Iv Mie 401

Inventory
A physical resources that a company holds in stock with the intent in

selling it or transforming it into more valuable state.
Stock of items kept to meet future demands.
a) Base stock - that portion of inventory that is replenished after it is

sold to customers.
b) Safety stock - the second portion of inventory that is held to
protect against the impact of uncertainty.
Goals of Inventory Management
To ensure that the inventories needed to sustain operation are

available
 To hold the cost ordering and carrying inventories to the lowest
possible level
Classes of Inventories
Raw materials –These are purchase items received that have not entered
the production process.
Work in progress(WIP)-Raw materials that entered the manufacturing
process and being work on or waiting to be work on.
Finished goods -ready for sale
Distribution inventories-Finished goods located in the distribution system.
Maintenance,repair,and operational supplies(MROs)- Item used in the
production that do not become part of the product
Importance of Inventory Control
 Improve customer service

 Aids in continuing production operation
 Reduce the risk of loss
 Protects from the fluctuation in demand
 Minimized the administrative work load
 Make effective use of working capital
 It has to minimize the investment in inventory
to enhance firm's profitability.
Types of Inventory Costs
Cost associated with the maintenance of inventory.
Carrying cost
- Capital cost
- Inventory risk cost
- Space cost
- Inventory Storage Cost
Ordering Cost
- Order processing cost
- Shipping cost
- Handling cost
Shortage Cost & Cost of Replenishment
- Temporary or permanent loss of sales when
demand cannot be meet
Factors Affecting the level of Inventory
Market structure
Inventory turn over
Type of product
Inventory cost
Financial position of the firm
Economies of production run
Inventory policy and attitude of management
Inventory Control Techniques
INVENTORY CONTROL TECHNIQUES
Modern Traditional
Technique Technique
Fixed stock Inventory

Economic Order Re-Order level Control Two Bin
Quantity (EOQ) Period (ROP) Analysis System
Selective Perpetual
Inventory Just - In - Inventory
Control Time (JIT) ABC Analysis System Periodic Order
Economic Ordering Quantity (EOQ)
What is an 'Economic Order Quantity - EOQ'
Economic order quantity (EOQ) is an equation for inventory that determines
the ideal order quantity a company should purchase for its inventory given a
set cost of production, demand rate and other variables. The full equation is
as follows:
Equation 23-9
Re-order Level
Re-order level is that level where the stock level reaches a

stage indicating the replenisment of the stock as there is
always a gap between placing an order and actually getting
the stock.
Reorder level or Ordering level = Maximum rate of
consumption * Maximum reorder period.
 Alternatively, it will be = safety stock + lead time
consumption
Fixed Stock Level
A stock level is level or quantitative limit which is

something standard that does not permit to exceed the
limits.
 Maximum level
 Minimum level
 Re-order level
 Average stock level
 Safety Stock
Maximum Level
Maximum level indicates the maximum quantity of an

item of inventory which can be held in store at any time.
Maximum level=(Re-order level + Re-order quantity)-

minimum consumption rate* minimum Re-order period)
Maximum Level may be alternatively fixed as Safety Stock +

Reorder Quantity or EOQ.
Minimum Level
Minimum level indicates the quantitative balance of an

item of inventory which must maintain in hand at all times.
Minimum level of stock = Re-order level – (Average rate of

consumption * Average re-order period)
Average Stock Level
There are basically two stock

1-minimum stock
1-maximum stock
2-maximum or re-order quantity
Average stock level= maximum level + minimum level
2
Safety Stock level
Safety stock - Inventory held to guard against larger-than

normal sales and /or normal shipping delays.
Safety Stock = (Annual Demand/365) x (Maximum Reorder

Period – Average Reorder Period)
Selective Inventory Control
is an inventory categorization technique. It divides an inventory into
three categories- " A items" with very tight control and accurate
records, "B items" with less tightly controlled and good records, and
"C items" with the simplest controls possible and minimal records.
‘A’ items – 20% of the items accounts for 70% of the annual
consumption value of the items.
‘B’ items - 30% of the items accounts for 25% of the annual
‘C’ items - 50% of the items accounts for 5% of the annual
ABC Analysis
• inventory is classified based on the value of the units
Advantages of ABC Classification:

• This kind of categorization of inventory helps one manage the entire
volume and assign relative priority to the right category. For Example
• A Category Items are the high value items. Hence one is able to
monitor the inventory of this category closely to ensure the inventory
level is maintained at optimum levels for any excess inventory
• B Category Items: These can be given second priority with lesser
frequency of review and less tightly controls with adequate
documentation, audit controls in place.
• C Category Items: Can be managed with basic and simple records.
Inventory quantities can be larger with very few periodic reviews.
Just-in –Time (JIT)Inventory
A strategy to increase efficiency and decrease waste by receiving goods only
as they are needed in the production process there by decreasing inventory
cost.
By using just-in-time concepts, there is a greatly reduced need for raw
materials and work-in-process, while finished goods inventories should be
close to non-existent.

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Inventory

A physical resources that a company holds in stock with the intent in

a) Base stock - that portion of inventory that is replenished after it is

To ensure that the inventories needed to sustain operation are

 Improve customer service

Fixed stock Inventory

Re-order level is that level where the stock level reaches a

A stock level is level or quantitative limit which is

Maximum level indicates the maximum quantity of an

Maximum level=(Re-order level + Re-order quantity)-

Maximum Level may be alternatively fixed as Safety Stock +

Minimum level indicates the quantitative balance of an

Minimum level of stock = Re-order level – (Average rate of

There are basically two stock

Safety stock - Inventory held to guard against larger-than

Safety Stock = (Annual Demand/365) x (Maximum Reorder

• inventory is classified based on the value of the units

Advantages of ABC Classification:

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