MICHAILA SORIANO

MARIEL SOROLLA

DIANNE TAMAYO

ALEXIS TINAAN

JULIA VARGAS

GROUP 5 ANGELLICA
VELASQUEZ
INVENTORY
STOCK OR STORE OF
GOODS
INVENTORY MODELS
INDEPENDENT- DEPENDENT-
DEMAND ITEMS DEMAND ITEMS

ITEMS THAT ARE COMPONENTS OF

READY TO BE SOLD FINISHED PRODUCTS
OR USED
 THE NATURE AND IMPORTANCE OF
INVENTORIES
- vital part of business
- contributes to customer satisfaction
- reduction of inventories can result in an increase in ROI
- ROI (return in investment)
-> measures managerial performance
PROFIT AFTER TAXES
TOTAL ASSETS
 THE NATURE AND IMPORTANCE OF
INVENTORIES
KINDS OF INVENTORY
1.Raw Materials and purchased parts
2.Work-in-process
3.Finished-goods inventories or merchandise
4.Tools and supplies
5.Maintenance and repairs inventories
6.Goods-in-transit to warehouse, distributors or
customers.
 THE NATURE AND IMPORTANCE OF
INVENTORIES
FUNCTIONS OF INVENTORY
1. To meet anticipated customer demand
- inventories are referred to as anticipation stocks (held to satisfy expected
demand)
2. To smooth production requirements
- inventories are referred to as seasonal inventories (build up inventories to
meet overly high requirements during seasonal periods)
3. To decouple operations
- inventory buffers are important in supply chains (maintains continuity of
production)
 THE NATURE AND IMPORTANCE OF
INVENTORIES
FUNCTIONS OF INVENTORY
4. To take advantage of order cycles
- economical to produce in larger rather than smaller quantities
- inventory storage enables firm to buy and produce in economic
lot sizes (results in periodic orders or order cycles)
5. To hedge against price increases
- a firm will suspect that a substantial price increase is about to
occur and purchase larger-than-normal amounts to beat the
increase
 THE NATURE AND IMPORTANCE OF
INVENTORIES
FUNCTIONS OF INVENTORY
6. To permit operations
- intermediate stocking of goods leads to pipeline inventories
(production-distribution system)

7. To take advantage of quantity discounts

- discounts on large orders
 THE NATURE AND IMPORTANCE OF
INVENTORIES
OBJECTIVE OF INVENTORY MANAGEMENT

Overall Objective:
To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds.
THE NATURE AND IMPORTANCE OF
INVENTORIES
Inadequate control of inventory can result in under - and
overstocking of items.
UNDER-STOCKING OVERSTOCKING

results in missed unnecessarily takes up

deliveries, lost sales, space and ties up funds
and dissatisfied that might be more
customers productive elsewhere.
 THE NATURE AND IMPORTANCE OF
INVENTORIES
PERFORMANCE MEASURES TO JUDGE
EFFECTIVENESS OF INVENTORY MANAGEMENT

1.COST AND CUSTOMER SATISFACTION

- might be measured by the number and
quantity of backorders and/or customer complaints
 THE NATURE AND IMPORTANCE OF
INVENTORIES
PERFORMANCE MEASURES TO JUDGE
EFFECTIVENESS OF INVENTORY MANAGEMENT

2.Inventory Turnover
- ratio of annual cost of goods sold to average
inventory investment. Indicates how many times a year
the inventory is sold. Generally, the higher the ratio the
better. However, the desirable number of turns depends
on the industry and what the profit margins are.
 THE NATURE AND IMPORTANCE OF
INVENTORIES
PERFORMANCE MEASURES TO JUDGE
EFFECTIVENESS OF INVENTORY MANAGEMENT

3. Days of inventory on hand

- a number that indicates the expected number of
days of sales that can be supplies from existing inventory.
Balance is needed. High number of days might imply
excess inventory, while a low number might imply a risk of
running out of stock
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
MANAGEMENT'S TWO BASIC FUNCTIONS
CONCERNING INVENTORY.

a.To establish a system to keep track of items in

inventory

b.To make decisions about how much and when to

order.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
To be effective, management must have the following:
1.A system to keep track of the inventory on hand and on order.
2.A reliable forecast of demand that includes an indication of
possible forecast error.
3.Knowledge of lead times and lead time variability.
4.Reasonable estimates of inventory holding costs, ordering costs,
and shortage costs.
5.A classification system for inventory items
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
Inventory Counting Systems - can be periodic or perpetual

PERIODIC SYSTEM

physical count of items in inventory is made at

periodic, fixed intervals (e.g., weekly, monthly)
in order to decide how much to order of each
item.
REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
PERIODIC SYSTEM
ADVANTAGE

Orders for many items occur at the same

time, which can result in economies in
processing and shipping orders
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
PERIODIC SYSTEM
DISADVANTAGE

Lack of control between reviews.

The need to protect against shortages between

review periods by carrying extra stock.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
PERPETUAL INVENTORY SYSTEM

(also known as a continuous review system)

keeps track of removals from inventory on a
continuous basis, so the system can provide
information on the current level of inventory for
each item.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
PERPETUAL SYSTEM
ADVANTAGE
The control provided by the continuous monitoring of
inventory withdrawals.

Fixed-order quantity; management can determine an

optimal order quantity.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
PERPETUAL SYSTEM
DISADVANTAGE
Added cost of record keeping.

A physical count of inventories must still be performed periodically to verify

records because of possible errors, pilferage, spoilage, and other factors that
can reduce the effective amount of inventory. (Bank transactions such as
customer deposits and withdrawals are examples of continuous recording of
inventory changes.)
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
Two-bin system, a very elementary system, uses two containers
for inventory.
ADVANTAGE DISADVANTAGE

There is no need to The reorder card may not

be turned in for a variety of
record each reasons (e.g., misplaced,
withdrawal from the person responsible
inventory. forgets to turn it in)
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
Supermarkets, discount stores, and department
stores have always been major users of periodic
counting systems. Today, most have switched to
computerized checkout systems using a laser
scanning device that reads a universal product code
(UPC), or bar code, printed on the item tag or
packaging.
REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
The zero on the left of the bar code
identifies this as a grocery item, the
first five numbers (14800) indicate the
manufacturer (Mott's), and the last five
numbers (23208) indicate the specific
item (natural-style applesauce). Items
in small packages, such as candy and
gum, use a six-digit number.
REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

Point-of-sale (POS) systems

electronically record actual
sales.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
DEMAND FORECASTS AND LEAD-
TIME INFORMATION

Since inventories are used to satisfy demands, it is

essential to:
-have reliable estimates of amount and timing of
demand
-know how long it will take for orders to be delivered
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
There is also a need to know the extent to which demand
and lead time vary.

Lead time
-time interval between ordering and receiving the order.
The greater the range of variability, the greater need for
additional stock to reduce risk of shortage between
deliveries.
REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
INVENTORY COSTS

1. Purchase
2. Holding/Carrying
3. Ordering
4. Shortage
REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

PURCHASE COST
amount paid to supplier to buy the
inventory

largest of all inventory costs

 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

HOLDING/CARRYING COST
-cost of having items in the storage

-includes: interest, insurance, tax, depreciation,

deterioration, spoilage, breakage, warehousing
cost, opportunity cost
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
significance of the various holding costs depend on the
type of item involved.
—> Food (seafood, poultry, produce, baked goods) is prone
to rapid deterioration and spoilage
—> Expensive or luxury items (TVs, cars, smartphones)
prone to theft
—> Items with short shelf life (medicines, dairy products
batteries) are also prone to spoilage
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
HOLDING COSTS ARE STATED IN TWO WAYS:
1. Percentage of unit price
2. Dollar amount per unit

*Typical annual holding costs range from 20%-

40% of the value of an item. $100 item in
inventory for one year could cost $20-$40.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

ORDERING COST
-costs of ordering and receiving inventory
-includes: preparing invoices, inspecting
goods, moving goods to temporary storage
-expressed as a fixed dollar amount per
order
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

ORDERING COST
If a firm produces own inventory instead of
ordering it from a supplier, the firm incurs
machine setup costs which are analogous to
ordering costs. Setup costs are costs involved in
preparing equipment for a job.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

SHORTAGE COST
-result of demand exceeding supply of inventory
on hand (D > S)

-includes: opportunity cost of not making a sale,

loss of customer goodwill, backorder costs, etc.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

SHORTAGE COST
-shortage in item carried for internal use (item
used to supply an assembly line) would lead to
cost of lost production

-difficult to measure, subjectively estimated

 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

CLASSIFICATION SYSTEM
An important aspect of inventory management is that items
that held in inventory are not equal of importance in terms of
dollar invested, profit potential, sales or usage volume, or
stockout penalties.

A more realistic approach would be to allocate control efforts

according to relative importance of various items in inventory.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

ABC CLASSIFICATION SYSTEM

A-B-C approach
Classifying inventory according to some
measure of importance, and allocating control
efforts accordingly
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
Three classes of items used:
A items (very important)
10 to 20 percent of the number of items in inventory and
about 60 to 70 percent of the annual dollar value
B items (moderately important)
C items (least important)
50 to 60 percent of the number of items in inventory but
only about 10 to 15 percent of the annual dollar value
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
STEPS IN CONDUCTING A-B-C ANALYSIS
1.For each item, multiply annual volume by unit price to get
the annual dollar value.
2.Arrange annual dollar values in descending order.
3.The few (10 to 15 percent) with the highest annual dollar
value are A items. The most (about 50 percent with the
lowest annual dollar values are C items. Those in between
(about 35 percent) are B items.
EXAMPLE
A manager has
obtained a list of
unit costs and
estimated annual
demands for
inventory items and
now wants to
categorize the items
on an A-B-C basis.
EXAMPLE
1. For each item, multiply
annual volume by unit
price to get the annual
dollar value.

ANNUAL DEMAND
X UNIT COST
ANNUAL DOLLAR VALUE
EXAMPLE
1. For each item, multiply
annual volume by unit
price to get the annual
dollar value.

ANNUAL DEMAND
X UNIT COST
ANNUAL DOLLAR VALUE
EXAMPLE
2. Arrange annual dollar values in descending order.
EXAMPLE
3. The few (10 to 15 percent) with the highest annual dollar value are A items.
The most (about 50 percent with the lowest annual dollar values are C items.
Those in between (about 35 percent) are B items.
EXAMPLE
3. The few (10 to 15 percent) with the highest annual dollar value are A items.
The most (about 50 percent with the lowest annual dollar values are C items.
Those in between (about 35 percent) are B items.
EXAMPLE

Although annual dollar value may be the primary factor in

classifying inventory items, a manager may take other factors
into account in making exceptions in certain items.
Factors may include the risk of obsolescence, the risk of
stockout, the distance of supplier, etc.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

Managers use the A-B-C concept in many different

settings to improve operations. One key use occurs in
customer service, where a manager can focus attention
on the most important aspects of customer service.
The point is to not overemphasize minor aspects of
customer service at the expense of major aspects.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
CYCLE COUNTING
• It is a physical count of items in inventory.

• Its purpose is to reduce discrepancies between the amounts indicated by

inventory records and the actual quantities of inventory on hand. Accuracy is
important because inaccurate records can lead to disruptions in operations,
poor customer service, and unnecessarily high inventory carrying costs. The
counts are conducted more frequently than once a year, which reduces the costs
of inaccuracies compared to only doing an annual count, by allowing for
investigation and correction of the causes of inaccuracies.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
CYCLE COUNTING
Guidelines recommended by APICS for inventory record accuracy:

± .2 percent for A items;

± 1 percent for B items; and
± 5 percent for C items.

A items are counted frequently, B items are counted less frequently, and C
items are counted the least frequently.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
CYCLE COUNTING
• Some companies use certain events to trigger cycle counting,
whereas others do it on a periodic (scheduled) basis.

• Events that can trigger a physical count of inventory include an

out-of-stock report written on an item indicated by inventory
records to be in stock, an inventory report that indicates a low
or zero balance of an item, and a specified level of activity.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
CYCLE COUNTING
• Some companies use regular stockroom personnel to do cycle
counting during periods of slow activity, while others contract with
outside firms to do it on a periodic basis.
• Use of an outside firm provides an independent check on inventory
and may reduce the risk of problems created by dishonest
employees.
• Still other firms maintain full-time personnel to do cycle counting.
INVENTORY ORDERING POLICY

Address the two basic issues of inventory

management:

• How much to order

• When to order
INVENTORY ORDERING POLICY
CYCLE STOCK SAFETY STOCK
The amount of Extra inventory carried
inventory needed to to reduce the
meet expected probability of a
demand stockout due to
demand and/or lead
time variability