department

Types of Cost
Ordering Cost
- Per order is the cost of placing a single order.

Carrying or Holding Cost

- Cost of Storing Inventory in the warehouse

Ordering Cost
Order placing
Transportation
Receiving, Inspecting and storing
Clerical and staff

Carrying Cost
Warehousing
Handling
Clerical and staff
Insurance
Deterioration and Obsolescence

Inventory Management Systems

Inventory Management
Systems

Independent Demand Inventory

Management Systems

For Retailers

For Manufacturers

ABC
Classification
of Items

Category
A Items

EOQ Model for

Manufacturers

Category
B Items

Basic Economic
Order Quantity
(EOQ) Model

EOQ Model
with Quantity
Discounts

Dependent Demand
Inventory Management
Systems

Material
Requirements
Planning (MRP)
Systems

Category
C Items

Just-In-Time
(JIT)
Systems

Hybrid MRP-JIT
Systems

Periodic
Review
System

EOQ Model with

Differential
Discounting

EOQ Model
with Safety
Stock

EOQ Model
with Intentional
Shortages

Inventory Management System (IMS)

Dependent

Independent

Demand for items used

to produce final products
Tires stored at a
Goodyear plant are an
example of a dependent
demand item

Demand for items used

by external customers
Cars, appliances,
computers, and houses
are examples of
independent demand
inventory
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Types of Dependent Demand IMS

Materials Requirement Planning System (MRP)
Inputs
Bill of materials (BOM)
Master plan schedule (MPS)
Inventory status

Outputs
Planned order report
Order release report

Order changes report

Types of Dependent Demand IMS

Just- In-Time System (JIT)
Inventories are acquired and inserted in production at the exact times
they are needed.
AS NEEDED basis
REQUIREMENTS
- Accurate productions
- Inventory information system
- Highly efficient purchasing
- Reliable suppliers
- Efficient inventory handling system

ABC Classification
Typical observations
A small percentage of the items (Class A) make up a large percentage
of the inventory value
A large percentage of the items (Class C) make up a small percentage

of the inventory value

These classifications determine how much attention should be given to
controlling the inventory of different items

Control by importance and Exception (CIE)

Selective control system

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ABC Analysis
A firm, which carries a number of items in inventory which differ in value,
can follow a selective control system.
ABC classifies inventories into three categories according to the
consumption value of items:
A Category consists of highest value items,
C category consists of lowest value items; and
B category consists of high value items.

Tight control may be applied on A category of items, and relatively loose

control for C category of items

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ABC Classification
- Items kept in inventory are not of equal importance in terms
of:
dollars invested
profit potential
sales or usage volume
stock-out penalties

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Periodic Review System

Checking the inventory level after a regular interval of time
Target level is compared with Present level
Formula:
1) Order size= Desired/ Target Inventory level Present Inventory Level

2) Desired/Target Inventory Level= Average demand during the review

period + Average DDLT +Safety Stock

13

Economic Order Quantity (EOQ) Model

Definition
-The optimal quantity of orders that minimizes total
variable costs required to order and hold inventory.
Assumptions
- Only one product is involved
- Annual demand requirements known
- Demand is even throughout the year
- Lead time does not vary
- Each order is received in a single delivery
- There are no quantity discounts
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The Inventory Cycle

Profile of Inventory Level Over Time

Q
Quantity
on hand

Usage
rate

Reorder
point

Receive
order

Place Receive
order order

Place Receive
order order

Time

Lead time
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Types of EOQ Model

Quantity Discount
Specify particular percentage of discounts on bulk purchases.
Total inventory cost is compared with EOQ model with discount option.
Lower inventory cost is selected and adopted.

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Types of EOQ Model

Differential Discount
Different discounts offered by a supplier for different quantities of an item.
EOQ option and discount option are considered separately and associated
total cost is calculated, then comparison of the total cost for different
option is made.
The least total cost is selected and adopted.

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Types of EOQ Model

Intentional Shortage
Due to loss in goodwill on the customers part which depends on how long
they have waited to receive the goods.

Because Carrying Cost of expensive items is very high.

Back orders are supplied on prior basis.
There are three types of Cost.
-Ordering Cost
- Carrying Cost
- Cost of shortage

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Types of EOQ Model

Safety Stock
Protection against the possibility of a stock out.

Stock out
An inventory shortage.

Service Level
Probability that the inventory available during lead time will meet
demand.

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Management Demand Uncertainty

In order to reduce demand uncertainty, the following three points
should be kept in mind by the production and inventory planners:
1.

Always treat demand forecasts as unreliable.

2. Take cognizance of the fact that longer the planning horizon, more
is the likelihood of the demand forecasts being inaccurate.
3. Try to arrive at aggregate forecasts by combining forecasts for
various models of a product in order to increase the overall accuracy.

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Risk Polling
When an organization moves from a decentralized inventory system
to a centralized inventory system, generally less overall safety stock is
required to be maintained at the centralized location compared to the
safety stocks required to be maintained at separate locations in a
decentralized system. This is so because the overall risk is reduced
due to the pooling of the inventory at a centralized location. This
concept is, therefore, called risk pooling.
The following three kinds of situations may happen with risk pooling
depending upon the correlation between demands at separate
locations (say, markets).
When demands are not correlated (independent demand)
When demands are positively correlated to each other
When demands are negatively correlated to each other
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Inventory Turnover Method

- It means how many times a companys inventory is sold and replaced
(finished product)

- Generally calculated as:

Sales/ Inventory
- However it may also be calculated as :
Cost of Good sold/ Average Inventory

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