Ch. 21 Inventory Control

Learning Objectives Analyze the importance of inventory. Describe the features of an inventory control system. Analyze the costs associated with inventory. Apply the economic order quantity (EOQ) model to solve inventory control problems.

Inventory Stock of goods.

Functions of inventory 1. To meet anticipated demand. 2. To decouple the production process. 3. To minimize the seasonal effect. 4. To protect against stockouts. 5. To take advantage of future price increases. 6. To purchase in a round lot.

Periodic inventory system An inventory management system in which a physical count of item sin inventory is made at periodic intervals to determine the quantities on hand.

Perpetual inventory system An inventory management system in which the inflows and removals of items are kept track of on a continuous basis.

Inventory carrying costs Indirect inventory costs associated with holding the inventories. Annual inventory carrying costs Average inventory level (in dollars) Inventory carrying costs as a percentage of inventory value =*

Average inventory level

Stockout costs A special type of inventory cost which includes tangible costs, such as special delivery costs, lost sales and profits, etc., and intangible costs because the stockout may upset customers which in turn will damage the reputation and goodwill of the firm.

Inventory ordering costs Indirect inventory costs which refer to the costs of placing and processing orders.

Annual inventory ordering costs Number of orders placed in a year Cost per order = * Annual inventory ordering costs = D / Q * CPO

Economic order quantity The order quantity at which total inventory costs will be minimized.

An EOQ model

Annual inventory carrying costs = Annual inventory ordering costs Q / 2 * UC * ICC = D / Q * CPO Q = √2(D)(CPO) / (UC)(ICC) EOQ = √2(D)(CPO) / (UC)(ICC)

Number of orders placed in a year = Expected annual demand (D) / Order quantity (Q) Order interval = 365 days / Number of orders placed in in year

Reorder point The quantity of inventory on hand when an order is placed.

Safety stock Stock that is carried in excess of expected demand.

Reorder point Expected demand during the time interval between when the order is placed and when the order arrives + = Safety stock (or buffer stock)

Inventory cycle

Just-in-time (JIT) Approach in managing inventory materials by having materials arrive just before they are needed.