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INVENTORY MANAGEMENT
Inventories
- Inventories are an essential part of virtually all business operations and
must be acquired ahead of sales.

- The main classifications of inventories are ;

1) Manufacturing Firm 2) Trading Firms
a. Raw Materials a) Merchandise Inventory
.
b. Goods in process
c. Finished goods
d. Factory supplies

INVENTORY MANAGEMENT
Cost associated with Investment in Inventory
The following are the costs associated with inventories which could vary
from firm to firm, from item to item and also over time.

1) Carrying Costs
Cost of capital tied up in inventory
Storage and handling costs
. Insurance
Property Taxes
Depreciation and obsolenscence
Administrative costs (e.g. accounting)

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INVENTORY MANAGEMENT
Cost associated with investment in Inventory
The following are the costs associated with inventories which could vary
from firm to firm, from item to item and also over time.

2) Ordering, Shipping and Receiving Costs

Cost of placing orders including production and setup costs
Shipping and handling costs
.
3) Costs of Running Short
Loss of sales
Loss of customer goodwill
Description of production schedules

INVENTORY MANAGEMENT
Inventory Management
- refers to the process of formulating and implementing plans and
policies to efficiently meet production and merchandising requirements
while minimizing costs relative to inventories.

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INVENTORY MANAGEMENT
Objective of Inventory Management
- To maintain inventory level that balances sales demand, the cost of
carrying additional inventory and the efficiency of inventory control.

INVENTORY MANAGEMENT
Inventory Management Techniques
1) Inventory Planning
2) Inventory Control

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INVENTORY MANAGEMENT
Inventory Planning
Inventory planning involves the determination of the appropriate quantity
and quality, as well as the right time of ordering, in order to minimize the
costs while meeting the demand for sales.
How many units to place every order?  Economic Order Quantity
When do we have to place the order?  Reorder Point

INVENTORY MANAGEMENT
Inventory Planning
Economic Order Quantity (EOQ) - is the ideal order quantity a company
should purchase to minimize inventory costs such as holding costs,
shortage costs, and order costs.

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INVENTORY MANAGEMENT
Economic Order Quantity
Illustration: Solution :
Assume a local gift shop is attempting to determine
how many sets of wine glass to order. The store EOQ =
feels it will sell approximately 800 sets in the next
year at a price of P18 per set. The wholesale price
that the store pays per set is P12. EOQ =
Cost of carrying one set of wine glasses are
estimated at P1.50 per year while ordering costs
. are estimated at P25. ( )
EOQ =
.
Required:
1) Determine the Economic Order Quantity for the EOQ = 163 units per order
set of wine glass.
2) Determine the annual inventory costs for the firm
if it orders in this quantity.

INVENTORY MANAGEMENT
Inventory Planning
Reorder Point - is the minimum unit quantity a specific product reaches to
trigger inventory replenishment. Reorder points give businesses time to
restock a product before the item is out of stock and they are unable to
fulfill orders.
Reorder Point (ROP) = Lead Time Usage + Safety Stock

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INVENTORY MANAGEMENT
Inventory Planning
Reorder Point (ROP) = Lead Time Usage + Safety Stock

Lead time is the number of days between when you place a purchase
order with your manufacturer or supplier for a product and when you
receive the product.

. Lead Time Usage = Average Daily Usage x Lead Time

INVENTORY MANAGEMENT
Inventory Planning
Reorder Point (ROP) = Lead Time Usage + Safety Stock

Safety Stock is the extra “just in case” inventory you keep on hand to
anticipate variability in demand or supply.

Safety stock = (Max daily orders x Max lead time) – (Ave daily orders x Ave lead time)
.
Safety stock = (Max daily orders x Max lead time) – Reorder Point w/o SS

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INVENTORY MANAGEMENT
EOQ & Reorder Point
Illustration: Solution :
The following inventory information and relationship
for the Baguio Corporation are available.
1) Orders can be placed only in multiple of 100 units 𝟐𝐃𝐎
EOQ =
2) Annual unit usage is 300,000 (assume 50-week 𝑪
year)
3) The carrying costs is 30% of the purchase price
𝟐 𝟑𝟎𝟎,𝟎𝟎𝟎 (𝟓𝟎)
4) The purchase price is P10 per unit EOQ =
5) The ordering cost is P50 per order 𝟑
.
6) The desired safety stock is 1,000 units (this does not
include delivery-time stock. EOQ = 3,162 units but since the order
7) Delivery time is 2 weeks must be placed in multiples of
100 units, hence, the EOQ
Required:
1) Determine the optimal EOQ level
becomes 3,200 units.
2) How many orders will be placed annually?
3) At what inventory level should a reorder be made?

INVENTORY MANAGEMENT
EOQ & Reorder Point
Illustration: Solution :
The following inventory information and relationship
for the Baguio Corporation are available.
1) Orders can be placed only in multiple of 100 units
2) Annual unit usage is 300,000 (assume 50-week
year)
3) The carrying costs is 30% of the purchase price
4) The purchase price is P10 per unit
5) The ordering cost is P50 per order
.
6) The desired safety stock is 1,000 units (this does not
include delivery stock.
7) Delivery time is 2 weeks ( )
Required:
1) Determine the optimal EOQ level.
2) How many orders will be placed annually?
3) At what inventory level should a reorder be made?

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INVENTORY MANAGEMENT EXERCISES

EOQ, Reorder Point (w/ Safety Stock)
Question :
Fruitcake specialists sells 36,000 fruit cakes annually. Annual carrying costs are P5 per fruit cake and
the ordering costs are P100 per order. The firm has decided to maintain a safety stock of one
month’s sales or 3,000 fruitcakes. The delivery time per order is 5 days. Assume a 365-day year.

Required:
1) What is the EOQ?
2) What is the Average Inventory?
3)
. How many orders should be placed each year?
4) What is the Total Inventory Cost?
5) What is the Reorder Point?

INVENTORY MANAGEMENT EXERCISES

EOQ, Reorder Point (w/ Safety Stock)
Illustration: Solution :
Clothes, Inc., has an average annual demand for
red, medium polo shirts of 25,000 units. The cost of 𝟐𝐃𝐎
placing an order is $80 and the cost of carrying one
EOQ =
𝑪
unit in inventory for one year is $25.

Required: 𝟐 𝟐𝟓,𝟎𝟎𝟎 (𝟖𝟎)

EOQ =
1) Use the EOQ model to determine the optimal order 𝟐𝟓
size.
. Determine the reorder point assuming a lead time
2)
EOQ = 400 units
of 10 days and a work year of 250 days.
3) Determine the safety stock required to prevent
stockouts assuming the maximum lead time is 20
days and the maximum daily demand is 125 units.

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INVENTORY MANAGEMENT EXERCISES

EOQ, Reorder Point (w/ Safety Stock)
Illustration: Solution :
Clothes, Inc., has an average annual demand for
red, medium polo shirts of 25,000 units. The cost of RP = Lead Time Usage + Safety Stock
placing an order is $80 and the cost of carrying one
unit in inventory for one year is $25. RP w/o SS = Lead Time Usage

RP w/o SS = Ave Daily Usage x Lead Time

Required:
1) Use the EOQ model to determine the optimal order RP w/o SS = (25,000 units / 250 days) x 10
size.
2) Determine the reorder point assuming a lead time RP w/o SS = 1,000 units
of 10 days and a work year of 250 days.
3) Determine the safety stock required to prevent
stockouts assuming the maximum lead time is 20
days and the maximum daily demand is 125 units.

INVENTORY MANAGEMENT EXERCISES

EOQ, Reorder Point (w/ Safety Stock)
Illustration: Solution :
Clothes, Inc., has an average annual demand for
red, medium polo shirts of 25,000 units. The cost of RP = Lead Time Usage + Safety Stock
placing an order is $80 and the cost of carrying one
unit in inventory for one year is $25. RP w/o SS = Lead Time Usage

Required: SS = (Max daily orders x Max lead time)

– (Ave daily orders x Ave lead time)
1) Use the EOQ model to determine the optimal order
size.
2) Determine the reorder point assuming a lead time
of 10 days and a work year of 250 days. SS = (Max daily orders x Max lead time)
3) Determine the safety stock required to prevent – (RP w/o SS)  or the Lead Time Usage
stockouts assuming the maximum lead time is 20
days and the maximum daily demand is 125 units. SS = 125 units x 20 days = 2,500 units
- 100 units x 10 days = 1,000 units
1,500 units

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INVENTORY MANAGEMENT
Inventory Control
Inventory control is the regulation of inventory within the predetermined limits. Effective
inventory management should provide adequate stocks to meet the requirements of
the business, while at the same time keeping the required investment to a minimum.

INVENTORY MANAGEMENT
Inventory Control
1. Fixed Order Quantity System / Continuous Review
This is a system wherein each time the inventory goes down to a predetermined
level (reorder point) , an order for a fixed quantity (EOQ) is placed. This system
requires the use of perpetual inventory records or the continuous monitoring of the
inventory level.

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INVENTORY MANAGEMENT
Inventory Control
2. Fixed Reorder Cycle System / Periodic Review / Replacement System
Orders are made after a review of inventory levels has been done at a regular
interval. An order is placed if at a time of the review the inventory level had gone
down since the preceding review, the quantity ordered under this system is variable
depending on usage or demand during the review period.
.
Replenishment level is computed by the following Where:
formula: M = Replenishment level in units
B = Buffer stock in units
M = B + D (R + L) D = Average demand per day
R = Time interval in days, between reviews
L = Lead time in days

INVENTORY MANAGEMENT
Inventory Control
2. Periodic Review / Replacement System / Fixed Reorder Cycle System

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INVENTORY MANAGEMENT
Inventory Control
3. Optional Replenishment Systems
Combination of fixed order and replacement systems.

In such systems, stock levels are reviewed on a periodic basis, but orders are placed
only when inventories have fallen to a predetermined reorder level.
.
Replenishment level is computed by the following Where:
formula: P = Reorder point in units
B = Buffer Stock in units
D = Average daily demand in units
P = B + D(L + R/2) L = Lead time in days
R = Time between review in days

INVENTORY MANAGEMENT
Inventory Control
4. ABC Classification System
Under this system, segregation of materials for selective control is made. Inventories
are classified for selective control.

A items – high value requiring highest possible control.  Highly important

. B items – medium cost items requiring normal control.  Moderately important
C items – low cost items requiring the simplest control.  Relatively important

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INVENTORY MANAGEMENT
Inventory Control A items  Highly important
B items  Moderately important
4. ABC Classification System C items  Relatively important

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