Prepared by: Syed Emad Azhar Ali,

Faculty, Iqra University.

 INVENTORY PLANNING
 The planning and control of inventory from product design to
final delivery are of considerable strategic significance to
management.
 Inventories serves as a cushion b/w the production and
consumption of goods and exists in various forms: Materials
awaiting processing: partially completed products or
components: and finished goods at the factory, in transit, at
warehouse distribution points, and in retail outlets.
 At each of these stages, sound economic justification for the
inventory should exist, since each additional unit carried in
inventory generates some additional costs.
 On the average, inventories accounts for about one third of
total assets.

Prepared by: Syed Emad Azhar Ali,

Faculty, Iqra University.
PLANNING MATERIALS
REQUIREMENT
 To plan manufacturing requirements, every stock item
or class of items must be analyzed periodically to:
1. Forecast demand for the next month, quarter, or
year.
2. Determine acquisition lead time.
3. Plan usage during lead time.
4. Establish quantity on hand.
5. Place units on order.
6. Determine reserve or safety stock requirements.
Prepared by: Syed Emad Azhar Ali,
Faculty, Iqra University.
PLANNING MATERIALS REQUIREMENT ( Cont’d)
 Example:
Lead time = 2 months
Safety Stock = 1000 units.
Planned or forecast usage from review date: ( As on 1st September )
September production 2500
October production 2000
November production 2500
Desired Inventory, Nov.30 (Safety Stock) 1000
Total to be provided 8000
Quantity on hand, Sept.1 1600
On order for Sept. delivery 2000
On order for Oct. delivery 2000
5600
Quantity to order for Nov delivery 2400
Prepared by: Syed Emad Azhar Ali,
Faculty, Iqra University.
 ECONOMIC ORDER QUANTITY
 The economic order quantity is the amount of inventory to
be ordered at one time for purposes of minimizing total
inventory cost.
 If a company buys in large quantities, the cost of carrying
the inventory is high because of the sizable investment. (
i;e carrying cost )
 If purchases are made in small quantities, frequent orders
with correspondingly high ordering costs will result.
 Therefore, the quantity to order at a given time must be
determined by balancing two factors:
(a) the cost of processing materials
(b) the cost of acquiring (ordering) materials.

Prepared by: Syed Emad Azhar Ali,

Faculty, Iqra University.
 Carrying Cost / Holding Cost
Carrying cost factors should include only those costs
that vary with the level of inventory.
Examples:
 Interest or investment of working capital.
 Insurance cost. ( when the premium is charged on the
fluctuating inventory value)
 Handling cost
 Deterioration and shrinkage of stocks.
 Obsolescence of stocks.
Prepared by: Syed Emad Azhar Ali,
Faculty, Iqra University.
 ORDERING COST
These costs include,
 Requisition and the purchase order,
 Handling the incoming shipment,
 Preparing a receiving report,
 Communicating in case of quantity/quality errors or
delays in receipt of materials, and accounting for the
shipment and the payment.

Prepared by: Syed Emad Azhar Ali,

Faculty, Iqra University.
 EOQ ( Illustration )
 Estimated requirements for next year= 2400 units
 Cost of the item per unit = Rs.1.5
 Ordering Cost = Rs.20 per order
 Inventory Carrying Cost = 10%
(% of average inventory investment)

Prepared by: Syed Emad Azhar Ali,

Faculty, Iqra University.
 QUANTITIVE DATA
Order size in units 300 400 800 1200 2400

Number of Orders 8 6 3 2 1

Average Inventory 150 200 400 600 1200

(Order Size/2)

COST DATA
Average Inventory 225 300 600 900 1800
Investment

Total carrying 22.5 30 60 90 180

cost(10% of Avg. Inv.)

Total Ordering Cost 160 120 60 40 20

Cost to order and
carry 182.5 150 120 130 200
DETERMINING THE TIME TO
ORDER
 The EOQ formula answers the quantity problem of
inventory control. However, the question of when to
order is equally important. This question is controlled
by three factors:
1. Time needed for delivery.
2. Rate of inventory usage
3. Safety Stock

Prepared by: Syed Emad Azhar Ali,

Faculty, Iqra University.
 DETERMINING THE TIME TO
ORDER
For most stock items there is a variation in either or both of
these factors, which almost causes one of three results:
1. If lead time or usage is below expectation during an
order period, the new materials will arrive before the
existing stock is consumed. thereby adding to the cost
of carrying inventory.
2. If lead time or usage is greater than expected, a stockout
will occur with resultant incurrence of costs associated
with not carrying enough inventory.
3. If average lead time is used to determine an order point,
a stockout could be expected on every other order.
Prepared by: Syed Emad Azhar Ali,
Faculty, Iqra University.