INVENTORY CONTROL

Dr K Ramya
Assistant Professor
PG & Research Department of Mathematics
Sri Ramakrishna College of Arts & Science
Coimbatore - 641 006
Tamil Nadu, India
 INVENTORY CONTROL
INVENTORY:
A company purchases a machine or appoints an expert in anticipation of the requirement of their
services in future, these resources work as inventory.
Inventory control:
Inventory control is the process of deciding what and how much of various items are to be kept
in stock. It also determines the time and quantity of various items to be procured. The basic
objective of inventory and ensuring that production process does not suffer at the same time.
Costs Involved in Inventory problems:
(i) Set up cost:
This is the cost associated with the setting up of machinery before starting production.
Setup cost is generally assumed to be independent of the quantity ordered or
produced.

(i) Ordering cost:

This is the cost associated with ordering of raw material for production purpose.
Advertisements, consumption of stationery and postage, telephone charges,
telegrams, rent for space used by the purchasing department, travelling expenditures
incurred etc.. constitute the ordering cost.

(ii) Purchase (or Production cost)

The cost of purchasing (or producing) a unit of an item is known as purchase cost. The
purchase price will become important when quantity discounts are allowed for purchase
above a certain quantity or when economics of scale suggest that the per unit production
cost can be reduced by a larger production run.

(iii) Carrying (or holding) cost:

The carrying cost is associated with carrying (or holding) inventory. This cost generally
includes that costs such as rent for space used for storage, interest on the money locked-
up, insurance of stored equipment, production, taxes, depreciation of equipment and
furniture used etc.

(iv) Shortage (or Stock out cost)

The penalty cost for running out of stock is known as shortage cost. This cost includes
the loss of potential profit through sales of items and loss of goodwill, in terms of
permanent loss of customers and its associated lost profit in future sales.

(v) Salvage cost (or selling price)

When the demand for certain commodity is affected by the quantity stocked, decision
problem is based on a profit maximization criterion that includes the revenue from
 selling. Salvage value may be combined with the cost of storage and hence is generally
neglected.

(vi) Revenue cost:

When it is assumed that both the price and the demand of the product are not under
control of the organization, the revenue from the sales is independed of the company’s
inventory policy and may be neglected except for the situation when the organization
cannot meet the demand and the sale is lost. Therefore, the revenue cost may or may not
be included in the study of inventory policy.

Factors affecting inventory control:

Factors which play an important tole in the study of inventory control are
1. Demand:
The number of units required per period is called demand. The demand pattern of a commodity may
be either deterministic or probabilistic.
2. Lead time:
The time gap between placing of an order and its actual arrived in the inventory is known as lead
time.
3. Order Cycle:
The time period between placement of two successive orders is referred to as an order cycle.
The order may be place based on inventory review systems.
(i)Continuous review (ii) Periodic review
4. Time horizon:
The time period over which the inventory level will be controlled is called the time horizon. This
horizon may be finite or infinite depending upon the nature of the demand for the commodity.
5. Re-order level:
The reorder level is the point between maximum and minimum stock levels at which purchasing
activities must begin to ensure timely replacement of inventory.
6. Stock replenishment:
Although inventory management accounts for lead time, stock replenishment may occur either
instantaneously or gradually over time, depending on the replenishment method.

Economic order quantity:

The quantity produced or procured during one production cycle is known as order quantity.
Economic order quantity is that size of order which minimizes total annual cost of carrying
inventory and cost of ordering.
Deterministic Inventory models:
The four types of inventory models are
Model I : Purchasing model with no shortages
Model II : Manufacturing model with no shortages
Model III : Purchasing model with shortage
Model IV : Manufacturing model with shortages
Model I (Purchasing model with no shortages)
(Demand rate uniform, production rate infinite )
(i) Demand is known and uniform
(ii) Q denote the lot size in each production run
(iii) Q denote the total number of units purchased / produced or supplied per time period.
(iv) Shortages are not permitted; as soon as the inventory level reaches zero, it is
immediately replenished.
(v) Production or supply of commodity is instantaneous (abundant availability)
(vi) Lead time is zero.
(vii) Stup cost per production run is Cs
(viii) Holding cost C1 per unit in inventory for a unit.
(i.e) C1 = I x C, where C is the unit cost, I is called inventory carrying expressed as % of the
value of the average inventory.
(ix) Q0 be the economic order quantity (EOQ) (or) optimal order quantity (or) economic lot
size.
Consider the inventory time diagram with Q on the vertical axis and time on the horizontal axis.

The total time period one year is directed into n- parts.

After each time t, we produce Q units. Since we have n runs, we have nQ= D
Moreover, nt= 1
1
Average inventory during t days = Area of the first triangle = 2 𝑄𝑇
1
𝑄𝑡 1
Average inventory on any day = 2
= 𝑄 , remains same throughout the whole year.
𝑡 2

2𝐷𝑐𝑠
1. Economic order quantity Q0 = √
𝐶1
𝐷
2. Optimum number of orders placed per time year n0 =
𝑄0
𝑇 2𝑐𝑠
3. Optimum length of time between two orders t0 = =√
𝑛0 𝐶1 𝐷
1 𝐷𝑐𝑠
4. Min total annual inventory cost T𝐶 0 = 𝑄0 𝐶1 +
2 𝑄0
= √2𝐷𝑐1 𝑐𝑠

Problems:
An oil engine manufacturer purchases lubricant cans at the rate of Rs. 42 per piece
from a vendor. The requirement of these lubricant cans is 1800 per year. What
should be the order quantity per order, if the cost per placement of an order is Rs.
16 and inventory carrying charges per rupee per year is 20 paise.
Solution:
Given D= 1800 units, annual requirement of an order.
𝐶𝑠 = Rs. 16 per order
C= Rs. 0.20, I= 42
𝐶1 = C x I = 42 x 0.20= Rs. 8.4
2𝐷𝑐𝑠
Economic order quantity Q0 = √
𝐶1

2(1800)(16)
=√
8.4

= 82.807≅ 83 units
2. Find the economic lot size the associated total cost, the length of time between
two orders gives that the set-up cost is Rs.100, the daily holding cost pert unit of
inventory is 5 paise and the daily demand is approximately 30 units.
Solution:
Given D= 30 units, daily requirement.
𝐶𝑠 = Rs. 100, the setup cost
𝐶1 = 5 paise, inventory holding cost
= Rs. 0.05
2𝐷𝑐𝑠
Economic order quantity Q0 = √
𝐶1

2(30)(100)
=√
0.05

= 346 units
Associate total cost T C0 = √2𝐷𝑐1 𝑐𝑠

= √2(30)(0.05)(100)
= Rs. 17
2𝑐𝑠
Length of time between two orders t0 = √
𝐶1 𝐷

2(100)
=√
0.05 (30)

=11.54 ≅ 12 days

3. The annual requirements for a particular raw material are 2000 units. The annual
requirements for a particular raw material are 2,000 units costing Re. 1 each to the
manufacturer. The ordering cost is Rs. 10 per order and the carrying cost 16% per
annum of the average inventory value. Find and explain the economic order quantity
and the total inventory cost per annum.
Solution:
Given D= 2000
 𝐶𝑠 = Rs. 10,
𝐶1 = C x I , where C is the unit cost and I is the inventory carrying charge
expressed in %
16
𝐶1 = x 1 = Rs 0.16
100

2𝐷𝑐𝑠
Economic order quantity Q0 = √
𝐶1

2(2000)(10)
=√
0.16

= 500 units
Total inventory cost per annum T𝐶 0 = √2𝐷𝑐1 𝑐𝑠

= √2(2000)(10)(0.16)
= Rs. 80
4.A manufacture has to supply his customers 600 units of his product per year.
Shortages are not allowed and the shortage cost amounts to Rs. 0.60/ unit/ year. The
set-up cost per run is Rs.80. find the optimum run size and the minimum average
yearly cost.
Solution:
Given D= 600 units
𝐶1 = Rs 0.60
𝐶𝑠 = Rs.80
2𝐷𝑐𝑠
Optimum run Size Q0 = √
𝐶1

2(600)(80)
=√
0.60

= 400 units
Minimum average yearly cost T𝐶 0 = √2𝐷𝑐1 𝑐𝑠

= √2(600)(80)(0.60)
= Rs. 240.
5. A company stocks an item that is consumed at a rate of 50 units per day. It costs the
company Rs. 25 each time an order is placed. A unit inventory held in stock for 1
week, it will cost Rs 0.7. . Determine, the optimum number of orders rounded to the
closest integer that the company has to place each year. Assume that the company has
a standing policy of not allowing shortages in demand.
Solution:
Given D= 50 / day
𝐶𝑠 = Rs.25 / order
0.7
𝐶1 = /day = 0.1/unit/day
7
𝐷
Optimum number of orders placed per time year n0 =
𝑄0

2𝐷𝑐𝑠
Optimum run Size Q0 = √
𝐶1

2(50)(25)
=√
0.1

= 158 units
𝐷 50
n0 = = =0.316 / day
𝑄0 158

n0 per year = 0.316 x 365= 115 per year

n0 = 115 orders per year .
6. The manufacture uses annually 12000 units of raw material costing Rs.1.25 per
unit. Placing each order costs Rs. 0.45 and carrying charges are 15% per year per
unit of the average inventory. Find EOQ.
Solution.
Given D= 12000/ year
𝐶𝑠 = Rs.0.45 / order
𝐶1 = 1.25 x 15%
15
= 1.25 x /unit/year = 0.1875 /unit /year
100

2𝐷𝑐𝑠 2(12000)(0.45)
EOQ, Q0 = √ = √
𝐶1 0.1875

= 240 units
 7. For an item, the production is instantaneous. The storage cost of one item is
Rs. 1 per month and the set of cost is Rs. 25 per run .If the demand is 200
units per month, find the optimum quantity to be produced per set and
hence determine the total cost of storage and number of set up per month.
Solution:
Given D= 200 units/ moths
𝐶𝑠 = Rs.25
𝐶1 = Rs. 1
2𝐷𝑐𝑠 2(200)(25)
The optimum quantity produced Q0 = √ = √ =100 units
𝐶1 0.1875

The total cost T𝐶 0 = √2𝐷𝑐1 𝑐𝑠

= √2(200)(25)(1)
= Rs. 100
𝐷 200
Optimum number of orders placed per time year n0 = = =2
𝑄0 100

Therefore Number of set ups is 2 time per month.

8. A company uses rivets at a rate of 5000 Kg per year, rivets costing Rs. 2 per Kg. It
costs Rs. 20 to place an order and the carrying cost of inventory is 10% per year.
How frequently should order for rivets be places and how much?
Solution:
Given D= 5000 kg/ year
𝐶𝑠 = Rs.20
𝐶1 = I x C
10
= x 2 = Rs 0.2
100

2𝑐𝑠 2(20)
Frequently of placing order, t0 = √ = √
𝐶1 𝐷 0.2𝑋 5000

= 0.2 year
= 0.2 x 12 months= = 2.4 months
 2𝐷𝑐𝑠 2(5000)(20)
Q0 = √ = √ =1000kg
𝐶1 0.2

Thus the quantity 1000kg is produced at a time interval of 2.4 months.

9. An aircraft company uses a certain part at a constant rate of 6000 per year. Each
unit costs Rs. 3 and the company personal estimated that it costs Rs. 60 to place an
order and the carrying cost of inventory is 10% per year. How frequently should
orders be placed?. Also determine the optimum size of each order.
Solution:
Given D= 6000 parts/ year
𝐶𝑠 = Rs.60
𝐶1 = I x C
10
= x 3 = Rs 0.3
100

2𝑐𝑠
The Frequency in which the orders should be placed t0 = √
𝐶1 𝐷

2(60)
=√
0.3𝑋 6000

= 0.258 year
= 0.258 x 12 months= = 3.1 months
2𝐷𝑐𝑠 2(6000)(60)
Optimum size of order Q0 = √ = √ =1549 units
𝐶1 0.3

Thus 1549 parts are produced in the interval of 3.1 months

10. The daily demand for a commodity is approximately 100 units. Each time an
order is placed a fixed cost of Rs. 100 is incurred. The daily holiday cost per unit
inventory is Rs. 0.02. If the lead time is 15 days. Determine the economic lot size
and the recorder point
Solution:
Given D= 100 / day
 𝐶𝑠 = Rs.100 / order
𝐶1 = Rs. 0.02
2𝐷𝑐𝑠 2(100)(100)
Q0 = √ = √ =1000 units
𝐶1 0.02

𝑄0 1000
t0 = = = 10 days
𝐷 10

Time between orders = 10 days

Given lead time= 15 days
Reorder point = lead time- time between orders
= 15-10= 5 days