1.

INVENTORY
CARRYING
COST
• Inventory carrying cost, also known as
holding cost, refers to all the expenses
a business incurs for holding onto
inventory. These are the costs
associated with storing unsold items
over a specific period.
Factors that contribute to inventory carrying
cost:
Storage costs: This includes rent, utilities, and
labor costs associated with running a
warehouse or storage facility to house the
inventory.
Capital costs: The money a business ties up in
buying inventory could be invested elsewhere,
so this represents an opportunity cost.
Shrinkage: This refers to losses
due to damaged or stolen
goods, or inventory counting
errors.

Obsolescence: The risk of

inventory becoming outdated
or unsellable due to changes in
fashion or technology.
Inventory carrying cost is crucial for effective
inventory management for several reasons:

Finding the Balance: It helps businesses strike a balance

between having enough stock to meet customer demand
(avoiding stockouts) and holding too much inventory.
Excessive inventory ties up capital that could be used for
other purposes, like expansion or product development.

Profitability: By understanding carrying costs, businesses

can make informed decisions about ordering quantities
and reorder points. This helps them minimize the amount
of inventory they hold, maximizing profits and reducing
the risk of holding onto unsold or obsolete items.
INVENTORY TURNOVER

Inventory turnover, also referred to

as the inventory turnover ratio, is a
metric that gauges how efficiently a
business manages its inventory. It
essentially measures how many
times a business sells and replaces
its stock of goods within a specific
period, typically a year.
Inventory turnover has a significant impact on
inventory in several ways:

Efficiency: A high inventory turnover ratio generally

indicates efficient inventory management. It suggests
products are selling well and not sitting in storage for
extended periods. This translates to less storage space
required, lower carrying costs (explained earlier), and
potentially freed-up capital for other investments.

Sales Performance: A high turnover ratio can be a sign

of strong sales and high demand for a company's
products. Conversely, a low turnover ratio might indicate
weak sales or overstocking of slow-moving items.
Here's a breakdown of the impact based on
inventory turnover:

High Turnover: Generally positive, indicates

efficient sales and low carrying costs, but be
mindful of potential stockouts if lead times are
long.

Low Turnover: Suggests weak sales or

overstocking, leading to higher carrying costs
and potential obsolescence.
By analyzing inventory turnover, businesses

can gain valuable insights into their inventory

management practices and make adjustments

to optimize stock levels, minimize costs, and

ensure they have the right products available to

meet customer demand.

3.Symptoms of Poor Inventory Management
1. Stockouts and Shortages:

This happens when a business doesn't have enough of a particular

item in stock to meet customer demand. It can occur due to
inaccurate forecasting, poor communication with suppliers, or
inefficient ordering processes.

Impact: Stockouts lead to lost sales, frustrated customers, and

potential damage to brand reputation. Customers may take their
business elsewhere if they can't find what they need.
2. Excess Inventory:

Explanation: This is the opposite of stockouts, where a business

holds more inventory than necessary. It can be caused by
overestimating demand, poor sales forecasting, or panic buying.
Impact: Excess inventory ties up valuable capital that could be
used for other purposes, like expansion or marketing. It also
increases storage costs, risks of obsolescence (especially with
seasonal or technology-driven products), and potential spoilage
(for perishable goods).
3. Inaccurate Inventory Data:

: This occurs when a business doesn't have a clear and up-to-date

understanding of its inventory levels. It can be caused by relying on
outdated spreadsheets, manual counting errors, or a lack of a
proper inventory management system.

Impact: Inaccurate data leads to poor decision-making. Businesses

might order too much or too little inventory, leading to stockouts or
excess stock. They might also miss out on sales opportunities if
they believe they have items in stock when they don't.
4. Highly Manual Processes:

This refers to businesses relying heavily on manual methods for

inventory management tasks like counting, ordering, and tracking.
This can be slow, inefficient, and prone to human error.
Impact: Manual processes are time-consuming, leading to delays
and potentially missed deadlines. They also increase the risk of
errors in data entry, ordering, and stock placement, causing further
problems.
5. Ineffective Inventory Reporting:
This happens when businesses don't have proper systems in
place to track and analyze inventory data. They might lack reports
on inventory turnover, lead times, or demand trends.

Impact: Without proper reporting, businesses can't identify areas

for improvement or make data-driven decisions about inventory
management. They might struggle to optimize stock levels or
identify slow-moving items.
Managing poor inventory management involves
getting a handle on what you have, ordering
strategically, and using clear systems. This means
taking a physical inventory count, setting reorder
points to avoid stockouts, focusing on high-demand
items, and potentially using a simple app to track it
all. Finally, keeping communication open with
suppliers and organizing your storage space will
ensure your inventory runs smoothly.
4.Here are some key areas to focus on
for improving inventory management:

Gaining Control:

Physical Inventory Count: Conduct a

regular physical count to ensure your
records match actual stock levels.

Data Accuracy: Maintain accurate and up-

to-date inventory data to make informed
decisions.
Optimizing Ordering:

Demand Forecasting: Analyze sales data to predict future

demand and optimize ordering quantities.
ABC Analysis: Categorize inventory (A- high value/demand,
B- medium, C- low) to prioritize critical items for closer
management.
Inventory Management Software: Consider using software to
automate tasks, improve data accuracy, and gain insights
into inventory trends.
5.Impact of an inventory reduction on
corporate profit performance

An inventory reduction can have a positive impact on a

company's profit performance in several ways:

Reduced Carrying Costs: Lower inventory levels mean

less money spent on storage, insurance, handling, and
other costs associated with holding onto stock. This frees
up capital that can be used for more productive purposes,
such as investing in research and development or
marketing initiatives.

Improved Cash Flow: By selling through inventory faster,

companies receive payment quicker, leading to better cash
flow. This allows them to pay bills on time, take advantage
of discounts, and invest in growth opportunities.
However, it's important to strike a
balance. Over-reducing inventory
can lead to stockouts, which can hurt
sales and customer satisfaction.
Businesses need to find the optimal
inventory level that minimizes
carrying costs without compromising
their ability to meet customer
demand.
6.Inventory management under
uncertainty is a critical challenge for
businesses. uncertainties that can disrupt
inventory planning.
These uncertainties can arise from:
Fluctuating Demand: Consumer
preferences and buying patterns can
change unexpectedly due to economic
factors, seasonal trends, marketing
campaigns, or competitor actions.
Supply Chain Disruptions:
Unexpected events like natural
disasters, political unrest, or
transportation issues can interrupt the
flow of goods from suppliers, leading
to stockouts.

Economic Volatility: Economic

downturns can cause dips in demand,
while economic booms might create
sudden spikes, making it difficult to
predict inventory needs.
7.Calculating Safety Stock
Requirements
-Safety stock acts as a buffer
against unexpected
fluctuations in demand or
supply.
There are two main approaches:
Basic Method: This is a simpler approach suitable for businesses with relatively
stable demand and supply.

Formula: Safety Stock = (Maximum Daily Sales x Maximum Lead Time) -

(Average Daily Sales x Average Lead Time)

Explanation:

Maximum Daily Sales: The highest amount you sell in a single day during a
specific period (e.g., quarter).
Maximum Lead Time: The longest time it takes for an order to arrive after being
placed.
Average Daily Sales: The total sales in a period (e.g., month) divided by the
number of days in that period.
Average Lead Time: The sum of all lead times for a period divided by the number
of lead times considered.
More Advanced Method (using standard deviation): This
method is more accurate for situations with more
significant variations in demand or lead time.

Formula: Safety Stock = Z * σ_d * √L

Explanation:
Z: Service Level (a statistical value based on the desired
level of protection against stockouts. You can find Z values
in a standard normal distribution table).
σ_d: Standard Deviation of Daily Demand (calculated
using statistical methods on historical demand data).
L: Lead Time (can be average or maximum lead time
depending on the chosen approach).
ABC Analysis: This categorizes items based on their
annual usage.

A-items: High-value, low-volume items requiring close

control (typically 80% of total value, 20% of total items).
B-items: Medium-value, medium-volume items requiring
moderate control.
C-items: Low-value, high-volume items requiring less
stringent control.
VEN Analysis: This classifies items based on their
criticality and supply risks.

V-items: Vital items essential for production (high

criticality, high supply risk).
E-items: Essential items important for production (high
criticality, low supply risk).
N-items: Non-critical items (low criticality, low supply
risk).
SDE (Seasonality-Demand-Exceptionality) Analysis:
This considers seasonality, demand patterns, and
exceptionalities (e.g., special promotions).
• S-items: Seasonal items with fluctuating demand.
D-items: Items with steady demand throughout
the year.
E-items: Exceptionality items with unpredictable
demand surges.
• By understanding safety stock calculations and
inventory classification, businesses can make
informed decisions about stock levels, minimize
risks, and optimize their inventory management
practices.
8.Derivation of Economic Order

Quantity

The Economic Order Quantity (EOQ)

formula helps businesses determine

the ideal order quantity that minimizes

the total inventory costs

EOQ formula provides a
foundational concept for inventory
management, helping businesses
determine the ideal order quantity
to balance ordering frequency and
holding costs.
IN CONCLUSION
Effective inventory management goes beyond just keeping stock on
hand. It's a strategic dance between minimizing costs and ensuring
you have the right products available to meet customer demand.

By understanding key concepts like inventory turnover, safety stock,

classification methods, and the EOQ formula, businesses can:

Reduce Carrying Costs: Lower storage, insurance, and handling

expenses by holding optimal inventory levels.
Improve Cash Flow: Sell through inventory faster to receive
payments quicker and free up capital for other needs.
Minimize Stockouts: Maintain the right amount of stock to avoid lost
sales and unhappy customers.
Enhance Efficiency: Streamline operations with better organization
and reduce lead times.

Ultimately, a well-managed inventory translates to increased

profitability, improved customer satisfaction, and a stronger
competitive edge. Remember, it's an ongoing process that requires
consistent monitoring, adaptation, and leveraging the right tools and
techniques.
PRESENTORS:
Divine Grace Quilla
Cherry Faith Casinas
Audrey Montero