12: Inventory Management
the stock of any item or resource used in an organization.
-OBHECTIVE of inventory control: Achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds.
Manufacturing Inventory includes:
Raw Materials, work-in process, finished products
inventory refers to the tangible goods to be sold and the suppliers necessary to administer the service.
WHY hold inventory?
– economies of scale (cycle inventory, battle fixed costs), 0guarding against uncertainties (safety), Speculation (specu-
lative), Transportation (pipeline), Smoothing (seasonal), Decoupling decision-making, avoid control costs.
Disadvantages of holding inventory
: -Expense (storage cost), -Obsolescence (out of fashion), -Delays (reduced responsiveness).
items kept in inventory are not of equal importance in terms of
which is calculated as
price per unit x aver-
age annual demand.
according to some measure of importance and allocating control efforts accordingly.
– very important (LARGE $ value,
small % of tot. items (typically contains about 10-20% of the items & 60-70% of the annual $ value)),
least (SMALL & value,
large % of total items (typically contains about 50-60% of the items, but only 10-15% of the $ value)).
( FC per order (S) [$] ) Variable purchasing cost per unit (P)[$/unit] ) –
(H) [$/unit/yr] marginal
annual cost of holding inventory, the components of holding inventory include maintenance cost, taxes, insurance, opportunity cost of capital.
Basic EOQ model:
= cost per unit,
= Order quant.,
= $ of placing an order,
= Annual holding cost per unit of invent-
-# of orders per yr
= D/Q -
Ave # of inventory
= Q/2 -
Annual Fixed order $
= S(D/Q) -
$ = PD -
inventory holding $
= HQ/2 -
Annual Tot Cost
= TC/Q = SD/Q + PD + HQ/2