CHAPTER FOUR

INVENTORY AND WASTE

MANAGEMENT

BY LELISE G.
 What is
Inventory?
In construction material Inventory refers to
the stock of raw materials, components,
tools, and equipment needed for
construction projects.
Proper inventory control ensures that
materials are available when required,
minimizes waste, and reduces project delays
and costs.
Types of Construction Inventory

1. Raw Materials
▪ Bulk materials like cement, sand, gravel, steel, bricks, and
timber.
▪ Essential for structural work and finishing.
2. Prefabricated Components
▪ Precast concrete slabs, beams, doors, windows, and
modular units.
▪ Reduces on-site construction time.
3. Tools & Equipment
▪ Machinery (excavators, cranes), hand tools, and safety
stuff.
▪ Not part of the final structure but necessary for execution.
4.Consumables
▪ Nails, screws, adhesives, welding rods, and
lubricants.
▪ Used up during construction.
5.Spare Parts & Maintenance Items
▪ Replacement parts for machinery and
equipment.
6.Safety Stock (Buffer Inventory)
▪Extra materials stored to prevent delays due to
supply chain disruptions.
Importance of Inventory Management
in Construction
➢ Prevents Project Delays – Ensures materials are available when
needed.

➢ Reduces Wastage & Theft – Proper tracking minimizes loss and

over-ordering.

➢ Cost Control – Avoids last-minute expensive purchases or idle

resources.

➢ Efficient Resource Allocation – Helps in just-in-time (JIT)

delivery, reducing storage costs.

➢ Compliance & Quality Control – Ensures materials meet

project specifications and standards.
Inventory cost Components
Effective inventory management in construction
requires understanding the various costs associated
with holding, ordering, and managing materials.
These costs impact project budgets, cash flow, and
profitability.

Purchase Costs
• Direct Cost of Materials: The actual price paid to
suppliers for raw materials (cement, steel, lumber,
etc.).
• Bulk Discounts & Negotiated Rates: Savings from
purchasing in large quantities.
Ordering Costs (Procurement Costs)
•Requisition Processing: Administrative work in
raising purchase orders.
•Supplier Communication & Negotiation: Time
and effort in vendor management.
•Transportation & Freight Charges: Shipping
costs from supplier to site/warehouse.
•Quality Inspection & Testing: Costs for
checking material quality before acceptance.
Carrying/Holding Costs

• Storage & Warehousing: Rent for storage facilities

or on-site holding areas.
• Insurance: Coverage against theft, fire, or damage.
• Depreciation & Obsolescence: Loss of value due to
aging or unused materials.
• Handling & Labor: Costs for moving, stacking, and
managing inventory.
• Capital Cost: Interest or opportunity cost of money
tied up in inventory.
Shortage Costs (Stockout Costs)
• Emergency Purchases: Higher costs from last-minute buying.
• Project Delays: Penalties or idle labor costs due to material
unavailability.
• Reputation Damage: Client dissatisfaction from missed deadlines.

Waste & Shrinkage Costs

• Material Wastage: Over-ordering, cutting losses, or improper
handling.
• Theft & Pilferage: Loss due to unauthorized use or theft.
• Spoilage: Damage from weather, pests, or poor storage (e.g., wet
cement).
 In materials management, different cost components
often involve tradeoffs, meaning reducing one cost may
increase another. Effective inventory and supply chain
management requires balancing these tradeoffs to
minimize total costs while maintaining service levels.
Here are the key tradeoffs:
1. Ordering Costs vs. Carrying Costs
• Increasing order size reduces ordering frequency
(lowering ordering costs) but increases inventory levels
(raising carrying costs).
• Solution: Use the Economic Order Quantity
(EOQ) model to find the optimal order size that
minimizes total costs.
 2. Carrying Costs vs. Stockout Costs
• Holding more inventory reduces stockout risk but increases
carrying costs (storage, obsolescence, capital costs).
• Solution: Balance safety stock levels using demand
forecasting and service level targets.

3. Purchase Price vs. Ordering & Carrying Costs

• Bulk purchasing may lower per-unit costs (economies of
scale) but increases carrying costs and risk of obsolescence.
• Solution: Negotiate volume discounts while considering
holding costs and demand variability.
Inventory models
◦ Inventory models help businesses determine how
much to order, when to order, and how to manage
stock to minimize costs while meeting demand. Below
are the key inventory models, their applications, and
tradeoffs.
Deterministic Inventory Model (Constant Demand)
◦ The Deterministic Inventory Model assumes
that demand is constant, known in advance, and
does not vary over time. This simplifies calculations
by removing uncertainty, making it ideal for stable
demand environments.
Types of Deterministic Models
Economic Order Quantity (EOQ) Model
◦Objective: Find the optimal order quantity (Q∗)
that minimizes total inventory costs
(ordering + holding costs).
Assumptions:
•Demand (D) is constant per unit time.
•Ordering cost (S) per order is fixed.
•Holding cost (H) per unit per year is constant.
•No stockouts or shortages allowed.
 Deterministic inventory models
Economic order quantity (EOQ) model with constant rate of demand

The objectives of this model is to determine an optimum

order quantity (EOQ) denoted by Q* such that total
inventory cost is minimized

TVC= Ordering cost + carrying (holding cost)

D Co + Q Cc
TVC =
Q 2

Co - cost of placing order D - annual demand

Cc - annual per-unit carrying /holding cost Q - order quantity
 EOQ
❑ The economic order quantity (EOQ) is a company's
optimal order quantity that meets demand while
minimizing its total costs related to ordering, receiving,
and holding inventory.

❑ Ordering a large amount of inventory increases a

company's holding costs while ordering smaller amounts
of inventory more frequently increases a company's setup
costs. The EOQ model finds the quantity that minimizes
both types of costs.
 THE EOQ MODEL
Demand
Order qty, Q
Inventory Level
rate

Reorder point, R

0 Lead Lead Time

time time
Order Order Order Order
Placed Received Placed Received

21
Minimizing Costs
Objective is to minimize total costs

Curve for total

cost of holding
and setup

Minimum
total cost
Annual cost

Holding cost
curve

Setup (or order)

cost curve
Optimal Order quantity
order
quantity
Economic orderquantity (EOQ) modelwith constant
rateof demand(Cont…)

D Co + Q Cc
TC= Q 2

Q* = 2DCo = Economic order quantity (EOQ)

Cc
 EXAMPLE

Given Data:
•Annual Demand (D): 10,000 units
•Ordering Cost (S): $50 per order
•Holding Cost (H): $2 per unit per year
•Lead Time (L): 5 days
•Working Days per Year: 250 days
Calculate

1.Optimal Order Quantity (EOQ)

2.Reorder Point (ROP)
3.Expected Number of Orders per Year
4. Total Annual Inventory Cost
Step 1: Calculate EOQ (Optimal Order
Quantity)

2𝐷𝑠
EOQ =
𝐻

2 ∗ 10,000 ∗ 50
EOQ =
2

=707 Units
 Step 2: Calculate Reorder Point
(ROP)

ROP=Demand per Day × Lead Time (in days)

Daily Demand=D/Working Days
d=10,000/250=40 units/day
ROP=40 units/day×5 days=200 units
 Step 3: Expected Number of Orders
per Year
◦Number of Orders=D/EOQ=10,000/707≈14.14 or
ders/year
Step 4: Expected Time Between Orders
(TBO)
◦TBO=Working Days per Year/Number of Orders
per Year
◦TBO=250days/14.14≈17.68days
◦Approximately 18 days
Step 5: Total Annual Inventory
Cost
 Quantity discounts
◦ Quantity discounts are price reductions offered by suppliers
when a buyer purchases larger quantities of a product. These
discounts incentivize bulk buying, helping suppliers increase
sales while allowing buyers to reduce per-unit costs.
Types of Quantity Discounts
1. All-Units Discount
The discount applies to all units purchased if the order reaches a
minimum quantity.
Example:
1. 0–100 units: $10/unit
2. 101–500 units: $9/unit (discount on entire order)
3. 500+ units: $8/unit
2.Incremental Discount
The discount applies only to units beyond the
threshold.
Example:
1.0–100 units: $10/unit
2.101–500 units: $9 for units 101+ (first 100 still at $10)
3.500+ units: $8 for units 500+
 Example: EOQ with All-Units
Quantity Discount
Given Data:
• Annual Demand (D): 5,000 units
• Ordering Cost (S): $100 per order
• Holding Cost (H): 20% of unit cost per year
• Discount Tiers:

Order Quantity (Q) Unit Price (P)

Q <500 $10
500 ≤Q <1,000 $9
Q ≥1,000 $8
Step 1: Calculate EOQ for Each Price

2𝐷𝑠
EOQ =
𝐻∗𝑝

Holding Cost=20% of P
 Holding
Price EOQ Valid?
Cost EOQ Calculation
(P) Result (Check Q Range)
(H = 0.2P)

$10 $2 √[(2×5,000×100)/2] 707 units No (707 > 500)

Yes (500 ≤ 745 <

$9 $1.80 √[(2×5,000×100)/1.80] 745 units
1,000)

$8 $1.60 √[(2×5,000×100)/1.60] 791 units No (791 < 1,000)

Note: The EOQ must fall within the discount tier’s quantity
range to be valid.
 Step 2: Compare Total Costs for Valid
EOQ & Discount Thresholds
Price Holding Purchase
Q Ordering Cost Total Cost
(P) Cost Cost

(500/2)×2 = 5,000×10 =
500 $10 (5,000/500)×100 = $1,000 $51,500
$500 $50,000

(745/2)×1.8 5,000×9 =
745 $9 (5,000/745)×100 ≈ $671 $46,342
≈ $671 $45,000

(1,000/2)×1. 5,000×8 =
1,000 $8 (5,000/1,000)×100 = $500 $41,300
6 = $800 $40,000

Optimal Order Quantity: 1,000 units (lowest total cost = $41,300)

 What is inventory waste?
Inventory waste is the lost revenue
created by unprocessed or unsold
inventory. You might think of excess
inventory as the lead cause of inventory
waste. But it also includes:
➢ Waste of transporting the inventory
➢Storage waste
➢ Waste of capital tied up in unprocessed
inventory
➢ Wasted payroll expenses on idle employees
➢ Any other wasted resources
associated with producing,
processing, and storing finished goods
Why is excess inventory considered
waste?
◦ Excess inventory is wasteful because it ties up
resources (both material and capital) that could
be used elsewhere, requires additional storage
capacity and holding costs (like insurance and
taxes), and creates unnecessary risk of damage,
loss, or obsolescence.
◦ Inventory control is a very complex process and
multiple information sources are required to
define the control mechanism.
•Inorder to control the wastages through
misplacing, improper stacking, different
types of inventory techniques are
followed

•ABC classification (Always Better

Control)
•FSN Analysis (Fast, Slow and Non-
moving)
1. When Purchase Cost is Added (Standard EOQ Model)
In the basic EOQ formula, the total cost includes:
• Ordering Cost (from placing orders).
• Holding Cost (storage, insurance, etc.).
• Purchase Cost (price of the materials).

Why Include Purchase Cost?

• Total Expenditure Perspective: It reflects the actual cash
outflow for procurement.
• Volume Discounts: If suppliers offer discounts for bulk
orders, purchase costs change, affecting EOQ decisions.
(Example: Buying steel rebars at 110 ETB/kg instead of 120
ETB/kg for orders >3,000 kg.)
2. When Purchase Cost is Excluded (Pure EOQ
Formula)
The classic EOQ formula (without purchase cost):

• Focus: Only minimizes ordering + holding costs.

• Assumption: Unit price is constant (no discounts).
When to Use This?
• If the purchase price does not vary with order
quantity (e.g., government-fixed prices).
However, the purchase price affects
EOQ when:
1.Quantity discounts are offered (i.e.,
the unit price decreases for larger orders).
2.Holding cost is a percentage of the
purchase price (e.g., if holding cost =
20% of item cost).
EXAMPLES

1. A local construction contractor regularly

buys cement for small housing projects. They
want to:
•Minimize ordering + storage costs.
• Avoid running out of stock or overstocking
(since cement can spoil if stored too long).
Given Data (Realistic for Ethiopia):
1.Annual Demand (D): 1,200 bags of cement
(based on past projects).
2.Ordering Cost (S): 1,500 ETB per order
(transport + labor for pickup).
3.Holding Cost (H): 100 ETB per bag/year
(storage rent, handling, spoilage risk).
4. Purchase Price (P): 800 ETB/bag (not used
in EOQ but added later for total cost).
 Step 1

𝟐𝑫𝒔
𝐄𝐎𝐐 =
𝑯
𝟐 ∗ 𝟏, 𝟐𝟎𝟎 ∗ 𝟏, 𝟓𝟎𝟎
𝐄𝐎𝐐 =
𝟏𝟎𝟎

EOQ = 190 bags

Step 2: Calculate Total Inventory Costs

1. Ordering cost per year=(D/EOQ) *S

= (1200/190) * 1500 = 9474 ETB/year
2. Holding cost per year= EOQ/2 * H
= (190/2) * 100= 9500 ETB/year
Total Inventory Cost (Ordering + Holding)
◦ 9,474+9,500=18,974ETB/year
Steps 3;include purchase price
•Total Purchase Cost
•D×P=1,200×800=960,000ETB/year.
•Actual Cash out flow(Purchase +
Inventory)
•960,000+18,974=978,974ETB/year
2. A mid-sized contractor is working on a
residential building project and needs to
procure steel bars (rebar). The following data is
collected:

•Annual Demand (D): 60,000 kg

•Ordering Cost (S): ETB 2,000 per order (includes
logistics, paperwork)
•Holding Cost (H): ETB 100 per kg per year
(storage, insurance, wastage)
•Unit Cost (C): ETB 120 per kg (market price)
◦Calculate the EOQ and Total Inventory Cost
(TIC) to minimize procurement expenses.
◦step 1: Calculate EOQ

2𝐷𝑠
EOQ=
𝐻
2∗60,000∗2000
=
100

= 1,549.19 kg
Since partial orders are impractical, the
firm should order ≈ 1,550 kg per order.
Step 2: Calculate Total Inventory Cost
(TIC)

1. Ordering Cost
2. Holding Cost
 =(60,000/1550 * 2000) + (1550/2 * 100)

=85,169ETB
◦To calculate cash out flow
= Ordering Cost+ Holding Cost +Purchase Cost

◦ 85,169br + (60,000×120)
=ETB7,354,919.35
 What if Order Quantity Changes?
Order Size Ordering Holding Cost
Total Cost (ETB)
(Q) Cost (ETB) (ETB)
1,000 120,000 50,000 7,370,000
1,550 (EOQ) 77,419.35 77,500 7,354,919.35

2,000 60,000 100,000 7,360,000

• 1,550 kg per order (EOQ) gives the lowest cost (ETB

7,354,919).
• Ordering smaller quantities (1,000 kg) increases
ordering costs due to frequent procurement.
• Ordering larger quantities (2,000 kg) increases holding
costs due to storage risks.
3.A contractor in Addis Ababa requires 50,000
bags of cement annually with the following
costs:
❑ Ordering cost (S): ETB 1,500 per order
❑ Holding cost (H): 20% of unit cost per year
❑ Supplier price breaks:
❑ <5,000 bags: ETB 380/bag
❑ 5,000-7,999 bags: ETB 360/bag (5% discount)
❑ ≥8,000 bags: ETB 340/bag (10% discount)
Determine the optimal order quantity that
minimizes total costs.

◦Step 1: Calculate EOQ for Each Price

2𝐷𝑆
◦ EOQ =
𝐻𝑃
◦ Where:
◦ H= holding cost percentage (20%)
◦ P= unit cost at each tier
 Unit Cost
Price EOQ Calculation EOQ Valid?
(C)

2 ∗ 50,000 ∗ 1500 1,404

ETB 380 Yes
(<5,000) 0.2 ∗ 380 bags

(5,000- 2 ∗ 50,000 ∗ 1500 1,443 No (below

ETB 360
7,999) 0.2 ∗ 360 bags min 5,000)

2 ∗ 50,000 ∗ 1500 1,486 No (below

ETB 340
(≥8,000) 0.2 ∗ 340 bags min 8,000)
Step 2: Calculate Total Costs for Valid
Quantities
◦TC=(D/Q×S)+(Q/2×P*H)+(D×C)
Order Qty Unit Cost Holding Purchase
Order Cost Total Cost
(Q) (C) Cost Cost

ETB ETB
1,404 bags ETB 380 ETB 53,418 ETB 53,352
19,000,000 19,106,770

ETB ETB ETB

5,000 bags ETB 360 ETB 15,000
180,000 18,000,000 18,195,000

ETB ETB ETB

8,000 bags ETB 340 ETB 9,375
272,000 17,000,000 17,281,375
•Optimal Order Quantity: 8,000
bags (10% discount )
•Total Annual Savings: ETB
1,825,395 compared to no-discount
EOQ.