INVENTORY

MANAGEMENT
Presented by:
GROUP-4
Gustilo, Edralyn
Lagan, Jamaicah
Magbanua, Mariel
Madarcos, Carren Joy
Ganancial, Relan Ahlsaid
Mahumot, Irish
Gustilo, Kevin Andrew
Losorata, Hannah Maxine
 CONTENTS:
01 02 03
Structure of Inventory Costs
Types of
Inventory Ordering Costs
Inventory
System Holding Costs

04 05 06 07
Economic ABC Fixed Fixed
Order Quantity Classification Quantity Period
Model System System Quantity
INVENTORY MANAGEMENT
Inventory management involves activities that organize the
availability of supply to the customers. Proper coordination
must be made with different activities, such as purchasing,
manufacturing, and distribution, to meet the goals of
marketing.
Inventory management is crucial for a company's success
because it ensures a smooth supply of goods to customers
while maintaining financial stability.

Effective stock control is essential to balance the needs of

different departments within an organization. The primary
goals of inventory management are:
1. Reducing the mismatch between supply and demand.
2. Minimizing the risk of stock shortages.
3. Reducing the overall supply chain costs.
DIFFERENT TYPES OF
INVENTORY
Major types of inventories maintained by
organizations are raw material, finished goods,
semi finished goods, and spare parts/supplies.
Example of inventories are items on shelves of
supermarkets and department stores, blood
supplies in hospitals, and cash reserves of
banks.
DIFFERENT TYPES OF
INVENTORY
Protection against fluctuating demand.
Sufficient inventories must be ready at all times to meet peak
demand .For example blood inventory is maintained at hospitals
for emergencies.
Protection against delayed supply.
Unavoidable circumstances,such as transport network
problems,bad weather labor strike or even lack of materials at the
supplier level are causes of shortage.Inventories serve as a buffer
that can be used in cases of late deliveries.
DIFFERENT TYPES OF
INVENTORY
Protection against inflation.

There are times when inventories are built up in

anticipation of a price increase.
Benefits of large quantities.
Buyers are entitled to a price discount when
purchasing large quantities of item
DIFFERENT TYPES OF
INVENTORY
Primary basis for business.
Fully stocked shelves and a wide selection of products
will attract customers to patronize a store.
.
Savings on ordering cost.
Ordering process entails cost.If orders are place in a large
quantities, then placing orders will be less frequent.This will lower
the total cost of ordering.
STRUCTURE OF INVENTORY SYSTEM
An inventory system involves a cyclical process that runs
over several periods. The major characteristics of an
inventory system are the following:

01 INVENTORY LEVEL
Each item that is stocked in a warehouse has to be monitored.
The inventory level refers to the size of the inventory or the
inventory on hand.
02 DEMAND and DEPLETION
The inventory gets depleted to serve demand. Day by day, the
inventory level will decline due to demand. The rate of
demand is equivalent to the depletion rate.
A higher rate of demand results to faster reduction of inventory. The
rate of demand can be constant, which reduces the inventory level in
equal proportions (Cycle 1). While a fluctuating demand will show
unequal steps and can be approximated by a curve (Cycle 2).
03 REORDERING
Every item must be replenished periodically in order to
have a sufficient inventory. A replenishment order is
made when the inventory is reduced to a certain level
called the reorder point. The time between an order is
placed and the arrival of delivery is called a lead time.
04 REPLENISHMENT
It is the restoration of a stock or supply to a former level or
condition.

05 SHORTAGES
A shortage will occur when the shipment arrives after the
depletion.
06 SURPLUSES
A surplus will happen when the shipment arrives before
depletion.
The simplest inventory models bear
the assumption that the reordering is
scheduled so that the replenishment
will be delivered when the inventory
level is fully depleted. This assumption
is very applicable when the demand is
constant (Cycle 1 in Figure 15.2). When
the demand fluctuates and/or the lead
time varies, the arrival of deliveries
might differ from the exact time the
inventory reaches the zero level.
 To avoid shortages, a level of safety stock or Monday
buffer must be established. To aid managers in 25
decision-making, an average inventory has to be Tuesday
calculated. A sample computation of a five-day 22
period inventory level is presented as follows: Wednesday
13
Thursday
10
 The most difficult decision in
inventory management is the
appropriate inventory level since this
decision can affect both finance and
marketing matters. Other related
decisions to that are the following:

"how much to order,"

"when to order," and
"size of safety stock."
INVENTORY COST
Maintaining inventory entails costs, and this
is one of the major concerns of
management. The following are the major
types of inventory costs:

•ORDERING COST
•HOLDING COST
The cost of obtaining additional
inventories. It includes expenses
pertaining to placing orders, such as the
cost of communicating the order, travel
expenses, clerical/paperwork expenses,
salaries of purchasing personnel,
inspection and receiving of deliveries,
data encoding, etc.
•ORDERING COST

To compute the ordering costs,

follow these steps:
Step 1: Get the total expenses in the
preparation of orders.

Step 2: Divide the total expense for

placement of orders by the number of
times an order was made.
•ORDERING COST

SAMPLE COMPUTATION:

Table 15.1 shows that if more

orders are processed, then the
average cost per order will be
lower. Thus, management should
make an analysis on the possible
savings if orders will be increased.
SAMPLE COMPUTATIONS:
Let us assume that the ordering cost (K) is at P100 per
order a day the annual demand will be 2,400 units. The
proposed purchasing policy of the company is annual,
quarterly, and monthly.

The total annual ordering formula is:

To = NK

Where:
N = Number of time an order is placed
K = Ordering cost
Figure 15.3 shows that the more
frequently orders are made and
fewer quantities are ordered, the
higher the ordering cost and vice
versa.
The holding cost or carrying cost is the cost of keeping
inventory in hand.

Its components include storage costs, interest on capital

invested in the inventories, deterioration or spoilage costs,
evaporation, insurance, rent, overhead of the stores, security,
and janitorial services. Also included are costs to maintain
data and expenses for physical inventory

Holding costs are expressed in terms of costs per item per

year or as percentage of the value of the inventory.

They are assumed to be constant per unit of inventory.

The larger the volume of inventory, the higher the total holding
cost and vice versa
Shortage costs would depend on the item under
consideration.

For example, a shortage of raw materials would result

in production stoppage and spoilage of other
materials. A finished product that is out of stock will
result in unsatisfied demand to loss of customers.
also called unit cost, is the price paid for one unit of
product under consideration. This cost can also
influence the inventory decisions because large
orders are usually given quantity discounts.
Inventories are a company’s asset and
require efficient management.
Large inventories tie up funds; small
inventories risk stockouts.
EOQ helps determine the optimal
order size to minimize total costs.
Developed by Ford W. Harris (1913)
and analyzed in depth by R. H. Wilson.
Q* = EOQ

N= orders to be
placed in a year

TC= Total annual

cost
A company sells electronic gadgets and needs to determine the
optimal order quantity for one of its products.
Given the following data:
Annual demand (D) = 5,000 units
Ordering cost per order (K) = $50
Holding cost per unit per year (H) = $2
Assumptions of the EOQ Model

The company knows exactly how much

inventory will be needed.
Demand and inventory usage remain constant.
No shortages are allowed.
Orders are received instantly with no delays.
Ordering and holding costs change with order
size.
No quantity discounts are considered.
 ABC
CLASSIFICATION
SYSTEM
An inventory management technique based on the Pareto
principle (80/20 rule).

It helps businesses prioritize inventory management by

classifying items based on their consumption value.

This method ensures that businesses focus their resources

efficiently on high-value items while still maintaining
control over lower-value ones.
 Pareto
Principle
The Pareto Principle (80/20
Rule) means that 80% of results
come from 20% of the efforts.
For example:
80% of total inventory value comes
from 20% of the items (A-Class items).

It helps prioritize what’s most important, so you focus

on the tasks or resources that give the biggest impact.
ABC classification categorizes inventory into three
groups:
A-Class Items
B-Class Items
C-Class Items

This classification helps organizations optimize inventory

control, reduce carrying costs, and improve overall supply
chain efficiency.
 A-Class B-Class C-Class
Items Items Items
20% of total inventory 30% of total inventory 50% of total inventory
80% of total sales Revenue 15% of total sales revenue 5% of total sales revenue

High-value items Not as significant as A-items

Low-value items that have
significantly contributing to but are still vital contributing
minimal impact on revenue.
your revenue stream. to overall performance.

Common Household Items,

Designer Luxury Goods, Mid-Range Electronics,
Disposable Medical supplies,
Golds, Expensive Machinery Standard Medical Equipment
Small Hardware Items, Fast
Parts, High-end Electronics, Mid-Priced Clothing and
moving consumer goods,
Life-saving Medicines accessories
Stationary
Efficient Resource Allocation

Cost Savings

Better Inventory Control

Reduces Wastage
Doesn’t Consider Criticality

Time-Consuming

Static Classification

May Require Advanced Systems

Ensures that predetermined quantity of materials is
ordered whenever the stock level reaches the re-order
point.

The quantity ordered is based on Economic Order

Quantity (EOQ).

A “safety stock” is usually added to the order, as

determined by experience and some forms of
computation.
 The procurement of items is done in the most
economical way.

Inventory investment is a property maintained by simply

setting the predetermined maximum and minimum values.

The EOQ may not reach the supplier's minimum.

Lead time is assumed; therefore, when changes occur, the reorder

point has to be adjusted, which makes it more cumbersome.
The fixed period system involves checking
inventory at regular intervals.

If stock is insufficient to last until the next

interval, an order is placed to restore inventory
to a predetermined maximum level.

The order quantity varies in each cycle.

 Allows joint reordering of items, leading to
cost savings.

Requires a large safety stock to avoid

shortages.

Variable order quantity can be inconvenient to

manage.
 CONCLUSION
Inventory management plays a vital role in ensuring a
company maintains an efficient supply chain while minimizing
costs. Effective inventory control helps businesses prevent
stock shortages, reduce excess inventory, and optimize
financial resources.

Several inventory models exist to help organizations manage

their stock efficiently. The Economic Order Quantity (EOQ)
model is widely used to regulate purchases and storage,
ensuring a steady inventory flow while avoiding unnecessary
financial tie-ups. The ABC classification system allows
businesses to prioritize valuable items by grouping inventory
based on importance, improving planning and control.