WHAT IS INVENTORY? 4.

Packing materials: These are the materials

used to package and ship finished goods.
Inventory refers to the goods and materials
This includes boxes, bags, labels, and other
that a business holds in stock for sale or for
materials.
use in its operations. It can include raw
materials, work-in-progress, finished
products, and supplies that are necessary for
the business to operate.

Inventory is an important asset for a business

because it represents the value of the goods
that can be sold to generate revenue. It also
enables a business to fulfill customer orders
and maintain a level of production without
running out of supplies or materials. 5. MRO (Maintenance, Repair, and Operating)
supplies: These are the materials and
Effective inventory management is critical for supplies that are necessary to maintain
a business to optimize its operations and cash and operate machinery and equipment.
flow. Too much inventory can tie up capital and Examples include lubricants, tools, and
increase storage costs, while too little spare parts.
inventory can result in lost sales and unhappy
customers. Understanding the types of inventories is
important for effective inventory
The five basic types of inventories are: management, as it helps businesses to
1. Raw materials: These are the basic manage their inventory levels, optimize
materials that are used to manufacture or production, and reduce costs.
produce a product. For example, steel,
TYPES OF INVENTORY
plastic, and wood are raw materials used
in the production of various goods. 1. Merchandise Inventory: This refers to the
2. Work-in-progress: This refers to the goods inventory of finished goods that retailers
that are in the process of being keep in stock for sale to customers. For
manufactured or produced but are not yet example, a clothing store that sells shirts
completed. Work-in-progress includes and pants would keep a merchandise
partially completed products and the raw inventory of those items.
materials and supplies used to make them. 2. Manufacturing Inventory: This includes all
3. Finished goods: These are the final the types of inventory that are involved in
products that are ready for sale or the production process, from raw materials
distribution to customers. Examples include to finished goods.
cars, electronics, and clothing.
3. Raw Materials: These are the basic materials manufacturer or supplier to its warehouse
that are used to manufacture or produce a or store.
product. For example, a furniture 9. Buffer Inventory: This is inventory that is
manufacturer would keep a raw materials held to protect against uncertainty in supply
inventory of wood, fabric, foam, and other and demand. For example, a grocery store
materials that are used in the production might keep a buffer inventory of canned
process. goods in case of a temporary shortage
4. Work In Progress: This refers to the goods caused by a weather event or other
that are in the process of being disruption.
manufactured or produced but are not yet 10. Anticipatory Stock: This is inventory that is
completed. For example, a car manufacturer held in anticipation of future demand. For
would keep a work-in-progress inventory of example, a retailer might keep anticipatory
partially completed cars on the production stock of seasonal items like Halloween
line. costumes or Christmas decorations in the
5. Finished Goods: These are the final products months leading up to those holidays.
that are ready for sale or distribution to
customers. For example, a bakery would keep Understanding the different types of

a finished goods inventory of bread, cakes, inventory is important for businesses to

and pastries that are ready for sale to manage their inventory levels effectively and

customers. to optimize their operations.

6. Packing Material: These are the materials

used to package and ship finished goods. For
example, a toy manufacturer would keep a
packing material inventory of boxes, labels,
and other materials used to package and
ship their toys.
7. MRO (Maintenance, Repair, and Operating)
Goods: These are the materials and supplies
that are necessary to maintain and operate
machinery and equipment. For example, an
airline would keep an MRO inventory of spare
parts, tools, and lubricants used to maintain
its fleet of airplanes.
8. Goods In Transit: These are the goods that
are in the process of being shipped from one
location to another. For example, a retailer
might have goods in transit from a
Inventory control obsolescence, and opportunity costs associated
with tying up capital in inventory.
Inventory control refers to the process of
managing and overseeing a company's inventory Basic Problem in Inventory Control:-
to ensure that the right inventory levels are
maintained at all times. The goal of inventory
1. High cost of inventory: This problem arises

control is to maximize the profitability of the when a company carries too much inventory,
company by minimizing the costs associated with which ties up capital and increases storage
inventory management while ensuring that the costs. For example, a retailer might order
business has sufficient stock to meet customer too much inventory of a particular product
demand. and be unable to sell it all, resulting in excess
inventory that takes up valuable shelf space
Inventory control involves a number of different
and requires additional storage costs.
activities, including:
2. Consistent stockouts: This problem occurs
1. Monitoring inventory levels: This involves when a company doesn't carry enough
regularly checking the inventory levels of inventory to meet customer demand, leading
different types of inventory, including raw
to lost sales and unhappy customers. For
materials, work-in-progress, finished goods,
example, a grocery store might frequently
and packaging materials.
run out of popular items, causing customers
2. Forecasting demand: This involves using
to go elsewhere to purchase those items.
historical data, market trends, and other
factors to predict how much inventory will be
3. High amount of obsolete inventory: This
needed to meet customer demand. problem occurs when inventory becomes
3. Managing orders: This involves placing orders obsolete due to changes in demand or
for inventory when it is needed, based on product specifications, resulting in wasted
demand forecasts and other factors. capital and storage space. For example, a
4. Tracking inventory movement: This involves clothing retailer might order a large quantity
keeping track of how much inventory is coming of a particular style of clothing that doesn't
into and leaving the company's warehouses, sell well, resulting in excess inventory that
factories, and stores.
becomes obsolete when the next season's
5. Implementing inventory management
styles arrive.
software: This involves using specialized
4. High amount of working capital: This problem
software to help automate the inventory
arises when a company ties up too much of
control process and provide real-time visibility
into inventory levels.
its capital in inventory, which can limit its
ability to invest in other areas of the
Effective inventory control is critical for business. For example, a manufacturer might
businesses to optimize their operations, reduce
have a large inventory of raw materials that
costs, and meet customer demand. It helps to
it is unable to use due to production delays,
ensure that inventory is available when it is
tying up valuable capital that could be used
needed, but also avoids the costs of carrying
excess inventory, such as storage costs,
 to invest in new technology or expand the that relies on established techniques and
business. formulas to determine the optimal inventory
5. High cost of storage: This problem arises levels for a given product. It is based on the
when a company has too much inventory and idea that inventory should be maintained at a
is required to pay additional costs to store it. level that balances the cost of holding
For example, a distributor might have excess inventory against the cost of ordering and
inventory that requires additional restocking inventory.
warehouse space, resulting in increased
In classical inventory control, the inventory
storage costs and reduced profitability.
level is determined by the economic order
6. Spreadsheet data-entry errors: This problem
quantity (EOQ), which is the optimal order
arises when a company relies on manual
quantity that minimizes the total inventory
data entry processes, which can result in
costs. The EOQ is calculated based on the cost
errors that can lead to inaccurate inventory
of ordering inventory, the cost of carrying
levels and mismanagement. For example, a
inventory, and the demand for the product.
retailer might have inaccurate inventory
levels due to errors in manual data entry, In the context of supply chain management
resulting in lost sales and poor customer (SCM), classical inventory control is an
service. important tool for managing inventory levels
7. Lost customers: This problem occurs when a throughout the supply chain. By using classical
company consistently fails to meet customer inventory control techniques, companies can
demand, leading to lost sales and customer optimize their inventory levels to ensure that
dissatisfaction. For example, a manufacturer they have enough inventory to meet customer
might have a reputation for poor inventory demand while minimizing the costs associated
management, resulting in delayed shipments with carrying excess inventory.
and lost customers who turn to competitors
with better inventory control processes. For example, a manufacturer might use
classical inventory control to determine the
Understanding these problems in inventory optimal inventory levels for raw materials,
control is important for businesses to develop work-in-progress inventory, and finished
effective inventory management strategies goods inventory. By using the EOQ formula, the
that maximize profitability and meet customer manufacturer can determine the optimal
demand. By identifying and addressing these order quantities for each type of inventory,
issues, companies can optimize their taking into account the cost of ordering
operations, reduce costs, and increase inventory, the cost of carrying inventory, and
customer satisfaction. the demand for the product.

Classical Inventory Control System In addition, classical inventory control can be

The classical inventory control system is a used to manage inventory levels at different
traditional method of inventory management stages of the supply chain. For example, a
retailer might use classical inventory control on the demand for the final product, taking
to determine the optimal inventory levels for into account the lead time required for
the products it sells, while a distributor might production and the cost of holding
use classical inventory control to manage the inventory.
inventory levels of the products it distributes.
For example, a company that produces and
Overall, classical inventory control is an sells its own products might use single-stage
important tool for managing inventory levels inventory control to manage its inventory
in SCM, allowing companies to optimize their levels. The company would take into account
inventory levels to meet customer demand the demand for its products, the lead time
while minimizing costs and maximizing required to produce those products, and the
profitability. cost of holding inventory to determine the
optimal inventory levels.

2. Two-stage inventory control: This approach

is used when a company has limited control
over the supply chain, such as when it relies on
suppliers or distributors to provide raw
materials or finished products. In this
approach, inventory control decisions are
Single-Stage and Two-Stage Inventory Control
made separately for each stage of the supply
chain, taking into account the demand for each
product and the lead time required for each
stage.

For example, a retailer that relies on suppliers

to provide products might use two-stage
inventory control to manage its inventory
Single-stage inventory control and two-stage
levels. The retailer would take into account the
inventory control are two approaches to
demand for its products, the lead time
inventory management in the context of
required to receive those products from
supply chain management (SCM). Here's an
suppliers, and the cost of holding inventory to
explanation of each approach:
determine the optimal inventory levels.
1. Single-stage inventory control: This
Overall, both single-stage and two-stage
approach is used when a company has
inventory control are important tools for
control over the entire supply chain, from
managing inventory levels in SCM. The
the production of raw materials to the sale
approach used depends on the level of control
of finished products. In this approach,
a company has over the supply chain and the
inventory control decisions are made based
complexity of the supply chain. By using
inventory control techniques that are levels of raw materials, work-in-progress
appropriate for their supply chain, companies inventory, and finished goods inventory. The
can optimize their inventory levels to meet manufacturer would take into account the
customer demand while minimizing costs and demand for each product, the lead time
maximizing profitability. required for each stage of production, and the
cost of holding inventory at each stage to
Multi-Stage Inventory Control
determine the optimal inventory levels.

Similarly, a distributor might use multi-stage

inventory control to optimize the inventory
levels of the products it distributes. The
distributor would take into account the
demand for each product, the lead time
Multi-stage inventory control is an approach
required to receive those products from
to inventory management in the context of
suppliers, and the cost of holding inventory to
supply chain management (SCM) that takes
determine the optimal inventory levels.
into account the different stages of the supply
chain, from the procurement of raw materials Overall, multi-stage inventory control is an
to the delivery of finished products to important tool for managing inventory levels
customers. This approach involves optimizing in SCM, allowing companies to optimize their
inventory levels at each stage of the supply inventory levels across the entire supply chain
chain to ensure that there is enough inventory to meet customer demand while minimizing
to meet demand while minimizing the cost of costs and maximizing profitability. By using
carrying inventory. inventory control techniques that are
appropriate for their supply chain, companies
In multi-stage inventory control, the inventory
can improve their operational efficiency,
levels are managed at each stage of the
reduce waste, and improve customer
supply chain, taking into account the demand
satisfaction.
for the product, the lead time required for
production and transportation, and the cost of
carrying inventory at each stage. This
approach ensures that each stage of the
supply chain has the right amount of inventory
at the right time, reducing the risk of
stockouts and excess inventory.

For example, in a multi-stage inventory control

system, a manufacturer might use inventory
control techniques to optimize the inventory
WHAT IS EOQ ? The EOQ cost model is used to calculate the total
cost of inventory, including ordering costs and
holding costs. The model takes into account the
Economic Order Quantity (EOQ) is a
cost of placing an order (ordering cost) and the
mathematical formula used in inventory
cost of holding inventory (holding cost). The
management to determine the optimal order
formula for calculating the EOQ is:
quantity that a company should purchase or
produce to minimize the total cost of inventory, EOQ = sqrt((2 x D x OC)/HC)
including ordering costs and holding costs.
where EOQ is the economic order quantity, D is
the annual demand for the product, OC is the
cost of placing an order, and HC is the holding
cost per unit per year. The total cost of inventory
is calculated by adding the ordering cost and the
holding cost. By minimizing the total cost of
inventory, companies can optimize their
inventory levels and reduce their inventory costs.

ASSUMPTION OF EOQ-

● Demand is known, constant, and independent:

The demand for the product is consistent and
does not fluctuate significantly over the order
cycle.
● Lead time is known and constant: The time it
takes to receive an order after it is placed is
consistent and predictable.
● Order quantity received is instantaneous and
complete: The entire order quantity is
delivered in a single delivery.

● No shortage is allowed: The inventory level

never drops below zero.

Inventory Order Cycle of EOQ

Limitations of Using EOQ

EOQ (Economic Order Quantity) is a

mathematical model used to determine the
optimal inventory quantity that minimizes the
total cost of ordering and holding inventory.
While EOQ has many benefits, there are also
The inventory order cycle of EOQ is the time some limitations to using it:
between two successive orders of a product. The
cycle starts with placing an order and ends when 1. Assumptions: The EOQ model is based on
the next order is placed. The length of the order several assumptions that may not always hold
cycle depends on the demand for the product, in real-world situations. For example, it
the lead time, and the order quantity. The goal of assumes that demand is constant and known,
the EOQ model is to determine the optimal order lead time is fixed and known, and inventory is
quantity and order cycle length that minimizes replenished instantaneously. However, in
the total cost of inventory. reality, demand may vary, lead times may be
uncertain, and inventory may take time to be
EOQ Cost Model replenished.
2. Cost factors: The EOQ model only considers
two costs - ordering costs and holding costs.
However, there may be other costs associated
with inventory management, such as stockout
costs, obsolescence costs, and transportation
costs, which are not taken into account by the
model.
3. Limited applicability: The EOQ model is most
appropriate for products that have stable
demand and low variability. It may not be
suitable for products that have unpredictable
demand or high variability.
4. Single-item focus: The EOQ model only
considers a single item at a time. However, in
real-world situations, companies often deal
with multiple products, each with its own
demand, ordering, and holding costs.

5. Limited time frame: The EOQ model is designed

to determine the optimal order quantity for a
fixed time frame. However, in dynamic
environments, the optimal order quantity may
change over time due to changes in demand,
costs, and other factors.

Overall, while the EOQ model is a useful tool for

inventory management, it is important to
recognize its limitations and use it in conjunction
with other techniques and approaches to ensure
effective inventory management.