Bolivarian Republic of Venezuela

Ministry for Popular Power of University Education

National Experimental University "Rafael María Baralt"
Rodolfo Loero Arismendi University Institute of Industrial Technology
Management Major in Industrial Management
Agreement

Inventory Models
AND ITS OPERATION.

Professor: Members:

Wilfredo Rodríguez Yusmely Ruiz, V-13165808

Eiskel Diaz V-14320152

Section: 03 Vicente Figuera, V-11945985

Leonardo Valderrey, V-8278118

Yolanda Molina, V-15677647

Tahiri Jiménez V- 19013103

Barcelona, May 8, 2014

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 INDEX

Content Page.
Introduction
Inventory Management 3
Definition of Inventories 4
Importance 5
Objectives 6
Functions of Inventories 6
Advantages of Inventory Systems... 6
Inventory Control 7
Inventory Valuation Methods 8
Inventory Models 10
Inventory Management Costs 10
Determination of Contingency Inventories………………………. 19
Determination of Safety Stocks... 20
Conclusion
Bibliography
Annexes

1
 INTRODUCTION

The following research focuses on inventories, their definition,

importance, the costs to which they are subjected, and different models
from its classification, it can be inferred that the inventories
they are the goods of a company intended for sale or also for
production for subsequent sale, such as raw materials, production
in process, finished goods and other materials used in the
packaging, container for goods or spare parts for maintenance that
they are consumed in the normal cycle of operations.

It is expected that this research will be very useful for understanding

from a simple perspective, the role that inventory plays in a
organization since they aim to be the engine of the
sales in the company, which will generate profit through a price
superior to the cost of acquisition and/or manufacturing. This profit will allow to the
company its permanence over time.
Inventory Management

Inventory management is related to planning and control

of inventories. Inventory planning seeks to answer two
basic questions:

When to place orders - This question relates to the concept

for the moment of orders. This is a system in which all material used
It is regularly reordered when its inventory level drops below a certain level.
The level is usually a function of delivery deadlines, daily demand,
and the safety stocks.

How much to order - the quantity requested is determined by the amount.

economic to arrange.

There are two basic systems of inventory planning.

The fixed order quantity model, and
The fixed time period model.

En la gestión el inventario registra el conjunto de todos los bienes

own and available for sale to customers, considered as an asset
corriente. Los bienes de una entidad empresarial que son objeto de
Inventory is the stock designated for direct sale or those
internally designated for the production process as raw materials,
unfinished products, packaging materials or containers and parts of
spare parts for maintenance that are consumed during the operational cycle

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INVENTARIO:

Inventories are a bridge between production and the

sales in a company, balances the production line if some machines
they operate at different volumes than others. It is the documentary record of the

goods and other things belonging to a person or community, fact

with order and precision.

Raw materials, semi-finished and finished products

they absorb the slack when sales fluctuate to the volumes of
production, which gives us another reason for inventory control.
.
In an entity or company, it is the orderly relationship of assets and
stocks, on a specific date. In accounting, it is an account of
current asset that represents the value of the existing merchandise in a
warehouse.

In accounting, it is a detailed relationship of the inventories

materials included in the asset, which must display the number of
units in stock, the description of the items, the unit prices,
the amount of each line, the partial sums by groups and classifications
and the total inventory. Therefore, what is expected is to keep it to a minimum.
the inventories.

Inventories are tangible goods that are held for sale in the
ordinary course of business or to be consumed in the production of
goods or services for your latermarketing.

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 When there are high levels of inflation, the concept of zero
inventories lose validity, as in this case the best way to protect oneself from the
inflation is maintaining high inventory levels, especially of those
articles whose inflation rate is higher than the average inflation, of
average. Another negative factor in inventories is the uncertainty of the
demand, which makes it difficult to maintain an inventory that can satisfy everyone
the requirements; existing conditions where they cannot be met
inventory shortages, with the same speed at which they run out, causing
costs due to shortages, at other times there are products that deteriorate
for existing in excess.

Understand the concept, characteristics, and the fundamentals of the

inventory shipping systems can be very useful for the
company, since they are the ones that really set the production point that
it can be had in a period. The financial manager must have the
relevant information that allows you to make decisions about the management that
this area of organizational assets should be given attention.

IMPORTANCE

To have control over any amount of goods or objects that

having it available is advisable in any entity, company
or institution, as well as in our home, allowing a
BetterOrganizationespecially when it is necessary to carry out a move or
Mobility from one point to another within the home, thus avoiding losing material or
well keeping better track of what has been transported.

For this reason, it is necessary to develop what is known as

Inventario, una tarea que si bien puede parecer sencilla desde afuera, lo

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it is true that it has different stages and can be very complex, depending
also depending on how elaborate you want to prepare it, or the type of Object to
Inventory, having different ways ofwork.

OBJECTIVES

Provide or distribute the necessary materials properly to the

company. Making them available at the right moment, to avoid
cost increases leading to losses of the same. Allowing to satisfy
correctly the real needs of the company, to which it must
to remain constantly adapted. Thereforethe managementof inventories
It must be carefully controlled and monitored.

FUNCTIONS OF THE INVENTORY

Storage of goods to meet anticipated demand.

2. Separate the production and distribution processes
3. Take advantage of quantity discounts
4. Protecting oneself from inflation and price changes
5. Protecting against out-of-stock inventory
6. Allow operations to continue smoothly.

ADVANTAGES OF AN INVENTORY SYSTEM

With the company, you can carry out your production and purchasing tasks.
saving resources, and also serve their customers more quickly,
optimizando todas las actividades de la empresa, sin embargo se presenta
a disadvantage is the maintenance cost; as it must be considered

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the cost of capital, the cost of storage, the opportunity cost causing
for nonexistence, and others.

Both inventory and accounts receivable must be increased.

until the saving result is greater than the total cost of maintenance
an additional inventory.

INVENTORY CONTROL

The efficiency of inventory control can affect flexibility

operation of the company. Two essentially identical companies, with the
same amount of inventory, but with large differences in the degrees of
flexibility of their operations, they can have unbalanced inventories,
mainly due to their inefficient controls.

 In an inventory control system, the following should be mentioned:

objectives:
 Minimize investment in inventory
 Minimize losses due to damage, obsolescence or by items
perishables.
 Maintain a sufficient inventory so that production does not lack
raw materials, parts, and supplies.
 Maintain an efficient transportation of inventories, including the
dispatch and receipt functions.
 Maintain an efficient inventory information system.
 Provide reports on inventory value or accounting
 Make purchases in a way that acquisitions can be achieved.
economic and efficient.

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  Make forecasts about future inventory needs

There are two systems for controlling inventories:

Periodic system: as its name indicates, it performs a check every

determined time or period, and for that it is necessary to do a counting
physical, in order to accurately determine the amount of available inventories
on a specific date. The company can only know the inventory
exactly like the cost of sales, at the time of doing a physical count, which
It is generally done at the end of a period, which can be monthly,
semiannual or annual.

Permanent inventory system: allows constant control of

the inventories, by keeping a record of each unit that enters and exits the
inventory. This control is carried out using cards called Karderx,
where the record of each unit is kept, its purchase value, the date of
acquisition, the value of the output of each unit and the date it is withdrawn
of the inventory.

In this way, the exact balance can be known at all times.

the inventories and the cost of sales value.

VALUATION METHODS

FIFO (First In, First Out) Method

This method basically consists of releasing from inventory those
products that were purchased first, so they will remain in the inventories
those products purchased most recently.

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 In any of the methods, purchases do not have much importance.
since these enter the inventory at the purchase value and do not require
special procedures.

In the case of returns of purchases, it is done by the

value that was purchased at the time of the operation, that is, the output is given of
inventory for the amount paid in the purchase.

FIFO method: (Last in first out)

In this method, what is done is to give output to the products that are
they recently purchased, with the aim of having it in the final inventory
let those products that were purchased first remain.

Here it is very useful when product prices increase.

constantly, which is very common in countries with trends
inflationary.

The treatment given to returns in purchases is the

the same as is given in the FIFO method, that is to say that it is given output from the

inventory at acquisition cost, this is because it is just

logically, the product is returned for the value that was paid at the time of
acquire it.

We must also remember that the different valuation methods

they are valid for costing sales or exits, since purchases already
they have an identified cost which is the value paid for them.

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Inventory Models

a) Deterministic: when the demand is known and constant.

b) Probabilistic; when the demand is unknown.

Inventory models help to answer two questions:

1.- When to place an order for the purchase
2.- How much to order of an item

COSTS INVOLVED IN INVENTORY MANAGEMENT

Inventory Management is an activity in which three coexist

types of costs

• Costs associated with flows

• Costs associated with stocks
• Costs associated with processes

This structure is proposed without prejudice to maintaining the classic.

cost structure by nature, as classified in the two

following large groups.

• Operating Costs.
• Costs Associated with the Investment

The first are those necessary for normal operation in the

achievement of the Goal. While the ones associated with Investment are those
financial related to depreciations and amortizations.

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Costs associated with the flows

In this classification, the costs of must be taken into account.

supply flows (transportation), although sometimes they will be by
supplier account and in other cases will be included in the price itself
of the acquired goods. It will be necessary to take into account both the costs
of operation as those related to investment.

Associated costs of stocks

In this area, all related to should be included

Inventories. These would include among others storage costs, damages,
losses and degradation of stored goods, among them also
We have the stock breakages, in this case they have a
fundamental component of the financial costs of inventories.

When one wants to know the total inventory costs.

all the indicated concepts must be taken into account. On the contrary,
when it is necessary to calculate costs for decision-making purposes,
(for example, to decide the optimal order size) it will only be necessary to
take into account the avoidable costs (which may vary in each case
considered), since unavoidable costs, by definition
they will remain outside regardless of the decision made.

Costs in the field of Processes

There are numerous and important concepts that must be attributed to

The costs of inventories are: Purchase costs, launch costs
of requests and activity management. A paradigmatic case is the

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next. In general, transportation costs are included in the price of
purchases (why not also include storage costs, or
from order management?), as a consequence of the fact that in the majority of
the cases are related to transportation on behalf of the supplier included in
more or less tacit or explicit way in the acquisition price. But
even when the transport is managed directly by the buyer
this practice is maintained, although many times the transportation cost does not
is directly proportional to the volume of goods purchased, but
it depends on the volume transported in each order. Under these circumstances
the cost of transportation also becomes part of the cost of
order launch.

The purely logistical classification of costs that has been cited until now.
it is no longer the most frequently used in 'the profession'. We have already
quoted in the previous paragraph concepts such as "launch cost of the
request" or "acquisition cost", which did not appear among the concepts
initially exposed. Well, the usual classification of costs that
the inventory managers use the following:

• Storage, maintenance, or ownership costs of

stocks
• Order launch costs
• Acquisition costs
• Stockout costs

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 STORAGE COSTS

The costs of storage, maintenance, or possession of the

Stock includes all costs directly related to ownership.
of inventories such as:

• Financial Costs of Inventory

• Warehouse Expenses
• Insurance
• Deterioration, loss, and degradation of goods.

Depends on the storage activity, this managed by the

company or not, or that the merchandise is stored under regime of
deposit by the supplier or owned by the manufacturer.

To record this complexity, the following is included

a detailed breakdown of storage costs,
maintenance or possession of stocks in the most general case possible. No
however, a simplified method for calculation will be presented later
these costs (the annual 'ad valorem' rate) that is used with much
frequency.
The classification of storage costs that follows
it includes, classifies them by activity (storage and maintenance), by
liability (fixed and variable) and by direct and indirect origin.

Direct storage costs

Fixed costs
• Personal

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• Surveillance and Security
• Tax Burdens
• Warehouse Maintenance
• Warehouse Repairs
• Rentals
• Depreciation of the Warehouse

• Depreciation of shelves and other storage equipment

• Financial immobilization expenses

Variable costs
• Energy
• Water
• Mantenimiento de Estanterías
• Replacement materials
• Repairs (related to storage)
• Deterioration, loss, and degradation of goods.
• Financial Expenses of Stock.

Direct maintenance costs

Fixed costs
• Personal
• Insurances
• Amortization of maintenance equipment
• Depreciation of computer equipment
• Financial expenses of fixed assets

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Variable costs
• Energy
• Maintenance of handling equipment
• Computer equipment maintenance
• Maintenance equipment repairs
• Communications.

Indirect storage costs

• Of administration and structure

• Training and development of staff

There is an approximate method for evaluating costs of

storage, known as the Annual Ad valorem rate.

Calculation of the Annual 'AD-VALOREM' Rate

This approximate method, which is widely used for planning

of Logistics Systems, consists of admitting that the costs of
storage can be approximated by an annual rate applied to the value
of the stored goods.

This hypothesis is evident in the case of financial costs of

the Stocks are generalized in this method to the other costs that are involved
in storage (Investments, personnel, energy, deteriorations, losses.)
Assuming that the more expensive a commodity is, the higher the cost.
storage.

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 ORDER LAUNCH COSTS

The launch costs of the orders include all costs.

what is incurred when a purchase order is issued. The costs that are
grouped under this heading must be independent of the amount that is
purchase and exclusively related to the act of placing the order. Their
the following components would be:

Implicit costs of the order: Cost of machine setup

when the order is launched by production, Cost of obtaining "PLACE" in the
Receiving warehouse (mobilization of goods or transportation to other
locations, for example), transportation costs exclusively linked
to the request (the invoice of a courier in the case of an urgent replacement, for
example), costs of supervision and monitoring of the need to launch a
order, etc.

Administrative costs related to the order circuit.

Reception and inspection costs.

ACQUISITION COST

It is the total amount invested in the purchase of the merchandise, or the value
accounting for the product when it comes to work in progress or products
finished.

In the first case (raw materials or components), the cost of

acquisition will incorporate the non-recoverable concepts that the provider will
to include in your invoice (for example, transportation, if it is at the expense of
provider, but not the VAT). It should be taken into account that many

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suppliers apply volume discounts, so sometimes the cost
The acquisition of an order will have a component of avoidable cost and others.
sometimes it will be entirely an unavoidable cost.

In the second case (work in progress or finished products), the

determination of the acquisition cost is more complex, depending on the
accounting practices of the company. In principle, it should incorporate the
following concepts:

• Incorporated Material Costs that, according to accounting practices

of the company can be valued according to the following
criteria.
• FIFO method (first in, first out).
PEPS
• LIFO method (last in, first out) - (Last in, first out)
UEPS is somewhat equivalent to a replacement cost.
• MIFO method (middle in, first out) is a weighted average
• Standard prices of the company
• Estimated replacement prices
• Direct production costs (labor, depreciation, etc.)
• Indirect Costs.

COSTS OF STOCK OUTAGES

The costs of stockouts or stock breakage include the set of

Costs due to stock shortages, these costs will not be absorbed by the
production in process, but will go directly to the state of
results.

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The criteria for valuing these break-up costs are:

• Decrease in income from sales: Lack of accounting integrity due to absence

References in an order placed implies a reduction in income.
for sales, both due to the shift in the invoicing date type,
as for the absolute loss of the loss.
• Increase in service expenses: This includes the
contractual penalties for supply delays, stoppages in the
production process, false freights, etc.

The assessment of these breakup costs is difficult and uncommon,

it is only possible if the company is equipped with an efficient management system
on quality, in general the inventory manager must comply with
subjective estimates or standard costs. In specialized literature these
are considered between 1% and 4% of sales revenue, but this
it is also tentative.

DETERMINATION OF CONTINGENCY INVENTORIES AND

SECURITY

CONTINGENCY INVENTORY

They are those that can be presented at a certain moment or

season, and that will serve to cover certain demand for a product that
clients require, these cases occur in companies
marketers, which are considered large and have several
branches in different locations of the country, and when a situation arises
contingency of a requirement for some material they do not have, they resort to

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the branches and transfer what they need, or they take out a loan of the
goods to another company of the same activity, to be returned as soon as it
have the existence, preferably within the month, generally in the
reality, that's how they work, they help each other mutually.

The contingency inventory allows for maintaining stock

additional above the normal, to protect oneself against the possibility of a
higher demand, which may occur due to unforeseen circumstances. The inventories
contingency funds intended to absorb the occasional variation in demand,
are determined by estimating the maximum demand that can reasonably
wait.

Determination of Contingency Inventories

One of the important components of the inventory system is a

contingency inventory, intended to absorb the variations of the
demand or delivery time of the supply, obviously when
the greater the contingency inventory, the lower the risk of it being
we run out of stock, our goal is to determine methods that
allow us to set contingency inventories at reasonable levels,
so that the risk of burnout is acceptable.

SAFETY INVENTORY

They are those that exist in a given place within the company like
result of uncertainty in the demand or supply of units in said
place. The safety stocks concerning raw materials,
they protect against the uncertainty of supplier performance due to
factors such as waiting time, strikes, vacations or units that to

19
Of poor quality will not be accepted. They are used to prevent
shortages due to uncertain fluctuations in demand.

Minimum amount of stock that a company has to cover

needs in case of supply failure.

Also called "safety cushion", it is the amount of

inventories that must be kept in stock to absorb fluctuations in
casting in the Demand or the use during the Time that elapses between the
placement of the order and its reception in warehouses.

Safety inventory, also known as 'safety cushion'

it is the one that is maintained to compensate for the risks of unplanned stoppages of

the production or unexpected increases in customer demand.

Determination of Safety Stocks

The determination of the most appropriate size for the mattress of

seguridad incluye un Equilibrio entre el Costo de quedar probablemente sin
inventories, and the cost of maintaining a sufficient safety cushion,
to avoid this probability.
If everything were safe, safety stocks would have no reason.
However, in reality, it is normal for there to be variability in
the demand and therefore, it is necessary to resort to inventories of
security if the service objectives are to be met.

Safety stock in process provides protection against

machine breakdowns, sick employees, and similar cases and in the case of

20
finished products protect us against lawsuits
unforeseen customer issues or production failures.

Managers must approve the benefits of having an inventory of

security against the cost involved in its management.

One way to determine what the appropriate safety stock is.

it consists of establishing a service level or service level cycle, it is
to say, the desired probability of not running out of inventory.

The determination of safety stock is also linked to

degree of reliability or level of service that the company is willing to
offer to its clients, which will not only take into account the requirements of
market, but the implications in terms of costs that it would bring for the
entity. There are different definitions related to the level of service, but
Most agree that this concept is associated with availability.
of a product or the reliability of compliance within a certain timeframe.

A safety stock or inventory is a term used to describe

the amount of inventory or stock available on hand to meet demand
possible inventory deficits. This type of inventory is useful for dealing with
with increases in demand or simply to ensure that there is
sufficient raw material and supplies on hand to continue producing
while you wait for the next scheduled delivery from the supplier. There is no a
universally accepted formula for calculating safety stock,
with different companies considering factors that are relevant to their
industry and its corporate culture. Most of the methods will involve
factors such as the average daily consumption and the time elapsed between the
order fulfillment and delivery.

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 CONCLUSION

Concluding the research, the vital importance of the

inventory management for administration highlighting the amount of the
investment that is generally required, as well as the complexity and degree of
difficulty involved in effective financial management, which will have
with the aim of maintaining and/or increasing the productivity of the company, already
that if there are no inventories there are no sales, and if there are no sales there is no profit

which within a certain period would lead to the closure of the business.

To achieve effective management, it is necessary to establish policies;

must be formulated jointly by the sales, production and
finance. These policies mainly consist of setting
parameters for investment control, through the establishment of
maximum inventory levels that produce acceptable turnover rates
and constants that lead towards equilibrium in the economy of the
organization.
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