Inventory Policies

Inventory
Management
Inventory
Inventory is a
stock or store of
goods or services,
kept for use or
sale in the future.
The motives of Holding Inventories
• Transaction motive – to facilitate smooth

production and operation
• Precautionary motive – to hold inventory

against unpredictable risk
• Speculative motive – to hold some inventories

to take advantage of changes in price and
getting quantity discounts.
Inventory Management
Inventory management is a systematic approach

to sourcing, storing, and selling inventory—both
raw materials (components) and finished goods
(products).
In business terms, inventory management

means the right stock, at the right levels, in the
right place, at the right time, and at the right cost
as well as price.
Importance of Inventory
Management
• Reduce costs
• Optimize fulfillment
• Provide better customer service
• Prevent loss from theft, spoilage, and
returns
Inventory management terms
• Barcode scanner
• Bundles
• Cost of goods sold (COGS)
• Deadstock
• Decoupling inventory
• Economic order quantity (EOQ)
• Holding costs
• Landed costs
• Lead time
• Order fulfillment
• Order management
• Purchase order (PO)
• Pipeline inventory
• Reorder point
• Safety stock
• Sales order
• Stock keeping unit (SKU)
• Third-party logistics (3PL)
• Variant
• Sales order
• Stock keeping unit (SKU)
• Third-party logistics (3PL)
• Variant
Inventory management formulas
• Economic order quantity (EOQ) formula

• Days inventory outstanding (DIO)

formula
• Reorder point formula

Lead time in demand
(Lead time in days x average daily usage)
+ safety stock )
Lead time = supply delay + reordering
delay
• Safety stock formula

Types of Inventory
• Raw materials & purchased parts

•Work in progress (WIP)
•Maintenance repair and operations goods
• Finished-goods inventories
• Pipeline inventory (Goods-in-transit)
• Vendor-managed inventory
Inventory Techniques
Bulk shipments
This method banks on the notion that it is almost
always cheaper to purchase and ship goods in
bulk. Bulk shipping is one of the predominant
techniques in the industry, which can be applied
for goods with high customer demand.
ABC inventory management is a technique that’s based

on putting products into categories in order of
importance, with A being the most valuable and C being
the least. Not all products are of equal value and more
attention should be paid to more popular products.
Backordering refers to a company’s decision to take

orders and receive payments for out-of-stock products.
Just In Time (JIT) inventory management 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..
Consignment 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. Typically, selling on consignment
involves a high degree of demand uncertainty from the
retailer’s point of view and a high degree of confidence
from the wholesaler’s point of view.
Dropshipping and cross-docking

This inventory management technique eliminates the
cost of holding inventory altogether. When you have a
dropshipping agreement, you can directly transfer
customer orders and shipment details to your
manufacturer or wholesaler, who then ships the goods.
Similar to dropshipping, cross-docking is a practice
where incoming semi-trailer trucks or railroad cars
unload materials directly onto outbound trucks, trailers,
or rail cars.
Cycle counting 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
with what you actually have in stock.
Inventory Policies
Key Aspects in Inventory Management
• Review period
• Inventory Position
• Order Point
Four Key Policies
Continuous (Perpetual) Review Policies:
(s, S)- Small s denotes re-order point and Large S is the Order
up to Level
(s,Q)- Small s denotes re-order point and Q is the Economic
Order Quantity
Periodic Review Policies:
(R, S)-R denotes review period and Large S is the Order up to

Level
(R, s, S)-R denotes review period, Small s denotes re-order
point and Large S is the Order up to Level
Continuous Review Policy
The Policy in (s,S)

policy is:
Order up to a level S,
every time your
inventory position
drops below s (Reorder
Point).
Continuous Review Policy
The Policy in (s,Q) policy is:
Order your Economic Order

Quantity Q, every time your
inventory position drops s or
below s (Reorder Point). It is
called a two bin system as
you have two Inventory
Bins: One is your Cycle
Inventory and another bin
consists of Demand during
lead time and Safety Stock.
Periodic Review Policy
The Policy in (R,S) policy is:
Order up to a level S, every

R time periods (R is the
Review Period).
Periodic Review Policy
The Policy in (R,s,S) policy

is:
Order up to a level S, every

R time periods (R is the
Review Period) if Inventory
Position is less than or equal
to s (Reorder Point).

Inventory Policies

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What are the different motives for holding inventory?

What are the different motives for holding inventory?

What are the benefits of effective inventory management?

What are the benefits of effective inventory management?

Inventory

• Transaction motive – to facilitate smooth

• Precautionary motive – to hold inventory

• Speculative motive – to hold some inventories

Inventory management is a systematic approach

In business terms, inventory management

• Economic order quantity (EOQ) formula

• Days inventory outstanding (DIO)

• Reorder point formula

• Safety stock formula

• Raw materials & purchased parts

ABC inventory management is a technique that’s based

Backordering refers to a company’s decision to take

Just In Time (JIT) inventory management lowers the

Consignment involves a wholesaler placing stock in the

Dropshipping and cross-docking

Cycle counting involves counting a small amount of

Periodic Review Policies:

(R, S)-R denotes review period and Large S is the Order up to

The Policy in (s,S)

The Policy in (s,Q) policy is:

Order your Economic Order

The Policy in (R,S) policy is:

Order up to a level S, every

The Policy in (R,s,S) policy

Order up to a level S, every

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