1. Inventory Management and Control2

2. AMAZON.com
Jeff Bezos, in 1995, started AMAZON.com as a “virtual” retailer – no inventory, no warehouses, no overhead; just a bunch of computers.
Growth forced AMAZON.com to excel in inventory management!
AMAZON is now a worldwide leader in warehouse management and automation.

3. Order Fulfillment at AMAZON (1 of 2)
You order items; computer assigns your order to distribution center [closest facility that has the product(s)]
Lights indicate products ordered to workers who retrieve product and reset light.
Items placed in crate with items from other orders, and crate is placed on conveyor. Bar code on item is scanned 15 times – virtually eliminating error.

4. Order Fulfillment at AMAZON (2 of 2)
Crates arrive at a central point where items are boxed and labeled with new bar code.
Gift wrapping done by hand (30 packages per hour)
Box is packed, taped, weighed and labeled before leaving warehouse in a truck.
Order appears on your doorstep within a week

5. Inventory Defined
Inventory is the stock of any item or resource held to meet future demand and can include: raw materials, finished products, component parts, supplies, and work-in-process 3

6. Inventory Classifications
Process stage
Demand Type
Number & Value
Other
Raw Material
WIP
Finished Goods
Independent Dependent
A Items B Items C Items
Maintenance Operating

7. Independent vs. Dependent Demand
Independent Demand (Demand for the final end-product or demand not related to other items; demand created by external customers)
Finished
product
Independent demand is uncertain Dependent demand is certain A
Dependent Demand
(Derived demand for component parts,
subassemblies,
raw materials, etc- used to produce final products)
B(4)
C(2)
D(1)
E(1)
E(2)
B(1)
E(3)
Component parts

8. Inventory Models
Independent demand – finished goods, items that are ready to be sold
E.g. a computer
Dependent demand – components of finished products
E.g. parts that make up the computer

9. Types of Inventories (1 of 2)
Raw materials & purchased parts
Partially completed goods called work in progress
Finished-goods inventories (manufacturing firms) or merchandise (retail stores)

10. Types of Inventories (2 of 2)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers

11. The Material Flow Cycle (1 of 2)

12. The Material Flow Cycle (2 of 2)
Wait
Time
Move
Time
Queue
Time
Setup
Time
Run
Time
Input
Output
Cycle Time
Run time: Job is at machine and being worked on
Setup time: Job is at the work station, and the work station is being "setup."
Queue time: Job is where it should be, but is not being processed because other work precedes it.
Move time: The time a job spends in transit
Wait time: When one process is finished, but the job is waiting to be moved to the next work area.
Other: "Just-in-case" inventory.

13. Performance Measures
Inventory turnover (the ratio of annual cost of goods sold to average inventory investment)
Days of inventory on hand (expected number of days of sales that can be supplied from existing inventory)

14. Functions of Inventory (1 of 2)
To “decouple” or separate various parts of the production process, ie. to maintain independence of operations
To meet unexpected demand & to provide high levels of customer service
To smooth production requirements by meeting seasonal or cyclical variations in demand
To protect against stock-outs

15. Functions of Inventory (2 of 2)
5. To provide a safeguard for variation in raw material delivery time
6. To provide a stock of goods that will provide a “selection” for customers
7. To take advantage of economic purchase-order size
8. To take advantage of quantity discounts
9. To hedge against price increases

16. Disadvantages of Inventory
Higher costs
Item cost (if purchased)
Ordering (or setup) cost
Holding (or carrying) cost
Difficult to control
Hides production problems
May decrease flexibility

17. Inventory Costs Holding (or carrying) costs
Costs for storage, handling, insurance, etc
Setup (or production change) costs
Costs to prepare a machine or process for manufacturing an order, eg. arranging specific equipment setups, etc
Ordering costs (costs of replenishing inventory)
Costs of placing an order and receiving goods
Shortage costs
Costs incurred when demand exceeds supply 5

18. Holding (Carrying) Costs
Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.

19. Inventory Holding Costs (Approximate Ranges)
Cost as a
% of Inventory Value 6%
(3 - 10%) 3%
( %)
(3 - 5%)
11%
(6 - 24%)
(2 - 5%)
26%
Category
Housing costs (building rent, depreciation, operating cost, taxes, insurance)
Material handling costs (equipment, lease or depreciation, power, operating cost)
Labor cost from extra handling
Investment costs (borrowing costs, taxes, and insurance on inventory)
Pilferage, scrap, and obsolescence
Overall carrying cost

20. Ordering Costs
Supplies
Forms
Order processing
Clerical support
etc.

21. Setup Costs
Clean-up costs
Re-tooling costs
Adjustment costs
etc.

22. Shortage Costs
Backordering cost
Cost of lost sales

23. Inventory Control System Defined
An inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished and how large orders should be
Answers questions as:
When to order?
How much to order?

24. Objective of Inventory Control
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Level of customer service
Costs of ordering and carrying inventory

25. Requirements of an Effective Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
A classification system

26. Inventory Counting (Control) Systems
Periodic System
Physical count of items made at periodic intervals; order is placed for a variable amount after fixed passage of time
Perpetual (Continuous) Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item (constant amount is ordered when inventory declines to a predetermined level)

27. Inventory Models Single-Period Inventory Model
One time purchasing decision (Example: vendor selling t-shirts at a football game)
Seeks to balance the costs of inventory overstock and under stock
Multi-Period Inventory Models
Fixed-Order Quantity Models
Event triggered (Example: running out of stock)
Fixed-Time Period Models
Time triggered (Example: Monthly sales call by sales representative) 7

28. Single-Period Inventory Model

29. Single Period Model
Single period model: model for ordering of perishables and other items with limited useful lives
Shortage cost: generally the unrealized profits per unit
Excess cost: difference between purchase cost and salvage value of items left over at the end of a period

30. Single Period Model Continuous stocking levels
Identifies optimal stocking levels
Optimal stocking level balances unit shortage and excess cost
Discrete stocking levels
Service levels are discrete rather than continuous
Desired service level is equaled or exceeded

31. Single-Period Model
This model states that we should continue to increase the size of the inventory so long as the probability of selling the last unit added is equal to or greater than the ratio of: Cu/Co+Cu 8

32. Optimal Stocking Level
Service level = Cs
Cs + Ce
Cs = Shortage cost per unit Ce = Excess cost per unit
Service Level So
Quantity Ce Cs
Balance point

33. Single Period Example 1 Ce = $0.20 per unit Cs = $0.60 per unit
Service level = Cs/(Cs+Ce) = .6/(.6+.2)
Service level = .75
Service Level = 75%
Quantity Ce Cs
Stockout risk = 1.00 – 0.75 = 0.25

34. Single Period Model Example 2
Our college basketball team is playing in a tournament game this weekend. Based on our past experience we sell on average 2,400 shirts with a standard deviation of We make $10 on every shirt we sell at the game, but lose $5 on every shirt not sold. How many shirts should we make for the game?
Cu = $10 and Co = $5; P ≤ $10 / ($10 + $5) = .667
Z.667 = .432
therefore we need 2, (350) = 2,551 shirts

35. Multi-Period Inventory Models
Fixed-Order Quantity Models (Types of)
Economic Order Quantity Model
Economic Production Order Quantity (Economic Lot Size) Model
Economic Order Quantity Model with Quantity Discounts
Fixed Time Period (Fixed Order Interval) Models

36. Fixed Order Quantity Models: Economic Order Quantity Model

37. Economic Order Quantity Model Assumptions (1 of 2):
Demand for the product is known with certainty, is constant and uniform throughout the period
Lead time (time from ordering to receipt) is known and constant
Price per unit of product is constant (no quantity discounts)
Inventory holding cost is based on average inventory

38. Economic Order Quantity Model Assumptions (2 of 2):
Ordering or setup costs are constant
All demands for the product will be satisfied (no back orders are allowed)
No stockouts (shortages) are allowed
The order quantity is received all at once. (Instantaneous receipt of material in a single lot)
The goal is to calculate the order quantitiy that minimizes total cost 9

39. Basic Fixed-Order Quantity Model and Reorder Point Behavior
4. The cycle then repeats.
1. You receive an order quantity Q.
R = Reorder point
Q = Economic order quantity
L = Lead time L Q R
Time
Number
of units
on hand
(Inv.
Level)
2. You start using them up over time.
3. When you reach down to a level of inventory of R, you place your next Q sized order.

40. Average Inventory (Q/2)
EOQ Model
Reorder Point (ROP)
Time
Inventory Level
Average Inventory (Q/2)
Lead Time
Order Quantity (Q)
Demand rate
Order placed
Order received

41. EOQ Cost Model: How Much to Order?
By adding the holding and ordering costs together, we determine the total cost curve, which in turn is used to find the optimal order quantity that minimizes total costs
Slope = 0
Total Cost
Order Quantity, Q
Annual cost ($)
Minimum total cost
Optimal order
Qopt
Carrying Cost = HQ 2
Ordering Cost = SD Q

42. Why Holding Costs Increase?
More units must be stored if more are ordered
Purchase Order
Description
Qty.
Microwave
1000
Order quantity
Purchase Order
Description
Qty.
Microwave 1
Order quantity

43. Why Ordering Costs Decrease ?
Cost is spread over more units
Example: You need 1000 microwave ovens
Purchase Order
Description
Qty.
Microwave 1
1 Order (Postage $ 0.33)
1000 Orders (Postage $330)
Order quantity
1000

44. Basic Fixed-Order Quantity (EOQ) Model Formula
TC=Total annual cost
D =Annual demand
C =Cost per unit
Q =Order quantity
S =Cost of placing an order or setup cost
R =Reorder point
L =Lead time
H=Annual holding and storage cost per unit of inventory
Total
Annual =
Cost
Annual
Purchase
Cost
Annual
Ordering
Cost
Annual
Holding
Cost + + 12

45. EOQ Cost Model
Using calculus, we take the first derivative of the total cost function with respect to Q, and set the derivative (slope) equal to zero, solving for the optimized (cost minimized) value of Qopt
TC =
S D Q
H Q 2 = Q2 H
TC Q
0 =
Qopt =
2SD
Deriving Qopt
Annual ordering cost =
S D Q
Annual carrying cost = HQ 2
Total cost =
H Q
Proving equality of costs at optimal point =
S D Q
H Q 2
Q2 =
2S D H
Qopt =
2 S D

46. Deriving the EOQ How much to order?: When to order?
We also need a reorder point to tell us when to place an order 13

47. EOQ Model Equations = × Q* D S H N T d ROP L 2 Optimal Order Quantity
Expected Number of Orders
Expected Time Between Orders
Working Days /
Year = × Q* D S H N T d
ROP L 2

48. EOQ Example 1 (1 of 3)
Given the information below, what are the EOQ and reorder point?
Annual Demand = 1,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15 14

49. EOQ Example 1(2 of 3)
In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units. 15

50. EOQ Example I(3 of 3) Order cycle time= 365/(D/Qopt) = 365/11
Orders per year = D/Qopt
= 1000/90
= 11 orders/year
Order cycle time= 365/(D/Qopt) = 365/11
= 33.1days
TCmin = SD Q HQ 2
(10)(1,000) 90
(2,5)(90)
TCmin = $ $111 = 22 $ + +

51. EOQ Example 2(1 of 2) Annual Demand = 10,000 units
Determine the economic order quantity
and the reorder point given the following…
Annual Demand = 10,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = 10% of cost per unit
Lead time = 10 days
Cost per unit = $15 16

52. EOQ Example 2(2 of 2)
Place an order for 366 units. When in the course of using the inventory you are left with only 274 units, place the next order of 366 units. 17

53. EOQ Example 3 H = $0.75 per yard S = $150 D = 10,000 yards Qopt =
2(150)(10,000)
(0.75)
Qopt = 2,000 yards
TCmin =
S D Q
H Q 2
TCmin =
(150)(10,000)
2,000
(0.75)(2,000)
TCmin = $750 + $750 = $1,500
Orders per year = D/Qopt
= 10,000/2,000
= 5 orders/year
Order cycle time =311 days/(D/Qopt)
= 311/5
= 62.2 store days

54. When to Reorder with EOQ Ordering ?
Reorder Point – is the level of inventory at which a new order is placed
ROP = d . L
Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
Service Level - Probability that demand will not exceed supply during lead time (probability that inventory available during lead time will meet demand) 1 - Probability of stockout

55. Reorder Point Example Demand = 10,000 yards/year
Store open 311 days/year
Daily demand = 10,000 / 311 = yards/day
Lead time = L = 10 days
R = dL = (32.154)(10) = yards

56. Determinants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)

57. Probabilistic Models Answer how much & when to order
Allow demand to vary
Follows normal distribution
Other EOQ assumptions apply
Consider service level & safety stock
Service level = 1 - Probability of stockout
Higher service level means more safety stock
More safety stock means higher ROP

58. Safety Stock Quantity Maximum probable demand Expected demandLT
Time
Expected demand
during lead time
Maximum probable demand
ROP
Quantity
Safety stock
Safety stock reduces risk of
stockout during lead time

59. Variable Demand with a Reorder Point
point, R Q LT
Time
Inventory level

60. Reorder Point with a Safety Stock
point, R Q LT
Time
Inventory level
Safety Stock

61. Reorder Point With Variable Demand
R = dL + zd L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock

62. Reorder Point for Service Level
Probability of
meeting demand during
lead time = service level
a stockout R
Safety stock dL
Expected Demand
zd L
The reorder point based on a normal distribution of LT demand

63. Reorder Point for Variable Demand (Example)
The carpet store wants a reorder point with a 95% service level and a 5% stockout probability
d = 30 yards per day
L = 10 days
d = 5 yards per day
For a 95% service level, z = 1.65
R = dL + z d L
= 30(10) + (1.65)(5)( 10)
= yards
Safety stock = z d L
= (1.65)(5)( 10)
= 26.1 yards

64. Fixed Order Quantity Models: -Noninstantaneous Receipt- Production Order Quantity (Economic Lot Size) Model

65. Production Order Quantity Model
Production done in batches or lots
Capacity to produce a part exceeds that part’s usage or demand rate
Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment
Material produced, used immediately
Provides production lot size
Lower holding cost than EOQ model
Answers how much to order and when to order

66. EOQ POQ Model When To Order
Time
Inventory Level
Both production and usage take place
Usage only takes place
Maximum inventory level

67. EOQ POQ Model When To Order
Inventory Level
Average Inventory
Optimal Order Quantity (Q*)
Reorder Point (ROP)
Time
Lead Time

68. POQ Model Inventory Levels (1 of 2)
Time
Supply Begins
Supply Ends
Production portion of cycle
Demand portion of cycle with no supply
Maximum inventory level

69. POQ Model Inventory Levels (2 of 2)
Time
Inventory Level
Production Portion of Cycle
Max. Inventory Q·(1- u/p) Q*
Supply Begins
Supply Ends
Inventory level with no demand
Demand portion of cycle with no supply
Average inventory Q/2(1- u/p)

70. Maximum inventory level
POQ Model Equations
2*D*S
Production Order Quantity = Q * = ( ) p u H* 1 - p ( ) - u p
Maximum inventory level * = 1 Q
D = Demand per year
S = Setup cost
H = Holding cost
d = Demand per day
p = Production per day D = * S
Setup Cost Q ( ) u =
Holding Cost
1/2 * H * Q 1 - p

71. Production Order Quantity Example (1 of 2)
H = $0.75 per yard S = $150 D = 10,000 yards
u = 10,000/311 = 32.2 yards per day p = 150 yards per day
POQopt = = = 2,256.8 yards
2 S D
H 1 - u p
2(150)(10,000)
32.2
150
TC = = $1,329 u p
S D Q
H Q 2
Production run = = = days per order Q p
2,256.8
150

72. Production Quantity Example (2 of 2)
H = $0.75 per yard S = $150 D = 10,000 yards
u= 10,000/311 = 32.2 yards per day p = 150 yards per day
Number of production runs = = = 4.43 runs/year D Q
10,000
2,256.8
Maximum inventory level = Q = 2,
= 1,772 yards u p
32.2
150
Qopt = = = 2,256.8 yards
2CoD
Cc 1 - d p
2(150)(10,000)
32.2
150
TC = = $1,329
CoD Q
CcQ 2
Production run = = = days per order
2,256.8

73. Fixed-Order Quantity Models: Economic Order Quantity Model with Quantity Discounts

74. Quantity Discount Model
Answers how much to order & when to order
Allows quantity discounts
Price per unit decreases as order quantity increases
Other EOQ assumptions apply
Trade-off is between lower price & increased holding cost
Total cost with purchasing cost
TC = PD
S D Q
iC Q 2
Where P: Unit Price

75. Price-Break Model Formula
Based on the same assumptions as the EOQ model, the price-break model has a similar Qopt formula:
i = percentage of unit cost attributed to carrying inventory
C = cost per unit
Since “C” changes for each price-break, the formula above will have to be used with each price-break cost value

76. Total Costs with PD Cost Adding Purchasing cost doesn’t change EOQ
TC with PD
TC without PD PD
Quantity
Adding Purchasing cost doesn’t change EOQ

77. Total Cost with Constant Carrying CostsOC
EOQ
Quantity
Total Cost
TCa
TCc
TCb
Decreasing
Price
CC a,b,c

78. Quantity Discount – How Much to Order?

79. Price-Break Example 1 (1 of 3)
ORDER SIZE PRICE
$10
(d1)
(d2)
For this problem holding cost is given as a constant value, not as a percentage of price, so the optimal order quantity is the same for each of the price ranges. (see the figure)

80. Price Break Example 1 (2 of 3)
Qopt
Carrying cost
Ordering cost
Inventory cost ($)
Q(d1 ) = 100
Q(d2 ) = 200
TC (d2 = $6 )
TC (d1 = $8 )
TC = ($10 )

81. Price Break Example 1 (3 of 3)
Qopt
Carrying cost
Ordering cost
Inventory cost ($)
Q(d1 ) = 100
Q(d2 ) = 200
TC (d2 = $6 )
TC (d1 = $8 )
TC = ($10 )
The lowest total cost is at the second price break

82. Price Break Example 2 QUANTITY PRICE 1 - 49 $1,400 50 - 89 1,100
$1,400
,100
S = $2,500
H = $190 per computer
D = 200
Qopt = = = 72.5 PCs
2SD H
2(2500)(200)
190
TC = PD = $233,784 SD
Qopt
H Qopt 2
For Q = 72.5
TC = PD = $194,105 SD Q
H Q 2
For Q = 90

83. Price-Break Example 3 (1 of 4)
A company has a chance to reduce their inventory ordering costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an ordering cost of $4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units?
Order Quantity(units) Price/unit($)
0 to 2,499 $1.20
2,500 to 3,
4,000 or more

84. Price-Break Example (2 of 4)
First, plug data into formula for each price-break value of “C”
Annual Demand (D)= 10,000 units
Cost to place an order (S)= $4
Carrying cost % of total cost (i)= 2%
Cost per unit (C) = $1.20, $1.00, $0.98
Next, determine if the computed Qopt values are feasible or not
Interval from 4000 & more, the Qopt value is not feasible
Interval from , the Qopt value is not feasible
Interval from 0 to 2499, the Qopt value is feasible

85. Price-Break Example 2 (3 of 4)
Since the feasible solution occurred in the first price-break, it means that all the other true Qopt values occur at the beginnings of each price-break interval. Why?
Because the total annual cost function is a “u” shaped function
Total annual costs
So the candidates for the price-breaks are 1826, 2500, and 4000 units
Order Quantity

86. Price-Break Example 2 (4 of 4)
Next, we plug the true Qopt values into the total cost annual cost function to determine the total cost under each price-break
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
= $12,043.82
TC( )= $10,041
TC(4000&more)= $9,949.20
Finally, we select the least costly Qopt, which in this problem occurs in the 4000 & more interval. In summary, our optimal order quantity is 4000 units

87. Multi-period Inventory Models: Fixed Time Period (Fixed-Order- Interval) Models

88. Fixed-Order-Interval Model
Orders are placed at fixed time intervals
Order quantity for next interval? (inventory is brought up to target amount, amount ordered varies)
Suppliers might encourage fixed intervals
Requires only periodic checks of inventory levels (no continous monitoring is required)
Risk of stockout between intervals

89. Inventory Level in a Fixed Period System
Various amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum p Q1 Q2 Q3 Q4
Target maximum
Time
d Inventory

90. Fixed-Interval Benefits
Tight control of inventory items
Items from same supplier may yield savings in:
Ordering
Packing
Shipping costs
May be practical when inventories cannot be closely monitored

91. Fixed-Interval Disadvantages
Requires a larger safety stock
Increases carrying cost
Costs of periodic reviews

92. Fixed-Time Period Model with Safety Stock Formula
q = Average demand + Safety stock – Inventory currently on hand

93. Fixed-Time Period Model: Determining the Value of sT+L
The standard deviation of a sequence of random events equals the square root of the sum of the variances 20

94. Order Quantity for a Periodic Inventory System
Q = d(tb + L) + zd T + L - I
where
d = average demand rate
T = the fixed time between orders
L = lead time
 d = standard deviation of demand
zd tb + L = safety stock
I = inventory level
z = the number of standard deviations
for a specified service level

95. Fixed-Period Model with Variable Demand (Example 1)
d = 6 bottles per day
sd = 1.2 bottles
tb = 60 days
L = 5 days
I = 8 bottles
z = 1.65 (for a 95% service level)
Q = d(tb + L) + zd tb + L - I
= (6)(60 + 5) + (1.65)(1.2)
= bottles

96. Fixed-Time Period Model with Variable Demand (Example 2)(1 of 3)
Given the information below, how many units should be ordered?
Average daily demand for a product is 20 units. The review period is 30 days, and lead time is 10 days. Management has set a policy of satisfying 96 percent of demand from items in stock. At the beginning of the review period there are 200 units in inventory. The standard deviation of daily demand is 4 units. 21

97. Fixed-Time Period Model with Variable Demand (Example 2)(2 of 3)
So, by looking at the value from the Table, we have a probability of , which is given by a z = 1.75 22

98. Fixed-Time Period Model with Variable Demand (Example 2) (3 of 3)
So, to satisfy 96 percent of the demand, you should place an order of 645 units at this review period 23

99. Miscellaneous Systems: Optional Replenishment System
Maximum Inventory Level, M
Actual Inventory Level, I
q = M - I I M
Q = minimum acceptable order quantity
If q > Q, order q, otherwise do not order any. 24

100. ABC Classification System
Demand volume and value of items vary
Items kept in inventory are not of equal importance in terms of:
dollars invested
profit potential
sales or usage volume
stock-out penalties 26

101. ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
A - very important
B - mod. important
C - least important
Annual
$ value
of items A B C
High
Low
Percentage of Items

102. ABC Analysis
Classify inventory into 3 categories typically on the basis of the dollar value to the firm $ volume = Annual demand x Unit cost
A class, B class, C class Policies based on ABC analysis
Develop class A suppliers more carefully
Give tighter physical control of A items
Forecast A items more carefully

103. Classifying Items as ABC20 40 60 80
100 50
% Annual $ Usage A B C
Class
% $ Vol
% Items
70-80
5-15 15 30
5-10
50-60
% of Inventory Items

104. ABC Classification PART UNIT COST ANNUAL USAGE 1 $ 60 90 2 350 40
1 $ 60 90
PART UNIT COST ANNUAL USAGE

105. ABC Classification PART UNIT COST ANNUAL USAGE 1 $ 60 90 2 350 40
1 $ 60 90
PART UNIT COST ANNUAL USAGE
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,
8 16,
2 14,
1 5,
4 4,
3 3,
6 3,
5 3,
10 2,
7 1,
$85,400

106. ABC Classification A B C PART UNIT COST ANNUAL USAGE 1 $ 60 90
1 $ 60 90
PART UNIT COST ANNUAL USAGE
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,
8 16,
2 14,
1 5,
4 4,
3 3,
6 3,
5 3,
10 2,
7 1,
$85,400 A B C

107. ABC Classification A B C PART UNIT COST ANNUAL USAGE 1 $ 60 90
1 $ 60 90
PART UNIT COST ANNUAL USAGE
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,
8 16,
2 14,
1 5,
4 4,
3 3,
6 3,
5 3,
10 2,
7 1,
$85,400 A B C
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8,
B 1, 4,
C 6, 5, 10,

108. ABC Classification C B A % of Value | | | | | | 0 20 40 60 80 100
100 –
80 –
60 –
40 –
20 –
0 –
| | | | | |
% of Quantity
% of Value A B C

109. Inventory Accuracy and Cycle Counting
Inventory accuracy refers to how well the inventory records agree with physical count.
Physically counting a sample of total inventory on a regular basis
Used often with ABC classification
A items counted most often (e.g., daily)

110. Advantages of Cycle Counting
Eliminates shutdown and interruption of production necessary for annual physical inventories
Eliminates annual inventory adjustments
Provides trained personnel to audit the accuracy of inventory
Allows the cause of errors to be identified and remedial action to be taken
Maintains accurate inventory records

111. Last Words Inventories have certain functions. But too much inventory
Tends to hide problems
Costly to maintain
So it is desired
Reduce lot sizes
Reduce safety stocks