Inventory Management

Introduction
• Inventory is stock of goods
• Inventoryy comes in many
y shapes
p and sizes such as

 Raw materials – purchased items or extracted materials transformed

into components or products

 Components – parts or subassemblies used in final product

 Work-in-process – items in process throughout the plant

 Finished goods – products sold to customers

 Distribution inventory – finished goods in the distribution system

1
 Types of inventory

Inventory models
Independent Demand

A Dependent Demand

B(4) C(2)

D(2)
( ) E(1)
( ) D(3)
( ) F(2)
( )

Independent demand is uncertain.

Dependent demand is certain.

2
 Uses of inventory
• To meet anticipated and un-anticipated demand/lead time fluctuations

• Take advantage of quantity discounts or purchasing efficiencies

• To smooth production operations (seasonal fluctuations)

• To protect against stock-outs

• To help hedge against price increases

Inventory hides problems!!!

3
 Objectives of inventory control
• Provide desired customer service level
– Percentage of orders shipped on schedule
• Provide for cost-efficient operations:
– Buffer stock for smooth production flow
– Maintain a level work force
– Allowing longer production runs & quantity discounts
• Minimum inventory investments:
– Inventory turnover
– Weeks, days, or hours of supply

Example: The XYZ Motor Company has annual cost of goods sold of
$10,000,000. The average inventory value at any point in time is $384,615.
Calculate inventory turnover and weeks/days of supply.

• Inventory Turnover:
annual cost of goods sold $10,000,000
Turnover    26 inventory turns
average inventory value $384,615

• Weeks/Days of Supply:
average inventory on hand in dollars $384,615
Weeks of Supply    2weeks
average weekly usage in dollars $10,000,000/52

$384,615
Days of Supply   10 days
$10,000,00 0/260
Only if it is explicitly
stated that the company
follows a 5‐day week

4
 Relevant inventory terminology
Item Cost (Cp or price paid for the item
C)

Lead time time interval between ordering and receiving the

order

Holding Costs Includes the variable expenses for space, workers,

and equipment related to the volume of inventory
(Cc, or H) held
Ordering Cost Fixed, constant dollar amount incurred for each
(Co or S) order placed. Includes transportation cost also.

Shortage Costs Loss of customer goodwill, back order handling,

and lost sales

Inventory system

• When to order?

• How much to order?

5
 Inventory systems
Continuous Review system (Q ‐ Periodic Review System (P
system) – system)
O d quantity
Order tit Q is
i constant
t t Q is
i variable
i bl

Order timing R (Order when inventory Order at the end of period

position drops to or below the P (can be daily, weekly,
predetermined reorder point) monthly)

Database update Every time a withdrawal or Only at the end of period

addition is made
Inventory size Lower Slightly higher because of
the need to carry more
safety stock

Economic Order Quantity (EOQ) model

 Continuous review system which tracks on-hand inventory each

time a withdrawal is made

 An optimizing method used for determining order quantity and

reorder points

 Inputs: Annual demand, Ordering costs and Inventory carrying costs

 Output: Economic Order Quantity

6
 EOQ model - Assumptions
 Only one product is involved

 Demand is known & constant (demand occurs at a uniform rate)

 Lead time is known & constant

 No quantity discounts are available

 Ordering (or setup) costs are constant

 All demand is satisfied (no shortages)

 The order quantity arrives in a single shipment (orders are received all at once)

 There is no safety stock

 There is no inventory when an order arrives

Total costs – EOQ model

7
 What is the optimal quantity to order?

Total Cost = Purchasing Cost + Ordering Cost + Inventory Cost

Purchasing Cost = (total units) x (cost per unit)

Ordering Cost = (number of orders) x (cost per order)

Inventory Cost = (average inventory) x (holding cost)

Finding the optimal quantity to order…

Let’s say we decide to order in batches of Q…

Inventory position D
Number of periods
will be
Q

The average
inventory for each
period is…
Time
Period over which demand for Q has Q
occurred
2
Total Time

8
 Finding the optimal quantity to order…

Purchasing cost = D x C

D
Ordering cost = x S
Q

Q
Inventory cost = x H
2

So what is the total cost?

D Q
TC = DC + S + H
Q 2

In order now to find the optimal quantity we need to optimize the total
cost with respect to the decision variable (the variable we control)

Which one is
the decision
variable?

9
• Total annual stocking cost (TSC) = annual carrying cost +
annual ordering cost = (Q/2)H + (D/Q)S

• The order quantity where the TSC is at a minimum (EOQ) can

be found using calculus (take the first derivative, set it equal to
zero and solve for Q)

Economic Order Quantity - EOQ

2DS
Q* =
H

Example:
Assume a car dealer that faces demand for 5,000 cars per year, and that it costs
$15,000 to have the cars shipped to the dealership. Holding cost is estimated at
$500 per car per year. How many times should the dealer order, and what
should be the order size?

2(5,000)(15,000)
Q*   548
500

10
 Comments on EOQ model
1. At EOQ, ordering cost will be equal to inventory carrying cost

2 The
2. Th ttotal
t l costt curve is
i relatively
l ti l flflatt around
d th
the EOQ
EOQ.

Fixed Quantity (Q) model

Profile of Inventory Level Over Time

Usage
rate

EOQ

Time
Receive Receive
order order

11
 Another Example - Basic EOQ

Zartex Co. produces fertilizer to sell to wholesalers. One raw

material – calcium nitrate – is purchased from a nearby
supplier at $22.50 per ton. Zartex estimates it will need
5,750,000 tons of calcium nitrate next year.
The annual carrying cost for this material is 40% of the
acquisition cost, and the ordering cost is $595.
a) What is the most economical order quantity?
b) How many orders will be placed per year?
c) How much time will elapse between orders?

Example: Basic EOQ

• Economical Order Quantity (EOQ)

D = 5,750,000 tons/year
H = .40(22.50) = $9.00/ton/year
S = $595/order

EOQ = 2 DS / H
EOQ = 2(5,750,000)(595)/9.00
2(5 750 000)(595)/9 00

= 27,573.135 tons per order

12
 Example: Basic EOQ

• Total Annual Stocking Cost (TSC)

TSC = (Q/2)H + (D/Q)S
= (27,573.135/2)(9.00)
+ (5,750,000/27,573.135)(595)
= 124,079.11 + 124,079.11
= $248,158.22
Note: Total Carrying Cost
equals Total Ordering Cost

Example: Basic EOQ

• Number of Orders Per Year

= D/Q
= 5,750,000/27,573.135
= 208.5 orders/year
• Time Between Orders
Note: This is the inverse
= Q/D
of the formula above.
= 1/208.5
= .004796 years/order
= .004796(365 days/year) = 1.75 days/order

13
 Model II: EOQ for Production Lots

• Used to determine the order size, production lot, if an item is

produced at one stage of production, stored in inventory, and
then sent to the next stage or the customer

• Differs from Model I because orders are assumed to be

supplied or produced at a uniform rate (p) rate rather than the
order being received all at once

Model II: EOQ for Production Lots

• It is also assumed that the supply rate, p, is greater than the

demand rate, d
• The
Th change
h in
i maximum
i inventory
i t level
l l requiresi modification
difi ti
of the TSC equation
• TSC = (Q/2)[(p-d)/p]H + (D/Q)S
• The optimization results in

2 DS  p 
EOQ =  pd
H  

14
 Example: EOQ for Production Lots

Highland Electric Co. buys coal from Cedar Creek Coal Co. to
generate electricity. CCCC can supply coal at the rate of
3,500 tons per day for $10.50 per ton. HEC uses the coal at a
rate of 800 tons per day and operates 365 days per year.

HEC’s annual carrying cost for coal is 20% of the acquisition

cost, and the ordering cost is $5,000.
a)) What
Wh t is
i the
th economical
i l production
d ti lot
l t size?
i ?
b) What is HEC’s maximum inventory level for coal?

Example: EOQ for Production Lots

• Economical Production Lot Size

d = 800 tons/day; D = 365(800) = 292
292,000
000 tons/year
p = 3,500 tons/day
S = $5,000/order H = .20(10.50) = $2.10/ton/year

 p 
2 DS
EOQ =  pd
H 
EOQ = 2(292,000)(5,000)/2.10[3,500/(3,500-800)]
= 42,455.5 tons per order

15
 Example: EOQ for Production Lots

• Total Annual Stocking Cost (TSC)

TSC = (Q/2)((p-d)/p)H + (D/Q)S
= (42,455.5/2)((3,500-800)/3,500)(2.10)
+ (292,000/42,455.5)(5,000)
= 34,388.95 + 34,388.95
= $68,777.90
Note: Total Carrying Cost
equals Total Ordering Cost

Example: EOQ for Production Lots

• Maximum Inventory Level

= Q(p-d)/p
= 42,455.5(3,500 – 800)/3,500
= 42,455.5(.771429)
= 32,751.4 tons Note: HEC will use 23%
of the production lot by the
time it receives the full lot.
lot

16
 Model III: EOQ with Quantity Discounts

• Under quantity discounts, a supplier offers a lower unit price if

g quantities
larger q are ordered at one time
• This is presented as a price or discount schedule, i.e., a certain
unit price over a certain order quantity range
• This means this model differs from Model I because the
acquisition cost (ac) may vary with the quantity ordered, i.e., it
is not necessarily constant
• Under this condition, acquisition cost becomes an incremental
cost andd must bbe considered
id d ini the
h determination
d i i off the h EOQ
• The total annual material costs (TMC) = Total annual stocking
costs (TSC) + annual acquisition cost
TMC = (Q/2)H + (D/Q)S + (D)ac

Model III: EOQ with Quantity Discounts

To find the EOQ, the following procedure is used:

1 Compute
1. C the
h EOQ
OQ using
i the
h llowest acquisition
i i i cost.
– If the resulting EOQ is feasible (the quantity can be purchased at the
acquisition cost used), this quantity is optimal and you are finished.

– If the resulting EOQ is not feasible, go to Step 2

2. Identify the next higher acquisition cost.

17
 Model III: EOQ with Quantity Discounts

3. Compute the EOQ using the acquisition cost from Step 2.

– If the resultingg EOQ
Q is feasible,, ggo to Step
p 4.
– Otherwise, go to Step 2.

4. Compute the TMC for the feasible EOQ (just found in Step 3)
and its corresponding acquisition cost.

5. Compute the TMC for each of the lower acquisition costs

using
i the
h minimum
i i allowed
ll d order
d quantity
i for
f eachh cost.

6. The quantity with the lowest TMC is optimal.

Example: EOQ with Quantity Discounts

A-1 Auto Parts has a regional tire warehouse in Atlanta.

One popular tire, the XRX75, has estimated demand of 25,000
next year. It costs A-1 $100 to place an order for the tires, and
the annual carrying cost is 30% of the acquisition cost. The
supplier quotes these prices for the tire:
Q ac
1 – 499 $21.60
500 – 999 20 95
20.95
1,000 + 20.90

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 Example: EOQ with Quantity Discounts

• Economical Order Quantity

EOQ
Qi = 2 DS / Hi
EOQ3 = 2(25,000)100/(.3(20.90) = 893.00
This quantity is not feasible, so try ac = $20.95

EOQ 2 = 2(25,000)100/(.3(20.95) = 891.93

This quantity
Thi tit is
i feasible,
f ibl so there
th isi no reason to
t try
t ac =
$21.60

Example: EOQ with Quantity Discounts

• Compare Total Annual Material Costs (TMCs)

TMC = (Q/2)H + (D/Q)S + (D)ac
Compute TMC for Q = 891.93 and ac = $20.95
TMC2 = (891.93/2)(.3)(20.95) + (25,000/891.93)100
+ (25,000)20.95
= 2,802.89 + 2,802.91 + 523,750
= $529,355.80

19
 Example: EOQ with Quantity Discounts

Compute TMC for Q = 1,000 and ac = $20.90

TMC3 = (1,000/2)(.3)(20.90)
(1 000/2)( 3)(20 90) + (25
(25,000/1,000)100
000/1 000)100
+ (25,000)20.90
= 3,135.00 + 2,500.00 + 522,500
= $528,135.00 (lower than TMC2)
The EOQ is 1,000 tires
att an acquisition
i iti costt off $20
$20.90.
90

Reorder Point (ROP)

• EOQ model answers the question of how much to order, but not the
question of when to order
• Reorder point occurs when the quantity on hand drops to a predetermined
amount
• How to calculate ROP?
Profile of Inventory Level Over Time
Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time

20
 Determining Reorder Points

• Basis for Setting the Reorder Point

• DDLT Distributions

• Setting Reorder Points

If delivery is not instantaneous, but there is a lead time L:

When to order? How much to order?

Order
Quantity
Q
Inventory

Lead Time
Time
Place Receive
order order

21
 If demand is known exactly, place an order when
inventory equals demand during lead time.

Order Q: When shall we order?

Quantity A: When inventory = ROP
Q Q: How much shall we order?
A: Q = EOQ
Inventory

Reorder
Point
(ROP)
ROP = LxD

Lead Time
Time
D: demand per period
Place Receive
L: Lead time in periods
order order

Recall example:
Assume a car dealer that faces demand for 5,000 cars per year, and that it costs
$15,000 to have the cars shipped to the dealership. Holding cost is estimated at
$500 per car per year. How many times should the dealer order, and what
should be the order size?
What if the lead time to receive cars is 10 days? (when
should you place your order?)

Since D is given in years, first convert: 10 days = 10/365yrs

10 10
R = D = 5000 = 137
365 365

S when
So, h ththe number
b off cars on th
the llott reaches
h 137
137, order
d 548
more cars.

EOQ
computed
in slide 20

22
 But demand is rarely predictable.

Inventory
L
Levell

Order
Quantity

ROP = ???
Demand???

Place Receive Time

order Lead Time order

If Actual Demand < Expected Demand

Inventory
Level

Order
Quantity
Lead Time Demand X

ROP

Inventory at time of receipt

Lead Time Time

Place Receive
order order

23
 If Actual Demand > Expected, we Stock Out
Order
Quantity

Stockout
Point
ntory
Inven

Time

Lead Time
Unfilled demand
Place Receive
order order

If ROP = expected demand, service level is 50%.

Inventory left 50% of the time, stock outs 50% of
the time.
Inventory
Level

Order
Quantity
ROP = Expected Demand

U
Uncertain
t i DDemand
d
Average

Time

24
 To reduce stockouts we add safety stock
Inventory
Level

Order Quantity
ROP = Q = EOQ
Safety
Stock + Expected
Expected LT Demand
LT
Demand Safety Stock
Lead Time Time

Place Receive
order order

Decide what Service Level you want to provide

(Service level = probability of NOT stocking out)

Service level Probability

of stock-out

Safety
Stock

25
Safety stock = (safety factor z)(std deviation in LT demand)

Service level Probability

of stock-out

Safety
Stock

Read z from Normal table for a given service level

Caution: Std deviation in LT demand

Variance over multiple

p pperiods = the sum of the variances of
each period (assuming
independence)

Standard deviation over multiple periods is the square

root of the sum of the variances, not the sum of the
standard deviations.
deviations

26
 Average Inventory = (Order Qty)/2 + Safety Stock
Inventory
Level

Order
Quantity

EOQ/2
Average
Inventory

Safety Stock (SS)

Lead Time Time

Place Receive
order order

How to find ROP & Q

2SD
1. Order quantity Q = EOQ 
H
2. To find ROP, determine the service level (i.e., the probability of
NOT stocking out.)
 Find the safety factor from a z-table or from the graph.
 Find std deviation in LT demand: square root law.
std dev in LT demand  ( std dev in daily demand ) days in LT
 LT   D LT
 Safety stock is given by:
SS = (safety factor)(std dev in LT demand)
 Reorder point is: ROP = Expected LT demand + SS
3. Average Inventory is: SS + EOQ/2

27
Example (continued)…

Back to the car lot… recall that the lead time is 10 days and the
expected yearly demand is 5000. You estimate the standard deviation
of daily demand demand to be d = 6. When should you re-order if you
want to be 95% sure you don’t run out of cars?

Since the expected yearly demand is 5000, the expected demand over
the lead time is 5000(10/365) = 137. The z-value corresponding to a
service level of 0.95 is 1.65. So

ROP 1371.65 10(36) 168

Order 548 cars when the inventory level drops to 168.

28
 More on the Basis for Setting the Reorder Point
• In the fixed order quantity system, the ordering process is
triggered when the inventory level drops to a critical point, the
reorder point
• This starts the lead time for the item.
• Lead time is the time to complete all activities associated with
placing, filling and receiving the order.
• During the lead time, customers continue to draw down the
inventory
• It is during this period that the inventory is vulnerable to
stockout (run out of inventory)
• Customer service level is the probability that a stockout will
not occur during the lead time

Basis for Setting the Reorder Point

• The reorder point is set based on

– the demand during lead time (DDLT) and
– the desired customer service level

• Reorder point (ROP) = Expected demand during lead time

(EDDLT) + Safety stock (SS)

• Th
The amountt off safety
f t stock
t k needed
d d is
i based
b d on the
th degree
d off
uncertainty in the DDLT and the customer service level desired

29
 DDLT Distributions

• If there is variability in the DDLT, the DDLT is expressed as a

distribution
– discrete
– Continuous

• In a discrete DDLT distribution, values (demands) can only be

integers

• A continuous DDLT distribution is appropriate when the

demand is very high

Setting Reorder Point

for a Discrete DDLT Distribution
• Assume a probability distribution of actual DDLTs is given or
can be developed from a frequency distribution

• Starting with the lowest DDLT, accumulate the probabilities.

These are the service levels for DDLTs

• Select the DDLT that will provide the desired customer level
as the reorder point

30
 Example: ROP for Discrete DDLT Distribution

One of Sharp Retailer’s inventory items is now being

analyzed to determine an appropriate level of safety stock.
The manager wants an 80% service level during lead time.
The item’s historical DDLT is:
DDLT (cases) Occurrences
3 8
4 6
5 4
6 2

OP for Discrete DDLT Distribution

• Construct a Cumulative DDLT Distribution

Probability Probability of
DDLT (cases) of DDLT DDLT or Less
2 0 0
3 .4 .4
4 .3 .7
5 .2 .9 .8
6 .11 10
1.0
To provide 80% service level, ROP = 5 cases

31
 ROP for Discrete DDLT Distribution

• Safety Stock (SS)

ROP = EDDLT + SS
SS = ROP  EDDLT
EDDLT = .4(3) + .3(4) + .2(5) + .1(6) = 4.0
SS = 5 – 4 = 1

Setting Reorder Point

for a Continuous DDLT Distribution
• Assume that the lead time (LT) is constant

• Assume that the demand per day is normally distributed with

the mean (d ) and the standard deviation (d )

• The DDLT distribution is developed by “adding” together the

daily demand distributions across the lead time

32
 Setting Reorder Point
for a Continuous DDLT Distribution
• The resulting DDLT distribution is a normal distribution with
the following parameters:

EDDLT = LT(d)

DDLT = LT( d) 2

Setting Order Point

for a Continuous DDLT Distribution
• The customer service level is converted into a Z value using
the normal distribution table
• The
Th safety
f t stock
t k is
i computedt d by
b multiplying
lti l i the
th Z value
l byb
DDLT.
• The reorder point is set using ROP = EDDLT + SS, or by
substitution

OP = LT(d) + z LT(σ d ) 2

33
Example: ROP - Continuous DDLT Distribution

Auto Zone sells auto parts and supplies including a popular

multi grade motor oil.
multi-grade oil When the stock of this oil drops to 20
gallons, a replenishment order is placed. The store manager
is concerned that sales are being lost due to stockouts while
waiting for an order. It has been determined that lead time
demand is normally distributed with a mean of 15 gallons and
a standard deviation of 6 gallons.
The manager would like to know the probability of a stockout
during lead time.

Example: ROP - Continuous DDLT Distribution

• EDDLT = 15 gallons
• DDLT = 6 gallons

ROP = EDDLT + Z(DDLT )

20 = 15 + Z(6)
5 = Z(6)
Z = 5/6
Z = .833
833

34
Example: ROP - Continuous DDLT Distribution
• Standard Normal Distribution

Area = .2967

Area = .2033

Area = .5 z
0 .833

Example: ROP - Continuous DDLT Distribution

• The Standard Normal table shows an area of .2967 for the

region between the z = 0 line and the z = .833 line. The shaded
tail area is .5 - .2967 = .2033.

• The probability of a stockout during lead time is .2033

35
 Rules of Thumb in Setting ROP

• Set safety stock level at a percentage of EDDLT

ROP = EDDLT + j(EDDLT)

where j is a factor between 0 and 3.

• Set safety stock level at square root of EDDLT

ROP = EDDLT + EDDLT

Fixed Order Period Systems

• Behavior of Economic Order Period (EOP) Systems

• Economic Order Period Model

36
 Behavior of Economic Order Period Systems

• As demand for the inventoried item occurs, the inventory level

drops

• When a prescribed period of time (EOP) has elapsed, the

ordering process is triggered, i.e., the time between orders is
fixed or constant

• At that time the order quantity is determined using order

quantity = upper inventory target - inventory level + EDDLT

Behavior of Economic Order Period Systems

• After the lead time elapses, the ordered quantity is received ,

and the inventory level increases

• The upper inventory level may be determined by the amount

of space allocated to an item

• This system is used where it is desirable to physically count

inventory each time an order is placed

37
 Determining the EOP

• Using an approach similar to that used to derive EOQ, the

optimal value of the fixed time between orders is derived to be

EOP
EOP= = 2S/DH
2S / DC

Two bin system

• Simplest perpetual inventory system
• Uses
U ttwo containers
t i for
f inventory
i t
• Items are withdrawn from the first bin until its contents are
exhausted.
• Its time to reorder. Sometimes an order card is placed at the bottom
of the first bin
• Second bin contains enough stock to satisfy expected demand until
the order is filled, plus an extra cushion of stock that will reduce the
chance of a stock-out because of demand or lead time variability

38
 Inventory classification system

• Items held in inventory are not of equal importance in terms of

money invested, profit potential, sales or usage volume or stock-out
penalties

• Electric generators Vs Coils of wire Vs Bolts and nuts

• Unrealistic to devote equal attention to each of these items

• Realistic
R li i to allocate
ll controll efforts
ff according
di to the
h relative
l i
importance of various items in inventory

ABC approach

• Pareto analysis can be done to segment items into value categories

d
depending
di on annuall dollar
d ll volume
l

• A Items – typically 20% of the items accounting for 70% of the

inventory value-use Q system

• B Items – typically an additional 30% of the items accounting for

20% of the inventory value-use Q or P
• C Items – Typically the remaining 50% of the items accounting for
only 10% of the inventory value-use P

39
 ABC approach

Step 1:Calculate annual dollar volume for each

item

40
 Steps 2,3:List in descending order, Calculate
cumulative frequency

ABC Analysis: Results

 The A items (106 and 110) account for 60.5% of the value and 13.3% of the items
 The B items (115,105,111,and 104) account for 25% of the value and 26.7% of the items
 The C items make up the last 14.5%
14 5% of the value and 60% of the items

41
Other selective inventory control techniques…
Nomenclature Criteria Application

VED (Vital, Essential, Criticality or loss of Maintenance spares and mfg

Desirable) production equipment
SDE (Scarce, Difficult, Easy) Procurement difficulties: Keep vigil on availability with
Geography, reliability, difficulty of procurement in
paucity, etc., mind

GOLF (Govt., Ordinary, Local, Govt – lead time more for

Foreign) retrieval, payment
Foreign – Procedure long,
permissions, duties etc.,

SOS (Seasonal, off‐season) Soya bean, mangoes Should buy in harvest season
to get price advantage and
good quality supply

Other selective inventory control techniques

• VED analysis
• SDE analysis
• FSN analysis
• HML analysis
• GOLF analysis
• SOS analysis

42
 VED analysis

• Based on criticality and shortage cost of an item

– It is a subjective analysis.
analysis
– Items are classified into:
• Vital:
Shortage cannot be tolerated.
• Essential:
Shortage can be tolerated for a short period.
• Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly scrutinized

SDE analysis

• Based on availability
–SScarce
• Managed by top level management
• Maintain big safety stocks
– Difficult
• Maintain sufficient safety stocks
– Easily available
• Minimum safety stocks

43
 FSN analysis

• Based on utilization.
–FFastt moving.
i
– Slow moving.
– Non-moving.
• Non-moving items must be periodically reviewed to prevent
expiry & obsolescence

HML analysis

• Based on cost per unit

– High
– Medium
– Low
• This is used to keep control over consumption at departmental level
for deciding the frequency of physical verification.

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 GOLF analysis

• Based on the nature of suppliers. As the source of supply of

different items are different, with a view to determining the
lead time, order quantities, safety stock and terms of purchase
and payment.
– G = Government controlled supplies
– O = Open market supplies
– L = Local supplies
– F = Foreign market supplies.

SOS analysis

• This analysis is based on the nature of suppliers and period of

their availability. This is useful for deciding the time of
purchase or procurement, so that the cost of materials and the
holding cost may be balanced. Here, the two classes are:

– S = Seasonal items

– OS = off seasonal items i.e., items available throughout the

year.

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