Inventory Management & Stock Control 1

Inventory Management & Stock Control

Dr. Emad Elwy Habib, PGCHE, FHEA, PhD.

Associate Professor of Business Administration.

Deputy Head Department MIS and Modules Leader.
Faculty of Management Sciences.
October University for Modern Sciences and Arts (MSA).
6th of October City, Egypt.
Production Operations Management Expert and Trainer.
Supply Chain Management Expert and Trainer.
Fellow of Higher Education - Greenwich university - UK.
E-Mails: [email protected] - [email protected]
Middle Sex University U.K
Greenwich University U.K.
Cardiff Metropolitan University U.K.
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 Inventory Management & Stock Control 2

Plan

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Inventory Management & Stock Control 3

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 Inventory Management & Stock Control 4

Inventory
• Inventory
– A stock or store of goods
• Independent demand items
– Items that are ready to be sold or used

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Cycle Inventory

Inventory Whereabouts EOQ Model

Inventory Cost

• through the S.C. …

Storage Areas: Raw material & components Inventory

Customers
Suppliers

Work in process inventory, (WIP) Simi-

finished products

Warehouses: Finished products

inventory ready to be shipped

Spare parts inventory

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 Inventory Management & Stock Control 6

Types of Inventory
• Raw materials and purchased parts
• Work-in-process
• Finished goods inventories or merchandise
• Maintenance and repairs (MRO) inventory, tools
and supplies
• Goods-in-transit to warehouses or customers
(pipeline inventory)

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 Inventory Management & Stock Control 7

Inventory Functions
• Inventories serve a number of functions such as:
1. To meet anticipated customer demand
2. To smooth production requirements
3. To decouple operations
4. To protect against stock-outs
5. To take advantage of order cycles
6. To hedge against price increases
7. To permit operations
8. To take advantage of quantity discounts

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Inventory Management

• Management has two basic functions concerning

inventory:
1. Establish a system for tracking items in
inventory
2. Make decisions about
• When to order
• How much to order

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Effective Inventory Management

• Requires:
1. A system keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of
• holding costs
• ordering costs
• shortage costs
5. A classification system for inventory items

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 Inventory Management & Stock Control 10

Inventory Counting Systems

• Periodic System
– Physical count of items in inventory made at periodic
intervals
• Perpetual Inventory System
– System that keeps track of removals from inventory
continuously, thus monitoring current levels of each
item
• Two-bin system
– Two containers of inventory; reorder when the first is
empty
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Inventory Counting Technologies

• Universal product code (UPC)
– Bar code printed on a label that has information
about the item to which it is attached
• Radio frequency identification (RFID) tags
– A technology that uses radio waves to identify
objects, such as goods in supply chains

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Demand Forecasts and Lead Time

• Forecasts
– Inventories are necessary to satisfy customer demands, so it is
important to have a reliable estimates of the amount and
timing of demand
• Lead time
– Time interval between ordering and receiving the order
• Point-of-sale (POS) systems
– A system that electronically records actual sales
– Such demand information is very useful for enhancing
forecasting and inventory management
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What is inventory?
• Examples:
– Parts in a factory
– Paper towels in your cupboard
– Customers on hold
– Paperwork in secretary’s in-box
• Not limited to physical products
Inventory is DELAY in business process.

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What is inventory? ..
Within organization:

Input Transformation Output

Raw materials Work-in-Process Finished goods
• Materials received • Semi-finished • Products waiting to
• Customers waiting products be shipped
in a bank • Customers at the • Customers leaving
• Paperwork in in-box counter the bank
• Paperwork on • Paperwork in out-
desk box

Between organizations: Goods-in-transit

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Functions of Inventory
• To smooth capacity requirements
• To deal with uncertainty:
- In business process: decoupling consecutive stages in business
process
- In demand
• To reduce ordering costs
• To take advantage of quantity discount
• To hedge against possible price increase in the near future

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Cycle Inventory

Why inventory in a S.C.? EOQ Model

Inventory Cost

• To avoid mismatch between Supply and Demand.

• To have the shortest possible lead time.
• To reduce costs by exploiting economies of scale in
production or/and distribution:
- Material cost
- Fixed ordering cost
- Holding cost

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Cycle Inventory

Why inventory in a S.C.? .. EOQ Model

Inventory Cost

• To buy when price is low or stock is available

- avoid pricing risk
- avoid shortage risk
• To cope with unexpected changes in supply and demand
- variability in time
- variability in quantity
• To be able to run the production process. (Technological
Factor)

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Cycle Inventory

Role of Inventory in SC EOQ Model

Inventory Cost

• As one of the SC’s drivers, inventory plays a

significant role in achieving the SC’s strategy. This
role is performed by:
– Minimizing total cost.
– Improving SC efficiency.
– Improving the responsiveness.

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Cycle Inventory

Inventory & Competitive Strategy EOQ Model

Inventory Cost

Its role is to enable the supply chain to support the

company’s competitive strategy

If a. High level of responsiveness is required

Large quantity of inventory close to the customer

Or b. High level of efficiency is required

Reduced quantity of inventory through centralized warehouses
and stoking areas

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Cycle Inventory

Inventory Types EOQ Model

Inventory Cost

• Cycle Inventory: To manage economies of scale in the SC

• Safety Inventory: To manage Supply & demand uncertainties

in the SC.

• Seasonal Inventory: To manage seasonal predictable variability

Better synchronize Supply and Demand

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What’s at Stake (Critical) ? Cycle Inventory

EOQ Model

Cost Savings ? Inventory Cost

• Holding cost is about 20% to 40% of the product value, and

includes:
– cost of money
– storage space
– Loss
– Handling
– Administration
– Insurance
• Successful inventory management results in high efficiency
level.
• To reach the desired results, analysis of the inventory items
is necessary.
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Selective Inventory Control

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Selective Inventory Control

• Selective Inventory Control is defined as a process
of classifying items into different categories, thereby
directing appropriate attention to the materials in
the context of company’s viability.

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Classification of Materials for Inventory Control

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ABC Classification System

• Classifying inventory
according to annual value of
consumption of the items.
High
A - very important A
B - mod. important Annual
$ value
C - least important of items
B
• When a large number of items
are involved, relatively few
items account for a major part C
of activity, based on annual Low
value of consumption of items.
Few Many
• It is based on the principles of
‘vital few and trivial many’. Number of Items

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ABC Classification System ..

• A-items: 15% of the items are of the highest value
and their inventory accounts for 70% of the total.
• B-items: 20% of the items are of the intermediate
value and their inventory accounts for 20% of the
total.
• C-items: 65%(remaining) of the items are lowest
value and their inventory accounts for the relatively
small balance, i.e., 10%.

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Pareto curve

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V-E-D Classification

• Based on the critical nature of items.

• Applicable to spare parts of equipment, as they do

not follow a predictable demand pattern

• Very important in the company

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V-E-D Classification ..

• V-Vital :Items without which the activities will come

to a halt

• E-Essential : Items which are likely to cause

disruption of the normal activity

• D-Desirable : In the absence of which the hospital

work does not get hampered

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 Inventory Management & Stock Control 30

H-M-L Classification

• Based on the unit value (in rupees) of items

• Similar to A-B-C analysis

H – High

M – Medium

L – Low

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F-S-N Classification
• Takes into account the distribution and handling
patterns of items from stores
• Important when obsolescence is to be controlled
F – Fast moving
S – Slow moving
N – Non moving

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S-D-E Classification

• Based on the lead-time analysis and availability

S – Scarce : longer lead time

D – Difficult : long lead time

E – Easy : reasonable lead time

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S-O-S Classification

S-O-S: Seasonal- Off - Seasonal

• Some items are seasonal in nature and hence
require special purchasing and stocking strategies

• EOQ formula cannot be applied in these cases

• Inventories at the time of procurement will be

extremely high

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G-O-L-F Classification

G-O-L-F stands for:

• G – Government

• O – Ordinary

• L – Local

• F – Foreign

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X-Y-Z Classification

• Based on the value of inventory stored

• If the values are high, special efforts should be made

to reduce them

• This exercise can be done once a year

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Cycle Inventory

Inventory: Products Segmentation EOQ Model

Inventory Cost

ABC Analysis
100 —
5% • Classifying inventory
90 — according to
15%
importance and
80 —
Allocating control
70 — efforts accordingly
• Importance: measured
% of dollars value

60 —
by annual $ volume
50 —
30%
40 —

30 — Class C
Class A

Class B

20 —

10 —

0—
10 20 30 40 50 60 70 80 90 100 www.topbusiness-hr.com
Percentage of items
 Inventory Management & Stock Control 37

ABC Inventory Classification

ABC classification is a method for determining level of control

and frequency of review of inventory items

• A Pareto analysis can be done to segment items into value

categories depending on annual dollar volume

• A Items: typically 20% of the items accounting for 80% of the

inventory value-use Q system

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ABC Inventory Classification ..

• B Items: typically an additional 30% of the items

accounting for 15% of the inventory value-use Q or P

• C Items: Typically the remaining 50% of the items

accounting for only 5% of the inventory value-use P

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 Inventory Management & Stock Control 39

ABC Inventory Classification ..

The AAU Corp. is considering doing an ABC analysis

on its entire inventory but has decided to test the
technique on a small sample of 15 of its SKU’s. The
annual usage and unit cost of each item is shown
below

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ABC Inventory Classification ..

• (A) First calculate the annual dollar volume for each

item

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ABC Inventory Classification ..

B) List the items in descending order based on annual

dollar volume. (C) Calculate the cumulative annual
dollar volume as a percentage of total dollars. (D)
Classify the items into groups

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ABC Inventory Classification ..

Graphical solution for AAU Corp showing the ABC
classification of materials
• The A items (106 and 110) account for 60.5% of the value
and 13.3% of the items
• The B items (115,105,111,and 104) account for 25% of the
value and 26.7% of the items
• The C items make up the last 14.5% of the value and 60% of
the items
• How might you control each item classification? Different
ordering rules for each?
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Why an Inventory?

Replenishment EOQ Model

Inventory Cost

Ordering: is about accessing the committed order amounts with

a short term perspective. It happens within a supplier
partnership or as an event in the market buying.
An important management decision:
• Replenishment time:
- When to order? at what frequency?
• Lot size:
- How much to order?

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 Inventory Management & Stock Control 48
Why an Inventory?

Replenishment systems EOQ Model

Inventory Cost

1. Periodical replenishment system

• low variability of demand

• high inventory level

• economies of scale

• low price of products (e.g.: groceries and household

products)

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Why an Inventory?

Periodical Replenishment System EOQ Model

The Periodical Replenishment is Characterized by: Inventory Cost

• Periodicity in placing orders e.g.: the first day of the week

• Unfixed ordered quantities, but depending on the inventory level.

Delivery Lead Time

Inventory level

Q1
Q2

order placed
Time
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 Inventory Management & Stock Control 50
Why an Inventory?

Replenishment System .. EOQ Model

Inventory Cost

1. Periodical replenishment System

2. Order Point System (OP)

– high variability of demand

– low inventory level

– high price of products

– Supply flexibility

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 Inventory Management & Stock Control 51
Why an Inventory?

Order Point System (OP) EOQ Model

Inventory Cost

Lead Time
Inventory level

Delivery
OQ

OP

Time

order placed

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 Inventory Management & Stock Control 52
Why an Inventory?

Order Point System (OP) .. EOQ Model

Inventory Cost

OP and OQ ?

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 Inventory Management & Stock Control 53
Why an Inventory?

Order Point System (OP) .. EOQ Model

Inventory Cost

Lead Time
Inventory level

Delivery
OQ

OP

Time
OP = Demand x Lead time

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Why an Inventory?

Order Point System (OP) .. EOQ Model

Inventory Cost

Unexpected high demand

Delivery
Inventory level

OQ
Stock out
OP

Time

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 Inventory Management & Stock Control 55
Why an Inventory?

Order Point System (OP) .. EOQ Model

Inventory Cost

When the order quantity decision is made it must be determined when

an Order should be placed?

Lead Time
Inventory level

Delivery
OQ

OP

Safety inventory ( to avoid stock outs)

Time
OP = Demand x Lead time + Safety stock
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Why an Inventory?

Order Point System (OP) .. EOQ Model

Inventory Cost

Fixed in coordination with supplier

OP = Demand x Lead time + Safety inventory

Forecasted
Small: lower inventory carrying costs
Large: lower number of lost orders & higher
customer service level

How about (OQ)?

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Why an Inventory?

Order Point & order quantity Systems EOQ Model

Inventory Cost

OP
Ordering Policies fixed variable

order amount Q
order Q
fixed whenever inventory reaches
in a fix interval
a defined level

OQ
order amount that fills
order amount that fills
inventory up to a certain level
variable Inventory up to a certain
whenever inventory reaches a
level in a fix interval
defined level

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Why an Inventory?

Cycle Inventory EOQ Model

Inventory Cost

Is the average inventory in a stage of a SC due to production

or purchases in lot sizes that are larger than those required
by the customer.

Cycle Inventory

Average Cycle Inventory = Q/2 ( Q=Quantity in lot size)

Average flow time = Q/2D (D: demand per unit time)

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Why an Inventory?

Cycle Inventory .. EOQ Model

Inventory Cost

• The larger the cycle inventory the longer the flow time.
E.g.: Toyota Keeps a cycle inventory of only few hours of
• Production and the results are :
– Inventory space is reduced within the factory
– The factory has never been left with parts that it does
not need….(Cost ! )

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Why an Inventory?

Cycle Inventory: Impact on costs EOQ Model

Inventory Cost

The decision taken about the size of (Q) is influenced by:

• Cost information:
– Three basic costs are associated with inventories are:
– a. Holding or carrying cost: is cost to carry an item in inventory for a length of
time, usually a year.
– b. Ordering (transaction) costs: are the costs of ordering and receiving
inventory.
– c. Shortage costs: costs resulting when demand exceeds the supply of
inventory on hand; often unrealized profit per unit
1. The average price paid per unit Purchased
2. The fixed ordering cost
3. The holding cost
Cycle inventory role is to enable the SC’s stage to take
Advantage of economies of scale.
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To minimize the total cost ( 1,2 & 3)

 Inventory Management & Stock Control 61

Cycle Inventory: Impact on Costs ..

The goal: The goal:

Decrease cycle Avg. price Use economies of scale
Inventory per unit ie: Increase cycle inventory
purchased

Trade-Off
Holding cost Ordering cost

The goal: Use economies of scale

Why an Inventory?
ie: Increase cycle inventory
EOQ Model
Inventory Cost
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How much to order: Economic order quantity models:

• Economic order quantity (EOQ) is the order size that
minimizes total cost. Three order size models are described
here:
• Basic economic order quantity (EOQ) model:
• It is used to identify the order size that will minimize the
sum of the annual costs of holding inventory and ordering
inventory.
• Assumptions of the basic EOQ model:
1. Only one product is involved.
2. Annual demand requirements are known.
3. Demand is spread evenly throughout the year so that the demand
rate is reasonably constant.
4. Lead time dose not vary.
5. Each order is received in a single delivery.
6. There are no quantity discounts.
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Inventory Management Models

• Basic inventory management decisions:
– How much to order (Q): EOQ and Quantity Discount
Models
– When to order: Reorder Point and Fixed Order
Interval Models

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Economic Order Quantity Model

• Example: a small store selling 2-liter bottles of soft
drink
– Demand Rate: d = 10 units/day
– Annual Demand: D = 3,650 units/year
– Purchase cost (Price): P = $1/unit
– Ordering cost: S = $20/order
– Holding cost:
• Rate: h = 15%/year
• Annual Cost/Unit/Year: H = $0.15/unit/year

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The Inventory Cycle

Units
Order Usage
Quantity rate
(Q)

Time
Receive Receive
order order

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The Inventory Cycle ..

Large Q

Small Q

Time

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 Inventory Management & Stock Control 68

When to order?
Order Cycle
Units
500
450 LT: Lead Time
400
ROP: Reorder Point
350
300
250
200
150
ROP 100
50
0 Time
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Placing Receiving
Order LT Order
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 Annual Cost
A . Carrying cost are
linearly related to Q/2*H
ordering size

Order quantity

B. Ordering costs are

Annual Cost
inversely and non D/Q*S
linearly related to order
size

Order quantity

TC = Q/2*H + D/Q*S
Annual Cost

C. Total-cost Curve is
U Shape

Q* Order quantity
69
A . Annual carrying cost = Q/2 *H Where ……..
Q = order quantity in units
H = holding (carrying) cost per unit
B. Annual ordering cost = D/Q * S Where ………
D = demand, usually in units per year
S = ordering cost
C. Total Annual Cost = Annual carrying cost + Annual ordering cost

The optimal order quantity :

Q* = 2DS/H

Length of order cycle ( time between orders)= Q*/D

Example Inventory Management & Stock Control 71

A local distributor for a national tire company expects to sell approximately

9,600 steel belted radial tires of a certain size and tread design next year.
Annual carrying cost is $16 per tire, and ordering cost is $75. The distributor
operates 288 days a year.

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 Inventory Management & Stock Control 72

When to order?
Order Cycle
Units
500
450 LT: Lead Time
400
ROP: Reorder Point
350
300
250
200
150
ROP 100
50
0 Time
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Placing Receiving
Order LT Order

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When to order? Constant d and LT

1. Constant demand and lead time
– d= demand rate, e.g. units/day
– LT = Lead Time
ROP  d (LT )
Question: d= 10/day, LT = 15 days
ROP = ?
Objective of ROP:
To satisfy demand during LT (DLT)

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When to order?
Variable d and constant LT
2. Variable demand, constant lead time
– d= normal distribution
– LT = constant
d ,  d

DLT  d1  d 2      d LT
• When each dt is normally distributed, the sum of
dt’s (DLT) is also normally distributed

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 Inventory Management & Stock Control 75

Economic production quantity (EPQ):

The assumptions of the EPQ model are similar to those of the EOQ
model, except that instead of orders received in a single delivery,
units are received incrementally during production. The assumptions
are:
1. Only one item is involved.
2. Annual demand is known.
3. The usage rate is constant.
4. Usage occurs continually, but production occurs periodically.
5. The production rate is constant.
6. Lead time dose not vary.
7. There are no quantity discounts.

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Economic Production Quantity (EPQ):

Q
Production Usage Production Usage Production
and usage only and usage only and usage
Q*
Cumulative
production

Imax

Amount
on hand

Time

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 Inventory Management & Stock Control 77

The number of runs or batches is D/Q, and the annual setup

cost is equal to the number of runs per year times the setup
cost per run: (D/Q)S. Total cost is
I max
Tc min  Carrying cost  Setup cost  ( ) H  ( D / Q )S
2
Where I max  Maximum inventory
2 DS p
The economic run quantity is
Qp 
H p u
Where
P = production or delivery rate
U = usage rate
Qp
Cycle time =
u
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The maximum and average inventory levels are

Q0 I max
I max  ( p  u) I average 
p 2
Quantity discounts:
Quantity discounts are price reductions for large orders offered
to customers to induce them to buy in large quantities.
TC = Carrying cost + ordering cost + purchasing cost
=
Q D
( H)  ( )S  PD
2 Q
Where
P = Unit price
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 Inventory Management & Stock Control 79

I max
Case 1 : Tc min  Carrying cost  Setup cost  (
2
) H  ( D / Q )S

• A shop that makes candles offers a scented candle, which has a

monthly demand of 360 boxes. Candles can be produced at a rate
of 36 boxes per day. The shop operates 20 days a month. Assume
that demand is uniform throughout the month. Setup cost is $60
for a run, and holding cost is $2 per box on a monthly basis.
Determine the following:
A. The economic run size 2 DS p
Qp 
B. The maximum inventory H p u
C. The number of days in a run Q/p
• The daily usage rate (u) is 18 boxes. The daily production rate (p)
is 36 boxes Q
Qp I max  0
( p  u)
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 Inventory Management & Stock Control 80

A)

B)

C)

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 Inventory Management & Stock Control 81

Case 2 :
• A toy manufacturer uses 48,000 rubber wheels per year for
its popular dump truck series. The firm makes its own
wheels, which it can produce at a rate of 800 per day. The
toy trucks are assembled uniformly over the entire year.
Carrying cost is $1 per wheel a year . Set up cost for a
production run of wheels is $45. The firm operates 240 days
per year. Determine the
– Optimal run size
– Minimum total annual cost for carrying and setup
– Cycle time for the optimal run size
– Run time

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 Inventory Management & Stock Control 83

Thank You

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