Inventory Management
K.U.B.S
Inventory Control
1. Plan Setting up of various stock levels
i.e.. Re- ordering level, maximum level,
minimum level, average stock level, danger level,
E.O.Q.
2. Prepare Inventory Budget
3. Maintain Maintaining Perpetual Inventory System
i.e. Daily cycle count, quarterly or half
yearly cycle count, wall to wall cycle count
4. Establish Ordered, processed, and stored.
5. Analyze Inventory Turnover Ratio, ABC
Categorization
Inventory Classification
ABC Analysis - Based on Pareto Principle i.e. 80/20
HML Analysis – High, Medium and Low
FSN Analysis - Fast, Slow , Non moving
VED Analysis - Vital, Essential, Desirable
ABC Analysis
It is based on Pareto Principle i.e. 80/20;
“A” Category Items - Comprise 20% of SKU & Contribute
to
75% - 80% of Rupee spend.
“B” Category Items - Comprise 30% of SKU & Contribute
to
15% - 20% of Rupee spend.
“C” Category Items - Comprise 50% of SKU &
Contribute to
5% -10% of Rupee spend.
ABC Analysis
Procedure for ABC Analysis
1. List each item carried in inventory by number or some
other designation.
2. Determine the annual volume of usage and rupee value
of each item.
3. Multiply each item annual volume of usage by its rupee
value.
4. Compute each item percentage of the total inventory in
terms of annual usage in rupees.
5. Select the top 20% of all items which have the highest
rupee percentages and classify them as “A” items.
6. Select the next 30% of all items with the next highest
rupee percentages and designate them as “B” items.
7. The next 50% of all items with the lowest rupee
percentages are “C” items.
Economic Order Quantity
(EOQ)
Economic Order Quantity Model determines the optimal
order
Quantity that will minimize the total inventory cost.
This model pre supposes certain assumptions as under:
1. No safety Stocks available in inventory.
2. No shortages allowed in order delivery.
3. Demand is at uniform rate and does not fluctuate.
4. Lead Time for order delivery is constant.
5. The only two relevant costs are the inventory holding cost and
the fixed cost per lot for ordering or setup.
• EOQ is a basic model and further models developed based on this
model e.g. production Quantity Model and Quantity Discount Model.
Economic Order Quantity
(Cont.)
Use the EOQ:
Make-to-stock
Carrying and setup costs are known and
relatively stable
Modify to quantity discounts
Economic Order Quantity
(Cont.)
Calculating EOQ
• The EOQ Formula:
2DS
EOQ =
H
{D= Annual Demand, S= Set up or Ordering Cost, H= Holding
Cost}
• Time Between Orders (TBO):
TBOEOQ = EOQ (12) months/year
D
Calculating Cost - EOQ
Annual Holding Cost:
Annual holding cost = (Average cycle inventory) (Unit
holding cost)
Annual holding cost = (Q/2)*(H)
Annual Ordering Cost:
Annual ordering cost = (Number of orders/Year) (Ordering
Cost)
Annual ordering cost = (D/Q)*(S)
Total Cost:
Total costs = Annual holding cost + Annual ordering or
setup cost
Numerical Problem
Biotech. Co produces chemicals to sell to wholesalers. One of
the raw material it buys is sodium nitrate which is purchased
at the rate of $22.50 per ton. Biotech’s forecasts show a
estimated requirement of 5,75,000 tons of sodium nitrate for
the coming year. The annual total carrying cost for this
material is 40% of acquisition cost and the ordering cost is
$595. What is the Most Economical Order Quantity and TBO?
Solution:
D= 5,75000 Tons, H= 0.40(22.50) = $9.00/Ton/Year, S =
$595/Order
2DS 2(5,75000)=
EOQ = = 27,573 tons per order
H (595)
9
TBOEOQ = EOQ (12) months/year 27,573
= (12) = 0.575
D Month/Yr
575000
Numerical Problem
Suppose that you are reviewing the inventory policies on
an $80 item stocked at a hardware store. The current
policy is to replenish inventory by ordering in lots of 360
units. Additional information is:
D = 60 units per week, 60 x 52 = 3,120 units per year
S = $30 per order
H = 25% of selling price = $80 x 25% = $20 per unit per year
What is the EOQ?
SOLUTION
2DS 2(3,120)(30)
EOQ = = = 97 units
H 20
Application of EOQ
What is the total annual cost of the current policy (Q = 360),
and how does it compare with the cost by using the EOQ?
Current Policy EOQ Policy
Q = 360 Units Q = 97 Units
T.C = Annual H.C + Annual T.C = Annual H.C + Annual
S.C S.C
T.C = (360/2)(20) + T.C = (97/2)(20) +
(3,120/360)(30) (3,120/97)(30)
T.C = 3,600 + 260 T.C = 970 + 965
T.C = $3,860 T.C = $1,935
Application of EOQ
What is the time between orders (TBO) for the current
policy and the EOQ policy, expressed in weeks?
SOLUTION
360
TBO360 = (52 weeks per year) = 6 weeks
3,120
97
TBOEOQ = (52 weeks per year) = 1.6 weeks
3,120
Inventory Replenishment
Policies
Inventory management approach consists of two
models;
1. Continuous Review
works on fixed order quantity basis where a trigger
for fixed quantity replenishment is released
whenever the inventory level reaches
predetermined reorder point or safety level.
2. Periodic Review
This model works on the basis of placing order
after a fixed period of time.
Quantity is not fixed.
Inventory Replenishment Process
Receiv Inventory
e depletion
order (demand rate)
Q
On-hand inventory
Average
Q cycle
2 inventory
(units)
1 cycle
Time
Inventory Replenishment Process
(Cont.)
Inventory Replenishment Process (Cont.)
Order Quantity = Q = 100 Units, Sales per day = d = 10 Units,
Lead Time = L = 4 days, Sales During Lead Time = d x L = 4 x 10 = 40 Units,
ROP = 40 Units, Starting point t =0, Time b/w replenishments = T = Q/d = 10 Days
Inventory Replenishment Process (Cont.)
Order Quantity = Q = 100 Units, Sales per day = d = 10 Units,
Lead Time = L = 10 days, Sales During Lead Time = d x L = 10 x 10 = 100 Units,
ROP = 100 Units, Starting point t =0, Time b/w replenishments = T = Q/d = 10 Days
