Inventory

Methods
What is Inventory?
Held for sale in the ordinary
course of business, in the process
of production for such sale or in
the form of materials or supplies
to be consumed in the production
process or in the rendering of
services
What is Inventory
Management?
A company's success hinges on
serving customers and staying
financially stable. Supplying goods
means focusing on having the right
products at fair prices. Inventory
management ensures the
availability of supplies to
customers.
What is Inventory
Management?
Coordination among
departments like purchasing
and distribution is crucial for
marketing goals. Efficient stock
control balances various
departmental needs.
Purpose of Inventory
Management
The role of inventory
management is to
resolve said conflict in
the best interest of the
company;
Purpose of Inventory
Management
(a) suppress the mismatch
between supply and demand,
(b) minimize the risk of shortage
of supply, and minimize the total
cost of the supply chain
Different types of
Inventory
Major types of inventories is
maintained by organizations
are:
raw materials
finished goods
semi-finished goods
spare parts/supplies.
Purpose of Inventory
Protection against fluctuating
demand. Sufficient inventories must
be ready at all times to meet peak
demand.

Protection against inflation. There

are times when inventories are built
up in anticipation of a price
increase.
Purpose of Inventory

Protection against delayed

supply. Unavoidable
Circumstances, inventories
serve as a buffer that can
be used in cases of late
deliveries.
Purpose of Inventory
Benefits of large quantities.
Buyers are entitled to a price
discount when purchasing large
quantities of items.

Primary basis for business. Fully

stocked shelves and a wide
selection of products will attract
customers to patronize a store.
Purpose of Inventory

Savings on ordering costs.

Ordering process entails
costs. If orders are placed
in large quantities, then
placing orders will be less
frequent.
Structure of
Inventory System
An inventory system
involves a cyclical
process that runs over
several periods.
Major
characteristics:
Inventory Level
- refers to the size of the inventory or the
inventory on hand.

Demand and Depletion

- The inventory gets depleted to serve demand.
Day by day, the inventory level will decline due
to demand. The rate of demand is equivalent to
the depletion rate.
Reordering
- A replenishment order is made when the inventory
is reduced to a certain level called the reorder point.
The time between an order is placed and the arrival
of delivery is called a lead time.

Safety Stock and Average Inventory

- To avoid shortages, a level of safety stock or
buffer must be established. To Aid managers in
decision-making, an average inventory has to be
calculated.
Replenishment, Shortages, and
Surpluses
- Simple inventory models assume
scheduled reordering for delivery
upon complete depletion, suitable
for constant demand. Fluctuating
demand or varied lead times may
cause deliveries to arrive either
after or before inventory depletion,
resulting in shortages or surpluses
accordingly.
Inventory cost
- refers to the cost
associated with storing and
maintaining its inventory over a
certain period of time. It is a
crucial component of supply
chain management as it directly
affects the profitability of a
business.
Major types of
Inventory Cost:
Purchase Cost - This is the cost paid to suppliers for
acquiring the inventory. It is usually the largest
component of inventory cost.

Example:
- f a retail store buys 100 units of a product for ₱10
each, the purchase cost is 100 units * ₱10/unit = ₱1000.
Ordering Cost
- This is the cost associated with placing an order for
more inventory, regardless of the order size. It
includes costs related to paperwork, shipping,
handling, customs, etc.

Example:
- If it costs ₱50 in administrative and shipping fees to
place an order, and you place 10 orders in a year, the
annual ordering cost is ₱50/order * 10 orders = ₱500.
Holding Cost (or carrying cost)
- These are the costs associated with storing the
inventory until it's sold. It includes warehousing costs
(rent, utilities, security), insurance, taxes, depreciation,
obsolescence, and opportunity cost of capital tied up in
inventory.

Example:
- If you pay ₱2000 per month for warehouse rent and
utilities, your annual holding cost is ₱2000/month * 12
months = ₱24,000.
Stockout Cost (or shortage cost)
- These are the costs associated with not having
enough inventory to meet demand. It includes lost sales,
customer dissatisfaction, and potential loss of future
business.

Example:
- If you estimate that you lose ₱100 in profit for each
day you're out of stock, and you're out of stock for 10
days in a year, your annual stockout cost is ₱100/day *
10 days = ₱1000.
Overstock Cost
- These are the costs associated with having too
much inventory. It includes the cost of markdowns or
discounts to sell excess inventory, as well as the cost
of disposing of or writing off unsold inventory.

Example:
- If you have to mark down ₱5000 worth of inventory
to sell it, and you have to write off ₱2000 worth of
unsold inventory, your overstock cost is ₱5000 +
₱2000 = ₱7000.
Economic
Order
Quantity
Learn More
ECONOMIC ORDER
QUANTITY
• An approach to build an idealized
inventory system
• Calculate a fixed order quantity that
minimizes the total quantity.
• Our goal is to lower the total inventory
cost (TC) and the formula which is TC= OC
+ HC
Frequency of Orders OC + HC= TC

Annual 100 + 57,600 = 57,700

Quarterly 400 + 14,400 = 14,800

Monthly 1,200 + 4,800 = 6,000

EOQ can be determined mathematically
with a 'greater' degree of accuracy.

Using these formulas:

Q* = √2 OC D / HC N = D/ Q
Where Q is the Optimal Order Size Where N is the best number of orders
to be placed in a year
Where:
OC = Ordering Cost
D= Annual Demand
HC= Holding Cost
 Q* = √2 (100)
(2,400)
÷ 48
= 100 units
It means that the optimal order size will be 100 units at a time Also, the maximum
inventory on hand should be maximum to 100 and the average inventory is half.

N = 2,400 / 100 = 24 times

The best number of orders to be places in a year

D= 365/N
= 365/24 times
= every 15.20 days
Compute for the Total Annual Cost :
(excluding the cost of items)

TC = D OC / Q + HC Q /2
= 2,400 +
2,400
= 4,800
Practice:
Mansci Corps. is trying to decide between two alternative Order
Plans for its invemtory of a vcertain item. Irrespective of the plan to be
followed, demand for item is expected to be 1,000 units annually. Under
Plan 1, Mansci would use a teletype of ordering; order cost would be 40
per order. Inventory holding cost would be 100 per unit per annum.
Under Plan 2 prder cost would be 30 per order, and holding cost would
20% and unit cost is 480.
Find out EOQ and Total Inventory Cost then decide which plan will
result in the lowest inventory cost.
ABC
CLASSIFICATION
SYSTEM
WHAT IS ABC CLASSIFICATION
SYSTEM?
It is a technique of Inventory
Control.
ABC ANALYSIS IS BASED ON
PARETO LAW WHICH SAYS
THAT IN ANY LARGE GROUP
THERE ARE " SIGNIFICANT FEW"
AND “INSIGNIFICANT MANY".
Why ABC Analysis?
Ensures control over the costly items
Reduction in the storage expense
Resource Allocation
Increased Economy
FIXED QUANTITY SYSTEM
&
FIXED PERIOD SYSTEM
 Control of Inventory Systems
Q MODEL P MODEL
In Fixed Quantity In Fixed Period System,
System/Perpetual System, a inventory is counted only at
fixed quantity of material is particular times, such as every
ordered whenever the stock on week or every month. Counting
hand reaches the re-order inventory and placing orders
point. This strategy helps to periodically are desirable in
ensure that the right amount of situations when vendor make
stock is available to meet routine visits to customers and
customer demand. take orders for their complete line
of product.
· REALTIME HIGH SET UP
· INVENTORY TRACKING COSTS NOT
ALWAYS RELIABLE
· ALLOWS JOINT REORDERING · DELAYED RESULTS
OF OTHER ITENS IN THE SAME · THE SYSTEM REQUIRES A
PERIOD LARGE SAFETY STOCK TO
· LOW SET UP COSTS REDUCE THE POSSIBILITY OF
SHORTAGES
FIXED QUANTITY
SYSTEM/
PERPETUAL SYSTEM
FORMULA
 Suppose you're a perfume retailer who sells 200 bottles
of perfume every day. Your vendor takes one week to
deliver each batch of perfumes you order. You keep
enough excess stock for 5 days of sales, in case of

PROBLEM
unexpected delays.

SAMPLE
Now, what should your reorder point be?

Lead time = 7 days

Safety stock = 5 days x 200 bottles = 1000
bottles
ROP = (200 × 7) + 1000 = 2400 bottles

The order for the next batch of perfume should be placed

when there are 2400 bottles left in your inventory.
FORMULA
 Suppose you're a perfume retailer who sells 200
bottles of perfume every day. Your vendor takes one
week to deliver each batch of perfumes you order.

PROBLEM
SAMPLE
Now, what should your reorder point be without safety
stock?

Taking the above perfume example without including

safety stock, your ROP should be:

ROP = 200 x 7 = 1400 bottles

FIXED PERIOD
SYSTEM
Q = QUANTITY TO BE ORDERED
T= NUMBER OF DAYS BETWEEN REVIEWS
L = LEAD TIME IN DAYS

T + L = VULNERABLE PERIOD
D = FORECAST AVERAGE DAILY DEMAND
Z = NUMBER OF STANDARD DEVIATIONS
REQUIRED FOR SPECIFIED SERVICE LEVEL
OT+L = STANDARD DEVIATION OF DEMAND
DURING THE REVIEW AND LEAD TIME
1= CURRENT INVENTORY LEVEL (INCLUDING
ITEMS ON ORDER)
TIME IS CONSTANT ONLY UNITS VARY.
Daily demand (d) of 10 units

EXAMPLE
Daily standard deviation (op) of 3 units
Review period (T) of 30 days
Lead time (L) of 14 days
98 percent of demand should be met from
items in stock
150 Units in inventory (I)
THE CONCEPT OF QUANTITY
DISCOUNT
Quantity Discount
Quantity discount is a pricing strategy where a seller offers a
financial incentive or a price discount to a buyer, who purchases
goods or services in large quantities.

This strategy is often used to incentivize bulk purchasing, improve

customer loyalty, and increase sales volume.

There are two main types of quantity discounts:

Cumulative
Non-Cumulative.
Cumulative Quantity Discount
is a type of pricing strategy where the price of a
product or service decreases as the quantity purchased
over a specific period increases. This strategy is often
used to encourage customers to buy more items from a
seller, thereby increasing the seller's total sales volume.
This type of discount is based on the quantity purchased
over a specified period.
 For example:
Imagine you are the owner of an online stationery store. You have recently
introduced a Cumulative Quantity Discount program to encourage repeat
business from your customers. The program offers a 5% discount if a customer
purchases more than 100 units within a month. The discount applies to all
future orders within that period.
Sarah, a loyal customer who frequently purchases stationery items from
your online store. She has been buying around 50 units per month for the past
few months. However, she recently learned about your new Cumulative Quantity
Discount program. Intrigued, Sarah decides to take advantage of the discount. In
the first week of the month, she places an order for 60 units. In the second week,
she places another order for 40 units. How will the Cumulative Quantity Discount
program apply to Sarah's orders?
Explanation
In this scenario, Sarah's first order of 60 units exceeds the
minimum threshold of 100 units required to qualify for the
discount. Therefore, she will receive a 5% discount on that
order. Additionally, since Sarah's second order of 40 units
is within the same month, it will also be eligible for the 5%
discount. The discount applies to all future orders within
the month, encouraging repeat business from Sarah.
Non-Cumulative Quantity Discount
The discount is applied to a single purchase order or transaction,
regardless of the customer's purchase history or future purchases.

For example:

Imagine you are the manager of a wholesale electronics store. To incentivize larger, one-
time purchases, you have implemented a Non-Cumulative Quantity Discount program.
The program offers a 5% discount on orders of over 100 units, a 10% discount on orders
of over 200 units, and a 15% discount on orders of over 300 units. Meet Alex, a retailer
who regularly sources electronic devices from your wholesale store. Alex is planning to
stock up on inventory for an upcoming promotion and is interested in taking advantage
of your Non-Cumulative Quantity Discount program. He places an order for 150 units.
How will the discount program apply to Alex's order?
Explanation
In this scenario, Alex's order of 150 units exceeds the
minimum threshold of 100 units required to qualify for the
5% discount. Therefore, he will receive a 5% discount on his
order. However, since his order does not meet the threshold
of 200 units for the 10% discount or 300 units for the 15%
discount, he will not be eligible for those higher discount
tiers.
THANKS
For Your Attention