1. CHAPTER 6:
MANAGING
INVENTORY

2. Inventory Management
Objective:
1. Maximize inventory turnover
2. Carry sufficient inventories
EXCESSIVE
Heavy burden on cash
INSUFFICIENT
Lost sales, delay for
customers

3. Terms:
Lead Time
- Time between start of activity, process and
completion (Start till the end process).
Stock Out
- Production require the inventory, but stores out of
the inventory (Out of stocks).
Buffer
- Maintaining the inventory and WIP for any
interruption of supply.

4. Re-order Quantity
- Number of units in one order.
Re-order Level
- Level of inventory, when should place an order.
Economic Order Quantity
- Replenishment order size, minimize ordering
costs and holding costs.

5. Types of Inventory
1. Raw Materials
- Mostly on credit or Accounts Payables
2. Work In Progress (WIP)
- Consist partially finished goods.
- Need add work before become finished goods.
3. Finished Goods
- Product completed but not sold yet.

6. Costs of Inventory
There are three other inventory costs:
1. Holding costs
- Admin, staff costs, insurance & etc.
2. Order set up costs
- Incurred each time a batch of inventory is ordered.
3. Stock out costs
- Costs of running out inventory.
4. Purchase costs
- Actual cost of buying inventory

7. Economic Order Quantity
Model (EOQ)
Definition:
1. Tools to determine the optimal order quantity
that results in the lowest total in inventory cost.
2. Optimal order level will lead to minimal overall
inventory cost.

8. EOQ
Conflict among
dept:
- Financial dept:
low lvl of
inventory
- Marketing dept:
high lvl of
inventory
- Production Dept:
High lvl of
inventory
More frequent –
increase ordering cost,
decrease holding cost
Less frequent –
decrease ordering cost,
increase holding cost

9. EOQ Formula

10. Example
Annual demand – 30,000 barrels.
Purchase in lot 5,000 barrels.
Price is $12/each.
Ordering cost is $200/per order.
Holding cost is 10% of purchase price.
Calculate the total cost by using EOQ and without
EOQ technique?

11. Without EOQ
Total Cost
= Holding Cost + Ordering Cost
= (Average Inventory x Ch/unit) +
(No. of orders x Co/order)
= (Q/2 x Ch) + (D/2 x Co)
= (5,000/2 x 1.20) +
(30,000/5,000 x 200)
= $ 3,000 + 1,200
= $ 4,200