Inventory Management. Inventory System Defined. Purposes of Inventory. Objective of Inventory Control. To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds Level of customer service Costs of ordering and carrying inventory.
Independent Demand (Demand not related to other items or the final end-product)
(Derived demand items for component parts,
raw materials, etc.)
Inventory decisions are directly related to production plans and capacity of production
On the balance sheet it represents about 30 to 50 % of the assets.
Inventory Turns is the ratio of the annual sales to the investment in inventory
For ex, if the annual sales is 200 million and the investment in inventory is 40 million then the ratio is 5. It shows how effectively inventory is used.
Days of .supply is the ratio of inventory on hand to the avg daily usage.
Types Of Inventory:
MRO items (Maintenance, Repairs and Operational Suppliers
Substantial improvement in the productivity of inventory can be achieved by re-engineering supply chain processes.
It is portion of inventory that depleted as customer orders come in
and replenished as suppliers orders are received. Periodic
replenishment is required.
Example hospital ordering 10000 syringes and daily use is 500.
If Q is the order quantity per cycle then average inventory = Q/2
Exists because of the time needed to move the goods from one
location to another such as plant to distribution center called as
Pipeline or movement inventories.
is held to cover the unpredictable fluctuations in supply or demand or
lead time, so that stock out will not happen.
Cyclic inventory, pipeline inventory and safety stocks are critically linked to “how much” and “when” decisions in inventory planning
Cost of carrying and cost of ordering are fundamentally two opposing cost structures in inventory planning
Sum of the two costs
Total cost of carrying
Cost of Inventory
Total cost of ordering
Level of Inventory
Demand during the planning period = D
Order quantity = Q
The cost of ordering per order =
Inventory carrying cost per unit per unit time =
The average inventory carried by an organisation=
The cost associated with carrying inventory =
The total ordering cost is given by
Total cost of the plan =
Total cost of carrying inventory + Total cost of ordering
TC(Q) = +
Denoting EOQ by Q*, we obtain the expression of Q*as:
The optimal number of orders =
Time between orders =
R = Reorder Point
Q = Economic Order Quantity
L = Lead TimeBasic Fixed-Order Quantity Model and Reorder Point Behavior