INVENTORY

MANAGEMENT
CHAPTER 5
 Inventory
Is the term for the goods available for sale and raw materials
used to produce goods available for sale.
 TYPES OF INVENTORY
There are three types of businesses such as trading or
merchandising, manufacturing, and service. Out of these, services
are not inventorial.
 5 TYPES OF INVENTORY
Raw Materials - Materials that are needed to
turn your inventory into a finished product are
raw materials
Work In Progress - The partly processed raw
materials lying on the production floor.
Finished Goods - Any product that is ready to
be sold to your customers falls under this
category.
Packing Material - Packing material is the
inventory used for packing of goods. It can be
primary packing and secondary packing. Primary
packing is the packing without which the goods
are not usable. Secondary packing is the
packing done for convenient transportation of
goods.
MRO Goods - MRO stands for maintenance,
repair, and operating supplies. They are used to
repair machinery in production.
 DIFFERING VIEWPOINTS

FINANCIAL MARKETING MANUFACTURING PURCHASING

MANAGER MANAGER MANAGER MANAGER

Their general
They would like to They favor large
disposition toward To reach an amount
have large amounts production runs for
inventory levels is for a discount they
of inventories. Making the sake of lower
to keep them low. may purchase larger
sure that all orders unit production cost,
To ensure that the quantities of
could be satisfied, which would result in
firm’s money is not resources than are
avoiding backorders high finished goods
being unwisely actually needed.
for stock-outs inventories
invested in excess
resources.
 Commonly used techniques
for Inventory Management

ABC Inventory System

Economic Order Quantity (EOQ) Model
Just-in-Time (JIT) System
Production Order Quantity Model
Quantity Discount Model
 Inventory
management
refers to the process of ordering, storing and using a company's inventory. This includes
the management of raw materials, components and finished products, as well as
warehousing and processing such items
 7 Types of Inventory Management Techniques
pros:
1. Bulk shipments
-Higher potential for profitability
-Fewer shipments mean lower shipping costs
This method banks on the notion that -Works well for staple products with predictable
demand and long shelf lives
it is almost always cheaper to
purchase and ship goods in bulk.
cons:

-Highest capital risk potential

-Increased holding costs for storage
-Difficult to adjust quickly when demand fluctuates
 Types of Inventory Management Techniques
pros:
2. ABC inventory management
-Aids demand forecasting by analyzing a product’s
popularity over time
a technique that’s based on putting -Allows for better time management and resource
allocation
products into categories in order of -Helps determine a tiered customer service approach
importance, with A being the most -Enables inventory accuracy
-Fosters strategic pricing
valuable and C being the least.
cons:

-Could ignore products that are just starting to trend

upwards
-Often conflicts with other inventory strategies
-Requires time and human resources
 Types of Inventory Management Techniques
pros:
3. Backordering
-Increased sales and cash flow
-More flexibility for small businesses
refers to a company’s decision to take -Lower holding costs and lower overstock risk

orders and receive payments for out-

of-stock products.

cons:

-Higher risk of customer dissatisfaction

- Longer fulfillment times
 Types of Inventory Management Techniques
pros
4. Just in Time (JIT)
-Lower inventory holding costs
-Improved cash flow
-Less deadstock
lowers the volume of inventory that a business
keeps on hand. It is considered a risky technique
because you only purchase inventory a few days
before it is needed for distribution or sale
cons:
-Problems fulfilling orders on time
-Minimal room for errors
-Risk of stockouts
 Types of Inventory Management Techniques
pros
5. Consignment -Offer a wider product range to customers without tying up
capital
-Decrease lag times when restocking products
-Return unsold goods at no cost
involves a wholesaler placing stock in the hands of
a retailer, but retaining ownership until the product
is sold, at which point the retailer purchases the
consumed stock.
cons:
-Test new products
-Transfer marketing to the retailer
-Collect useful information about product
performance
 Types of Inventory Management Techniques

6. Dropshipping and cross-docking Difference Between

Cross Docking and Drop
This inventory management technique eliminates
the cost of holding inventory altogether. W. hen you
Shipping
have a dropshipping agreement, you can directly -Drop shipping differs significantly from cross docking.
transfer customer orders and shipment details to
-Cross docking minimizes or eliminates the need for a
your manufacturer or wholesaler, who then ships the
goods. Similar to dropshipping, cross-docking is a warehouse.
practice where incoming semi-trailer trucks or -Drop shipping reduces the role of a distributor to an entity
railroad cars unload materials directly onto that simply provides shipping information.
outbound trucks, trailers, or rail cars. -In drop shipping, the burden of shipping is taken on by the
manufacturer, which sends products directly to its
customers
 Types of Inventory Management Techniques
pros
7. Inventory Cycle counting
-More time- and cost-efficient than doing a full stocktake
-Can be done without disrupting operations
-Keeps inventory holding costs low
- involves counting a small amount of inventory on a
specific day without having to do an entire manual
stocktake. It’s a type of sampling that allows you to
see how accurately your inventory records match up
cons:
with what you actually have in stock.
-Less comprehensive and accurate than a full
stocktake
-May not account for seasonality
 3 Types of inventory cycle count procedures
Control group cycle counting – This type Random sample cycle counting – If your
of cycle counting focuses on counting the warehouse has a large number of similar
same items many times over a short items, you might randomly select a certain
period. The repeated counting reveals number of items to be counted during each
cycle count. This helps reduce the
errors in the count technique, which can
disruption of any one category at once,
then be rectified to design an accurate
meaning you can carry out a count during
count procedure.
business hours.

ABC cycle counting – As mentioned above, ABC cycle counting uses the ABC inventory
management technique and Pareto principle to classify items in A, B or C categories based on
value. With this approach, A items are counted more frequently than B and C items.
 ABC INVENTORY SYSTEM

ABC ANALYSIS IS A TECHNIQUE OF

INVENTORY
CONTROL

ABC ANALYSIS IS BASED ON PARETO

LAW WHICH
SAYS THAT IN ANY LARGE GROUP
THERE ARE “SIGNIFICANT
FEW” AND “INSIGNIFICANT MANY”.

MATERIALS ARE CATEGORIZED IN 3

CATEGORIES ( A, B
AND C)
 Importance of ABC
Inventory System

Ensures Control Over the

Costly Items

Reduction in the storage

expenses

Resource Allocation

Increased Economy
 ABC INVENTORY
TRACKING
Category A Items: Tracked using a
perpetual inventory system, allowing daily
verification of stock levels to ensure
accuracy and prevent shortages.

Category B Items: Managed through

periodic inventory checks, typically weekly,
to maintain control without excessive
monitoring.

Category C Items: Monitored using simpler

methods, such as the two-bin system,
where one bin is used first, and when
emptied, a reorder is placed while
inventory is drawn from the second bin.
 Managing stress is an important part of self

Managing Stress
management. Practice relaxation techniques
such as meditation or deep breathing, and
make time for hobbies or enjoyable activities.
 Developing
Positive Habits
Positive habits can help improve self-
management. Start with small habits that you
can increase gradually. Create a daily routine
that supports your productivity and well being.
 Conclusion
Effective self-management requires planning, prioritization, and
consistency. By setting clear goals, managing time and energy well, and
developing positive habits, we can increase productivity and well being.
 Economic Order Quantity
This is the ideal order quantity a company should purchase to
minimize inventory costs such as holding costs, shortage costs,
and order costs.
 Economic Order Quantity
A technique of inventory control which minimizes total holding and ordering costs
EQQ is an important cash flow tool. The formula can help a company control the amount
of cash tied up in the inventory balance.
The EQQ formula determines a companies reorder point.
 ADVANTAGES AND
DISADVANTAGES OF EQQ

ADVANTAGES DISADVANTAGES

Minimizes storage Math

costs Complications
Business specific Assumption based
Better inventory immediate
management availability of
products with
suppliers
requires continous
monitoring
 ORDERING COSTS

It is the cost which are associated with

the purchasing and ordering of materials.

These costs Include:

cost to prepare a purchase
requisition
cost of labor required to inspect
goods when they are received
expenses incurred on the
transportation of goods purchased
 CARRYING COSTS

Also known as holding cost and inventory

carrying cost, are costs that a business
pays for holding inventory stock.
These costs Include:
Insurance
Lost of material due to deterioration
and obsolescence
Employee Cost
Cost of keeping items in the storage
Assumptions of
EQQ Model Ordering cost is constant
The rate of demand is Known
the lead time is fixed
the purchase price of the item is
constant. No discount available
The replenishment is made
instantaneously
FORMULA FOR
ECONOMIC ORDER
QUANTITY (EQQ)
EXAMPLES
 SOLVING ORDERING COSTS AND
CARRYING COSTS

We can determine the ordering cost by We then multiply this amount by

calculating the number of orders in a the order cost per order (S), To
year and multiply this by the cost of each determine the ordering costs
order. To determine the number of
orders, we simply divide the total
demand (D) of units per year by Q, the
size of each inventory order (S).
EXAMPLES
The cost of carrying inventory can be
calculated by multiplying the cost of
carrying a unit of inventory by the
average number of units carried, usually
for a year. If inventory is used at a steady
pace, and restocked when empty, then
the average number of units held would
be the order size divided by 2.
EXAMPLES
 Reorder Point
Reflects the number of days of lead time the firm needs to
place and receive an order and the firms daily usage of
inventory item
The point to which reorder inventory
 IMPORTANCE OF REORDER
POINT
Tells you when it is the right time to order more materials from
the supplier
Tells you when it is the right time to manufacture more products
by creating a manufacturing order
How to Calculate Reorder
Point
 Inventory Models

Inventory models help businesses optimize inventory

management by determining the right time and quantity to
order goods, considering costs like holding inventory,
ordering, and potential shortages. Common models include
 Two Types of Inventory Model

Fixed Reorder Quantity System – is inventory model,

where an alarm is raised immediately.
-when the inventory level drops below a fixed quantity
and new orders are raised to replenish the inventory to
an optimum level based on the demand.

Fixed Reorder Period System – is an Inventory Model

of managing inventories, where an alarm is raised after
every fixed period of time and orders are raised to
replenish the inventory to an optimum level based on the
demand.
INVENTORY
MODELS
REQUIREMENTS
 MATERIAL REQUIREMENT
PLANNING

MRP ( Material Requirement Planning) is designed to assist

Manufacturers in inventory and production management.
INVENTORY
MODELS MRP is designed to answer this 3 questions

REQUIREMENTS
INVENTORY
MODELS Following are some of MRP benefits

REQUIREMENTS
INVENTORY
MODELS
MRP outputs

REQUIREMENTS
INVENTORY
MODELS
MRP inputs

REQUIREMENTS
INVENTORY
MODELS
MRP inputs

REQUIREMENTS
INVENTORY
MODELS
MRP inputs

REQUIREMENTS
JUST IN TIME SYSTEM
A Japanese Management philosophy which has been applied in practice
since the early 1970’s. It is initially known as “Toyota Production System”,
the JIT was first developed and perfected in toyota manufacturing by Taiishi
Ohno.
CONCEPT
Waste Elimination
Pull Sytem/Kanban
Uninterrupted Workflow
Total Quality Control
Top Management and Employee Commitment
Long Term Relationships with Suppliers
Continuous Improvement(Kaizen)
MAJOR ELEMENTS
Just In Time Manufacturing
Total Quality Management
Respect for People
PROS & CONS
Pros
Lower Inventory Cost
Less Space Needed
Waste Reduction
Smaller Investments
Cons

High Dependence on Suppliers

Difficulty Handling Sudden Demand Surges
Risk of Running Out of Stock
GOODLUCK
GOD WILL PROVIDE
Thank You