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Inventory Management

The document discusses inventory management and outlines models for determining the economic order quantity and reorder point to minimize total inventory costs. It explains that the economic order quantity model aims to find the optimal order size to balance carrying and ordering costs, while the reorder point model determines when to reorder based on lead times, usage rates, and safety stock levels. Sample problems demonstrate how to apply these models to calculate inventory parameters.

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Joshua Cabinas
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197 views

Inventory Management

The document discusses inventory management and outlines models for determining the economic order quantity and reorder point to minimize total inventory costs. It explains that the economic order quantity model aims to find the optimal order size to balance carrying and ordering costs, while the reorder point model determines when to reorder based on lead times, usage rates, and safety stock levels. Sample problems demonstrate how to apply these models to calculate inventory parameters.

Uploaded by

Joshua Cabinas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Inventory Management

Working Capital Management


Objective

Costs of Maintaining
Inventory
Topic
Outline
EOQ Model

Reorder Point Model


Objective
To provide the inventories required to sustain the operation at a lowest
possible costs.
Costs of Maintaining Inventory

All costs associated with carrying inventory


Carrying Costs (increase with • 1. Storage costs
• 2. Interest Costs
order size) • 3. Spoilage
• 4. Insurance

Ordering Costs (decrease with Cost of placing order for new inventory
• 1. Transportation (delivery costs)
order size) • 2. Administrative costs
Important concerns
• Arriving at an inventory level that minimizes total carrying costs and stock out
costs
• Arriving at an order size that minimizes total carrying costs and ordering costs
• Economic Order Quantity (EOQ Model)
• Arriving at an inventory level that triggers the need to order
• Reorder point Model
Important concerns
• Arriving at an inventory level that minimizes total carrying costs and stock out
costs
• Inventory Level is too high - Carrying cost goes up
• Inventory Level is too low – Stock – out cost goes up
Important concerns
• Arriving at an order size that minimizes total carrying costs and ordering costs
• Economic Order Quantity (EOQ Model)
Sample Problem
ABC Corporation sells cellphone
cases which it buys from a local
400 units
manufacturer. ABC Traders sells
24,000 cases evenly throughout
the year. The cost of carrying one
unit in inventory for one year is
P11.52 and the cost per order is
P38.40.
400 units

Total Order Costs = Frequency of Order x Order Cost

Sample Problem Frequency of Order = Annual Demand/EOQ


Frequency of Order = 24,000/400
ABC Corporation sells cellphone Frequency of Order = 60
cases which it buys from a local Total Order Cost = 60 x 38.40
manufacturer. ABC Traders sells
24,000 cases evenly throughout Total Order Cost = 2,304.
the year. The cost of carrying one Total Carrying Costs = Ave. Invty x Carrying cost per unit
unit in inventory for one year is Average Invty. = EOQ/2
P11.52 and the cost per order is Average Invty. = 400/2
P38.40. Average Invty. = 200
Total Carrying Cost = 200 x 11.52
Total Carrying Cost = 2,304.
Important concerns
• Arriving at an inventory level that triggers the need to order
• Reorder point Model
Objective: To order at a point in time so as not to run out of stock before
receiving the inventory ordered but not so early that an excessive quantity of
safety stock is maintained.
Reorder Point Model
LEAD TIME – period between the time the order is placed and
received

NORMAL TIME USAGE – Normal lead time x Average usage

SAFETY STOCK = (Max lead time – Normal lead time)x Ave. usage

REORDER POINT if there is NO Safety Stock Required = Normal lead


time usage

REORDER POINT if there is Safety Stock Required = Safety Stock +


Normal lead time usage or Maximum lead time x Average Usage
Sample Problem
Daily Usage = Annual usage/Working days
ABC Corporation material Daily Usage = 720/240
X has the following details: Daily Usage = 3 tons
Annual usage in units 720 tons Safety Stock = Average Usage x (MLT – NLT)
Working days per year 240 days Safety Stock = 3 tons x (45days – 30days)
Normal lead time in days 30 days
Maximum lead time in days 45 days Safety Stock = 45 tons
Reorder Point = MLT x Average Usage
The tons of material X will Reorder Point = 45 days x 3 tons
be required evenly Reorder Point = 135 tons

throughout the year.

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