Inventory is used to maintain operations, meet varying product demand, provide flexibility, and take advantage of bulk purchase discounts. There are costs for carrying inventory like storage, as well as ordering costs. Inventory models determine optimal order quantities to balance these costs. A fixed-order quantity model monitors inventory and places bulk orders when it runs low, while a fixed-time period model reviews inventory and orders on a set schedule. Safety stock beyond expected demand helps mitigate risks from uncertain demand or delays.

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Inventory Control

2. Definition of Inventory
• Inventory: the stock of any item or resource used in
an organization and can include: raw materials,
finished products, component parts, supplies, and
work-in-process
• Inventory system: the set of policies and controls that
monitor levels of inventory and determines what levels
should be maintained, when stock should be
replenished, and how large orders should be?
LO 2

3. Purposes of Inventory
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production
scheduling
4. To provide a safeguard for variation in
raw material delivery time
5. To take advantage of economic
purchase-order size
LO 2

4. Inventory Costs
1. Holding (or carrying) costs
– Costs for storage, handling, insurance, etc.
2. Ordering costs
– Costs of placing an order
3. Setup (or production change) costs
– Costs for setting up specific equipment
4. Shortage costs
– Costs of running out of material
LO 3

5. Independent Versus Dependent
Demand
• Independent demand: the demands for
various items are unrelated to each other
• Dependent demand: the need for any
one item is a direct result of the need for
some other item
– Usually a higher-level item of which it is part
LO 2

6. Inventory Systems
• 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
LO 2

7. Multi-Period Models
There are two general types of multi-period
inventory systems
1. Fixed–order quantity models
• Also called the economic order quantity, EOQ,
and Q-model
• Event triggered
2. Fixed–time period models
• Also called the periodic system, periodic review
system, fixed-order interval system, and P-model
• Time triggered
LO 5

8. Key Differences
• To use the fixed–order quantity model, the
inventory remaining must be continually
monitored
• In a fixed–time period model, inventory
counting/ordering takes place at the
review period
LO 5

9. Fixed–Order Quantity and Fixed–
Time Period Differences
LO 5

10. Fixed-Order Quantity Model
Models
• Demand for the product is constant and
uniform throughout the period
• Lead time (time from ordering to receipt) is
constant
• Price per unit of product is constant
• Inventory holding cost is based on
average inventory
• Ordering or setup costs are constant
• All demands for the product will be
satisfiedLO 4

11. Basic Fixed–Order Quantity
Model
Place OrderLead time
Receive order
Use inventory
LO 4

12. Basic Fixed-Order Quantity
(EOQ) Model Formula
inventoryofunitpercoststorageandholdingAnnualH
timeLeadL
pointReorderR
costsetupororderanplacingofCostS
quantityOrderQ
unitperCostC
DemandD
costannualTotalTC
H
2
Q
+S
Q
D
+DC=TC
=
=
=
=
=
=
=
=
LO 4

13. Annual Product Costs, Based
on Size of the Order
LO 4

14. Establishing Safety Stock
Levels
• Safety stock: amount of inventory carried in addition
to expected demand
– Safety stock can be determined based on many different
criteria
• A common approach is to simply keep a certain
number of weeks of supply
• A better approach is to use probability
– Assume demand is normally distributed
• Assume we know mean and standard deviation
LO 4

15. ABC Classification
LO 2

16. Inventory Accuracy and Cycle
Counting
• Inventory accuracy: refers to how well
the inventory records agree with physical
count
• Cycle counting: a physical inventory-
taking technique in which inventory is
counted on a frequent basis rather than
once or twice a year
LO 2