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Uses of Inventory
To satisfy the
expected customer
demand
(Anticipation
Inventory)
To protect
against price
increases and
to take
advantage of
Quantity
Discounts
Inventory
To avoid stock
outs (Safety
Stock or Buffer
Stock)
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)
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
For Retailers
For Manufacturers
ABC
Classification
of Items
Category A
Items
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 Safety
Stock
EOQ Model
with Intentional
Shortages
L
e
v Q
e
l
Ist Inventory
Cycle
IInd Inventory
Cycle
IIIrd Inventory
Cycle
IVth Inventory
Cycle
0
t
t
Time
Safety Stock
Inventory decreases at a
constant rate
In
v
e
n
t
o
r
y
L
e
v Q
e
l
R E O R
D E R
L E V E L
500 units
0
Lead time
(10 days)
Ist order is placed
IInd order is
placed
IIIrd order is
placed
The goods are received
Time
Inventory decreases
at a constant rate
I
n
v
e
n
t
o
r
y Q
L
e
v
e
l 0
Inventory
decreases at
a faster rate
R E O R
500
units
D E R
L E V E L
Stock-out
Lead time
IInd order
(10 days)
is placed
The goods are
received
IIIrd order
is placed
Time
Inventory decreases
at a constant rate
I
n
v
e
n
t
o
r
y Q
L
e
v
e
l
LEAD TIME
UNDULY
STRETCHED BY
THE SUPPLIER
R E O R
500
units
D E R
L E V E L
Stock-out
0
Ist order is placed
Normal
Lead time
(10 days)
IInd order
is placed
The goods are
received
Time
Inventory decreases
at a constant rate
Level of Maximum Inventory
I
n
v
e Q
n
t
o
r
y
L
e
v
e
l
Inventory
decreases at
a faster rate
R E O R
D E R
L E V E L
500
units
200
units
IInd order
is placed
Ist order
is placed
S A F E T Y
S T O C K
Time
Inventory decreases
at a constant rate
Level of Maximum Inventory
I
n
v
e Q
n
t
o
r
y
L
e
v
e
l
R E O R
D E R
L E V E L
LEAD TIME
UNDULY
STRETCHED BY
THE SUPPLIER
500
units
200
Normal
units
Lead time
Ist order (10 days) The goods are
is placed
received
S A F E T Y
S T O C K
Time
In
v
e
n
t
o Q
r
y
L
e
v
e
l
R E O R
D E R
L E V E L
S A F E T Y
0
S T O C K
(1-)
Time
Inventory decreases
at a faster rate
Out-of-stock
situation
Lead time
Service Level
Service level
Average
DDLT
Safety stock
D
D
L
T
(1- )
Out-of-stock situation
10
L
e
v
e Q
l
(Q-S)
t2
0
t1
S
t
Time
The goods are received
11
Only sales of
Items taking
place at rate (d)
Ist Inventory
cycle
IInd Inventory
cycle
0
t1
Ist production
run
Time
t2
Production halts
IInd
production
run
12