Inventory New PDF

Inventory Management and
Control
1
Types of inventories
• Raw materials inventory – input to manufacturing system
• Bought-out-parts (BOP) inventory – directly go to assembly of

products
• Work-in-progress (WIP) or work-in-process inventory or

pipeline inventory.
• Finished goods inventory – supporting the distribution to

customers.
• Maintenance, repair and operating (MRO) – spare parts or

indirect materials – required for production systems. 2
Why do we need inventories
• Time lag between placing orders and getting supplies at the point
of consumption
• Variability of lead times
• Demand variability
• Seasonal inventory
• Pipeline inventory
• Other factors – inflationary pressures, shortage of materials in

markets, quantity discounts to encourage bulk purchasing.
3
Inventory Costs:
1. Purchase / Production cost. (Rs./unit)
2. Capital cost.
3. Ordering cost. (Rs./order)
• It is also known as setup costs, are essentially costs incurred every

time you place an order. It includes:
• Purchasing
• Inspection
• Accounting
• Transportation costs
4
4. Carrying cost.
• Money tied up in inventory, such as the cost of capital or the

opportunity cost of the money.
• Storage cost
• Space cost
• Insurance cost
• Interest rates
• Depreciation cost
• Record keeping cost
• Obsolescence's due to technological change
5
5. Shortage cost.
• These costs, also called stock-out costs, occur when businesses

become out of stock.
• Back order cost.

• Loss of future sales
• Loss of customer good will
• Extra cost associated with urgent small quantity ordering
cost.
6
Inventory Control System:
1. Fixed Quantity System ( Q-System)
2. Fixed Period System (P-System)

Fixed Quantity System :
• It is also called as Perpetual inventory system or Q-

system.
• The size of the order is fixed but the time of ordering is

allowed to vary depending upon the actual usage of
material.
• Order is placed once the level of inventory reaches the

pre-determined Re-Order Level.
• It is used for items of low unit value such as nuts,

screws, nails, etc.
Fixed Quantity System : Assumptions
• Demand for the product is constant and uniform throughout the

period.
• Inventory holding cost is based on average inventory.
• Ordering or setup costs are constant.
• All demands for the product will be satisfied. (No back orders
are allowed.)
• Lead time (time from ordering to receipt) is constant (later, this

assumption is relaxed with “safety stocks”).
• Price per unit of product is constant.

E G Maximum inventory
Stock Level
F Reorder Level (ROL)
Minimum inventory
A B
C Safety
D Stock
Place Receive Time

Order Order
Lead time
Parameters:
1. Re-order level (ROL)
𝑅. 𝑂. 𝐿 = 𝑚 + 𝐿 ∗ 𝐶
Where,
m – minimum or safety stock
L – Lead time (days/weeks/months)
C – consumption rate ( per day/per week/
per month)
2. Re-order Quantity (Q)

Q = EOQ
3. Maximum stock level (M)
M = 𝑚+𝑄
Where,
Q - Order Quantity
4. Average inventory
𝑄
Average Inventory =m+
2
Advantages:
1. Stock control will be accurate.
2. Suitable for low items.
Limitations:
1. There will be a load on the re-ordering system if
many items reach ROL.
2. Stock records and usage rate data has to be

maintained.
Problem
A company has a monthly demand of an item is 300 units. The price per
unit is Rs.10, inventory carrying cost is 18% of cost per item and
ordering cost is Rs. 36 per order. The Lead time is 1 month stock. The
ROL system of stock replenishment is followed (assume safety stock is
equal to lead time consumption)
Determine
i. Re-order Quantity.
ii. Re-order level.
iii. Minimum Level.
iv. Maximum level
v. Average Inventory.
i. Re-order Quantity.
2∗𝐷∗𝐶0 2∗(300∗12)∗36
𝑄= = = 380 𝑢𝑛𝑖𝑡𝑠
𝐶𝑝 ∗𝐼 10∗0.18
i. Re-order level = Lead time consumption + Safety stock
= 300 + 300 = 600 units
ii. Minimum Level = 300 units
iii. Maximum level = safety stock + order quantity
= 300 + 380 = 680 units
380
iv. Average Inventory = 300 + = 490 units
2
Fixed Period System
• It is also known as Periodic review system or P-system.

• In this system the inventories are reviewed after a fixed
pre-determined period of time.
• Size of the order is variable but time of order is fixed.
• (For example, the bread truck visits the grocery store on
the same days every week)
• Each time we review the inventory, we either order or
don’t. The decision depends upon our reorder point.
• In case of high variation in demand, the level of
inventories fluctuate and the size of the order also vary
considerably.
Fixed Period System
Parameters:
1. Maximum stock level (M)

M = 𝑚 +𝐶 𝑅+𝐿
m – minimum or safety stock

R – Review period
L – Lead time (days/weeks/months)
C – consumption rate ( per day/per week/per month)
2. Re-order Quantity.
Q = Maximum stock – stock actually held at the time of review
Advantages:
• inventory levels for multiple stock items reviewed at
same time - can be reordered together
• P systems can be used when multiple items are

ordered from the same supplier (joint-replenishment).
Limitations:
• Determination of review period becomes critical.
• Long periods of slack in demand may lead to carrying

of large inventories.
• Processing of order during the low demand

Fixed Period System
Problem:
ABC corporation has got a demand for particular product at 83,500
units per year. The ordering cost is Rs. 16,800 per order to place an
order and to process the delivery. The inventory carrying cost is
estimated as Rs. 150 per unit per year. If the company used a fixed
review period system, what is the periodicity of orders? What would be
the maximum inventory and reorder quantity? Take lead time as 2
weeks, safety stock as 690 units and the company had 5,000 units in
stock at a particular review period.
20
Solution
2 ∗ 83500 ∗ 16800
Economic order quantity (EOQ) = = 4325 units (Approx.)
150
83500
No. of order placed per year = = 19.31 or 20 (Approx.)
4325
Optimal review period P= 1/N = 1/19.31 = 0.0518 years

= 0.0518 * 52 = 2.69 weeks = 3 weeks
Consumption rate = 83500/52 = 1606 units/week
Maximum inventory M = m + C (R + L)
= 690 + 1606 (3 + 2) = 8720 units
Reorder quantity Q = Maximum stock – inventory on hand

= 8720 – 5000
= 3720 units
21
Fixed Period System
Review Period
3720
Stock 5000
8720
LT 690
Time
22

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Inventory Management and

• Raw materials inventory – input to manufacturing system

• Bought-out-parts (BOP) inventory – directly go to assembly of

• Work-in-progress (WIP) or work-in-process inventory or

• Finished goods inventory – supporting the distribution to

• Maintenance, repair and operating (MRO) – spare parts or

• Variability of lead times

• Other factors – inflationary pressures, shortage of materials in

1. Purchase / Production cost. (Rs./unit)

3. Ordering cost. (Rs./order)

• It is also known as setup costs, are essentially costs incurred every

• Money tied up in inventory, such as the cost of capital or the

• These costs, also called stock-out costs, occur when businesses

• Back order cost.

1. Fixed Quantity System ( Q-System)

2. Fixed Period System (P-System)

• It is also called as Perpetual inventory system or Q-

• The size of the order is fixed but the time of ordering is

• Order is placed once the level of inventory reaches the

• It is used for items of low unit value such as nuts,

• Demand for the product is constant and uniform throughout the

• Inventory holding cost is based on average inventory.

• Ordering or setup costs are constant.

• Lead time (time from ordering to receipt) is constant (later, this

• Price per unit of product is constant.

F Reorder Level (ROL)

Place Receive Time

1. Re-order level (ROL)

2. Re-order Quantity (Q)

1. Stock control will be accurate.

2. Suitable for low items.

2. Stock records and usage rate data has to be

i. Re-order level = Lead time consumption + Safety stock

= 300 + 300 = 600 units

ii. Minimum Level = 300 units

iii. Maximum level = safety stock + order quantity

= 300 + 380 = 680 units

• It is also known as Periodic review system or P-system.

1. Maximum stock level (M)

m – minimum or safety stock

• P systems can be used when multiple items are

• Long periods of slack in demand may lead to carrying

• Processing of order during the low demand

Optimal review period P= 1/N = 1/19.31 = 0.0518 years

Consumption rate = 83500/52 = 1606 units/week

Reorder quantity Q = Maximum stock – inventory on hand

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