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Module 5 Inventory Management

The document discusses various inventory management techniques. It defines inventory as items held for sale or used in production. The objectives of inventory management are to minimize investment in inventory while meeting product demand. Key costs of holding inventory are ordering costs, carrying costs, opportunity costs, and risks of price declines, deterioration and obsolescence. The document then describes ten tools and techniques for inventory management, including ABC analysis, economic order quantity, order point problems, two bin technique, VED, HML, SDE and FSN classifications, order cycling systems, and just-in-time inventory.

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Ryan Dave Malnegro
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Download as PPT, PDF, TXT or read online on Scribd
210 views

Module 5 Inventory Management

The document discusses various inventory management techniques. It defines inventory as items held for sale or used in production. The objectives of inventory management are to minimize investment in inventory while meeting product demand. Key costs of holding inventory are ordering costs, carrying costs, opportunity costs, and risks of price declines, deterioration and obsolescence. The document then describes ten tools and techniques for inventory management, including ABC analysis, economic order quantity, order point problems, two bin technique, VED, HML, SDE and FSN classifications, order cycling systems, and just-in-time inventory.

Uploaded by

Ryan Dave Malnegro
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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INVENTORY MANAGEMENT

INVENTORY
MEANING
held for SALE
Consumed in the PRODUCTION of goods/services
 Forms of Inventory:
Service Business - Supplies Inventory
Merchandising/Retail Business - Merchandise Inventory
Manufacturing Business - Raw materials, Work in process,
Finished goods and Supplies
Inventory Management- objectives

minimize investments in inventory

meet the demand for products by efficiently organizing the


production & sales operations
COSTS OF HOLDING
INVENTORIES
Ordering costs

Inventory Carrying costs

Opportunity costs of funds blocked

Shortage
RISK OF HOLDING
INVENTORY
Price decline

Product Deterioration

Product Obsolescence
TOOLS & TECHNIQUES OF
INVENTORY MANAGEMENT/
CONTROL
1. ABC Analysis
2. Economic Ordering Quantity (EOQ)
3. Order Point Problem
4. Two Bin Technique
5. VED Classification
6. HML Classification
7. SDE Classification
8. FSN Classification
9. Order Cycling System
10. Just In Time (JIT)
1. ABC Analysis - The ABC analysis suggests
that inventories of an organization are not of equal value. Thus, the inventory is
grouped into three categories (A, B, and C) in order of their estimated
importance.
CATEGORY NO. OF ITEMS(%) ITEM VALUE(%) MANAGEMENT
CONTROL

A 15 70 (HIGHEST) MAXIMUM

B 30 20(MODERATE) MODERATE

C 55 10(LEAST) MINIMUM

TOTAL 100 100


2. Economic Ordering Quantity
(EOQ)
The economic order quantity (EOQ) model is used
in inventory management by calculating the
number of units a company should add to
its inventory with each batch order to reduce the
total costs of its inventory. 
2. Economic Ordering Quantity
(EOQ) EOQ MODEL
2UP
Q =
S

Q = Economic Order Quantity


U = Annual usage/demand
P = Cost of Placing an order
S = Storage cost per unit per order
* Where Storage cost is given in % , it is always calculated by multiplying the % with
the purchase price of raw material per unit, i.e Storage cost = % X Purchase price of
raw material
Economic Order Quantity - EOQ
2UP
Q =
*

Example:
Assume a car dealer that faces demand for 5,000 cars per year, and that it costs
P15,000 to have the cars shipped to the dealership. Holding cost is estimated at
P500 per car per year. How many times should the dealer order, and what
should be the order size?

2(15,000)(5,000)
Q 
*
 548
500
BEHAVIOUR OF INVENTORY RELATED COSTS

Costs
Total costs

Carrying costs

Ordering costs
Quantity ordered
EOQ- Example
A firm’s annual inventory is 1,600 units. The cost of placing an order is P50,
purchase price of raw material/unit is P10 and the carrying costs is expected to
be 10% per unit p.a. Calculate EOQ?

U=1600
P= P50
S= 0.10 x P10=P1

EOQ = 2 x 1600 x 50
1

= 400 units
3. Order Point Problem
The re-order point is that level of inventory when a fresh order should
be placed with suppliers. It is that inventory level which is equal to the
consumption during the lead time or procurement time.
Re-order level = (Daily usage × Lead time) + Safety stock.
Minimum level = Re-order level – (Normal usage × Average delivery
time).
Maximum level = Reorder level – (Minimum usage × Maximum delivery
time) + Re-order quantity.
Average stock level = Minimum level + (Re-order quantity)/2.
Danger level = (Average consumption per day × Lead time in days for
emergency purchases).
4. Two Bin Technique
Control of Category ‘C’ inventories
Two Bins/Groups
First Bin- just enough to last from the date a
new order is placed until it is received for
inventory.
Second Bin- enough to meet current demand
over the period of replenishment.
5. VED Classification
Specifically used for Classification of SPARE PARTS

V- part is VITAL( high stock level)

E- part is ESSENTIAL (moderate stock level )

D- part is DESIRABLE (minimum stock level )


6. HML Classification
Material classified on the basis of UNIT VALUE

 H- HIGH VALUE
 M- MEDIUM VALUE
 L – LOW VALUE
7. SDE Classification
The SDE analysis looks at what inventory is
available and classifies it according to the scarcity
of supply.
 S- Scarce
 D- Difficult
 E – Easy
8. FSN Classification
Inventory is classified based on the
MOVEMENT OF INVENTORIES from stores
Inventory technique used to AVOID
OBSOLESCENCE
 F- Fast moving
 S- Slow moving
 N- Non moving
9. ORDERING CYCLING
SYSTEM
 Periodic reviews are made of each item of
inventory & orders are placed to restore stock to a
prescribed stock level.
10. JUST-IN-TIME (JIT) INVENTORY SYSTEM
• The JIT control system implies that the firm should
maintain a minimal level of inventory and rely on
suppliers to provide parts and components ‘just-in-time’
to meet its assembly requirements.

• JIT also known as Zero Inventory Production Systems(ZIPS),


Zero Inventories(ZIN), Materials as Needed(MAN), or Neck of
Time(N0T)

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