1. Purposes of Inventory Meet expected demand Absorb demand fluctuations
Protect against unexpected increases in demand
Decouple stages in the production process
Take advantage of quantity discounts
Hedge against possible price increases
Protect against disruption in delivery from suppliers

2. Types of Inventory Raw materials Work-in-process (WIP) Finished goods
Replacement parts
Supplies
Transportation

3. Dependent and Independent Demand
Dependent Demand = usually generated by a company’s own production process
Independent Demand = usually from outside sources such as customers

4. Types of Inventory Systems
Perpetual (Continuous Review)
Inventory level continuously monitored
Transactions recorded as they occur
Maintain specific level of inventory
Periodic
Inventory counted only at regular intervals
Inventory depends upon demand

5. ABC Classification of Inventory Items
Cumulative
Annual Unit Annual Dollar % Annual % Annual
Item Demand Cost Usage Dollar Usage Dollar Usage Classification 1 2 3 4 5 6 7 8 9 10
5,000
200
2,000
800
1,000
1,200
1,300
2,500
3,500
500
$ 30
450 10 20 5 4 2 1
$ 150,000
90,000
20,000
16,000
10,000
6,000
5,200
5,000
3,500
1,000
306,700
48.91
29.34
6.52
5.22
3.26
1.96
1.69
1.63
1.14
.33
48.91
78.25
84.77
89.99
93.25
95.21
96.90
98.53
99.67
100.00 A B C

6. Aggregate Performance Measures
-Average inventory investment
-Turnover ratio
- Days of inventory
Annual cost of goods sold
Average inventory investment
Days per year
Turnover ratio

7. Costs of Inventory Inventory Ordering Costs Inventory Holding Costs
Fixed
Staffing
Office and equipment
Variable
Shipping
Order placing
Setup cost
Lost materials
Receiving and inspection
Inventory Holding Costs
Fixed
Warehouse-capital
Property taxes
Warehouse-operating
Personnel
Variable
Cost of capital
Insurance
Losses
Inventory taxes
Rental costs

8. EOQ Model Assumptions 1. Constant known demand rate
2. Cost per unit fixed
3. Instantaneous replenishment
4. Ordering and carrying cost known and independent

9. Basic EOQ Inventory Pattern

10. Total Annual Variable Costs

11. EOQ Model D = Annual Demand rate S = Variable ordering cost
H = Variable holding cost

12. EOQ Model D = Annual Demand rate S = Variable ordering cost
H = Variable holding cost
D = 1,000 units/year
S = $50 per order H = $5 per unit per year

13. Total Annual Variable Cost (Slide 1 of 2)
Annual variable ordering cost = S
Annual variable holding cost = H
Total annual variable cost = H S Q Q 2 Q D 2 Q

14. Total Annual Variable Cost (Slide 2 of 2)
D = 1, S = $ H = $5
EOQ =
Total annual variable costs
,000
,000
,000
,000
EOQ:
(5) +
(50) = $707.11
140:
(5) +
(50) = $707.14
145:
(5) +
(50) = $707.33
200:
(50) = $750.00
(5) +

15. Quantity Produced During Replenishment Period vs. Maximum Inventory

16. Economic Run Size (Finite Replenishment Rate Model)
D = annual demand rate S = Variable ordering cost
H = variable holding cost u = dally demand (usage) rate
p = daily production rate
Total annual variable costs
D = 1,000; S = $50; H = $5; u = 4; p = 10

17. Class Examples
Class Examples

28. ABC Inventory Problem # 6

33. Homework
Problems 3,4,8,13,16 (ch. 9)