Inventory Management
Inventory Management
What is Inventory
A physical resource that a firm holds in stock with the intent of
selling it or transforming it into a more valuable state.
Stock of items kept to meet future demand.
Independent Demand
A Dependent Demand
B(4) C(2)
Safety stock
Functions of Inventory
To decouple operations
To permit operations
Objective of Inventory Management
Class A
• 5 – 15 % of units
• 70 – 80 % of value
Class B
• 30 % of units
• 15 % of value
Class C
• 50 – 60 % of units
• 5 – 10 % of value
Example of ABC Classification
1 $ 60 90
2 350 40
3 30 130
4 80 60
5 30 100
6 20 180
7 10 170
8 320 50
9 510 60
10 20 120
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.0
8 16,000 18.7 5.0 11.0
2 14,000 16.4 4.0 A 15.0
1 5,400 6.3 9.0 24.0
4 4,800 5.6 6.0 B 30.0
3 3,900 4.6 10.0 40.0
6 3,600 4.2 18.0 58.0
5 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 C 83.0
7 1,700 2.0 17.0 100.0
$85,400
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0
B 1, 4, 3 16.5 25.0
C 6, 5, 10, 7 12.5 60.0
Economic Order Quantity Models
DS
Annual Ordering Cost
Q
QH
Annual Holding Cost
2
DS QH
Total Inventory Cost
Q 2
At Optimal Point,
D
DS QH Number of orders per year =
Q 2 Q
Q H 2 DS
2
No. of days
Length of order cycle =
2 DS
Q D/Q
H
Example#1
The order quantity is received gradually over time, and the inventory
level is depleted at the same time it is being replenished.
Q
Maximum inventory level = Q - u
p
u
=Q1- 2DS
p
Q= u
Q u H 1-
Average inventory level = 1-
p
p
2
DS QH u
TC = Q + 2 1 - p
R d L
Where,
d = demand rate per period
L = lead time
Reorder Point with Variable Demand
R d L z d
L
Where,
d =
average daily demand
L =
lead time
d =
the standard deviation of daily demand
z =
number of standard deviations
corresponding to the service level probability
zd L = safety stock
Q
Inventory level
Reorder
point, R
0
LT LT
Time
Inventory level
Q
Reorder
point, R
Safety Stock
0
LT LT
Time
Reorder Point with Safety Stock
Probability of
meeting demand during
lead time = service level
Probability of
a stockout
Safety stock
zd L
dL R
Demand