Inventory Management

 Inventory is any idle material resource of

an enterprise awaiting future sales, use or
transformation.
Types of Inventory
 1. Production Inventories: Raw materials, parts
and components which are consumed in the
production process.
 2. MRO Inventories: Maintenance, repair and
operating supplies which are used in the
production process but do not become a part
of the products.
 3. In-Process Inventories: Partially completed/
finished goods that are still in the
production / operation.
 4. Finished Goods Inventories: Completed
products ready for shipping.
Elements of Inventory Cost
 1. Purchase Cost
 2. Procurement Cost (Ordering Cost)
 3. Carrying Cost
 4. Stock out Cost


 Economic Order Quantity (EOQ)

 It is an idealized inventory system to calculate
the fixed order quantity that minimizes total
costs. This optimal order size is called EOQ.


 Reorder Level
 Reorder level = lead time × demand per unit time
 ROL = LT × D



Fixed Order Quantity System or ‘Q’
System

EOQ
Reorder Level

Minimum Level

Safety Stock

T1 T2 T3

Time
 Fixed Order Period System or ‘P’
System

Q2 Q3

Q1

ML
Safety Stock

T T T
TIME
 EOQ Model

Total Cost Curve

Annual Cost

Min Tc Holding Cost

Ordering Cost

EOQ Order Quantity

EOQ = Optimum Quantity = Least Total


Cost


Total cost = Tc = D*Cp + D*Co + Q*Ch

 Q 2


Where,
Tc = Total Cost
D = Annual demand (units)
Cp = Purchase cost / unit
Q = Order quantity (EOQ)
Co = Cost of Placing an order

Ch = Holding cost


 Total Cost (Min.) = Ordering Cost = Carrying Cost
 D * Co = Q * Ch
 Q 2
Where, D/Q = No. of orders, Q/2 = Average

Inventory


 Thus, Q² = 2 D Co
 Ch


 Or Q =√2 D Co = EOQ
 Ch



 Q1. Company ‘XYZ’ buys 2000 pencils/year at

Rs 1/- each. The ordering cost is Rs 10/- per
order. Inventory carrying cost is 16% per
annum. Find:


 (1) EOQ
 (2) No. of orders &
 (3) Total inventory cost/year
 Sol. (1) Given:
 D = 2000 units, Co = 10, Ch = 16 % of Cp

 = 16 % x 1 = .16


 EOQ =√2x2000x10 = 500 units

 0.16
(2) No. of orders = D = 2000 = 4 orders

 Q 500


 (3) Tc = D . Co + Q . Ch =4 x 10+250 x 0.16 = 80

 Q 2

Q2. Telco Ltd. Uses 2,400 of particular type
of component per year. ‘X’ enterprise
supplies this at a price of Rs. 10 each.
Ordering cost is Rs. 100 per order &
carrying cost is 10% at Telco.
 ‘X’ enterprise wants to give 10% discount if

order quantity is 1000. Is it advisable to

accept the discount offer?


 Sol.2 EOQ =√2 D Co = √2*2400* 100 = 690 units

 Ch 1
Where, Ch= 10% x 10

Now, Total Cost for EOQ:

 Tc1 = D. Cp + D . Co + Q . Ch
 Q 2
= 2400 x 10 + 2400 x 100+690 x 10 x 10=24,693

 690 2 100
Total cost for Discount offer i.e. for order of 1000 units

Tc2 = 22,340

Hence, it is better to take discount offer as Tc2 < Tc1

ABC Analysis
 Also called “Always better Control”
 It takes into account both value & volume of
consumption of items


ITEMS Class A Class B Class C

Volume of Annual 10% 20% 70%
Consumption

Value of Annual 70% 20% 10%

Consumption


A items represent 10% of the total inventory items, but



70–80% of the total cost.



 Plywood


B items are of medium value that represent 20% of the



items and 15–25% of the total cost.



 Electrical wiring
 Upholstery for seats


The low price items are class C items, representing 70% of



the items and 5–10% of the total cost.



 Nuts

 Annual Consumption value of Total

70
90
100

0,0
A

10
B

30
C

Quantity
100