Inventory Management

References:

Cost Management – Strategic for Business Decisions – 3rd edition, Hilton, Maher & Selto

Operations Management – 5th editionRobert Russell & Bernard W. Taylor

Lecture Outline

Objectives Categories of Inventory Importance of Accurate Forecasting Inventory Costs and examples EOQ Model and Computation Inventory Management Techniques

Objectives

The main objectives of inventory management are to achieve maximum efficiency in production and sales with the minimum investment in inventory.

It is very difficult to manage each element of inventory properly due to the following reasons, forecasting of demands of various products, abnormal situations like strikes, other economic conditions and different Government policies.

Categories of Inventory

Raw materials Components Work in process ( Partially completed

products) Finished products Spares and parts

Importance of accurate forecasting of inventory

Improve customer service in time Economies of purchase Economies and in time production To continue the production in case of

natural disasters and strikes etc. Reduction of various costs like carrying

and ordering costs To maintain independence of supply

chain

Inventory Costs

Once inventory levels have been established, they become an important input to the budgeting system. Inventory decisions involve a delicate balance between three classes of costs:

1. Ordering costs2. Holding costs3. Shortage costs

Examples of Inventory Costs

Ordering costs : Time spent in finding suppliers and expediting orders, Clerical costs of preparing purchase orders, unloading and inspection costs.

Holding costs: Costs of storage space, Security, Insurance

Shortage costs: Lost sales and dissatisfied customers, Loss of quantity discounts on purchases, Idle workers.

EOQ model of Inventory management

EOQ refers to the quantity to be purchased every time so as to minimize the ordering and holding costs.

EOQ = 2AO/ C In Taylor Corporation, A = Annual demand = 4500 units O = Ordering cost per order = $60 C = Holding cost per unit per annum = $60

**( C = $ 1200* 5% = $60)

Computation of EOQ for Taylor Corporation

So EOQ = 2 x 4,500 x 60

60

= 95 unitsAnnual demands = 4,500 unitsPer order = 95 unitsSo number of orders per annum will be

=4,500/95 = 47.37 = 48 ordersSo the Taylor Corporation has to

purchase 95 units of distance measuring devices per order as per EOQ.

Inventory Management Techniques

Various inventory management techniques are as follows, ABC Analysis Determination of EOQ Setting of various stock levels Review of slow and non-moving items Use of control ratios Use of perpetual inventory records and

continuous stock verification

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