Nunticha Lorvitayaoran
ID: 5513961
Chapter 12
Inventory
Definition
A stock or store of goods
Types of Inventory
Objectives of Inventory Control
To achieve satisfactory levels of customer service while keeping inventory
costs within reasonable bounds
Inventory Management
Management has two basic functions concerning inventory:
1.Establish a system for tracking items in inventory
2.Make decisions about When to order and How much to order
Effective Inventory Management
Requires:
- A system keep track of inventory
- A reliable forecast of demand
- Knowledge of lead time and lead time variability
- Reasonable estimates of
holding costs
ordering costs
shortage costs
- A classification system for inventory items
Demand Forecasts and Lead Time
Forecasts
 Inventories are necessary to satisfy customer demands, so it is
important to have a reliable estimates of the amount and timing of
demand
 Lead time
Time interval between ordering and receiving the order
 Point-of-sale (POS) systems
A system that electronically records actual sales
Such demand information is very useful for enhancing forecasting and
inventory management
ABC Classification System
Cycle Counting
 Cycle counting
A physical count of items in inventory
 Cycle counting management
How much accuracy is needed?
 A items: ± 0.2 percent
 B items: ± 1 percent
 C items: ± 5 percent
Basic EOQ Model
 The basic EOQ model is used to find a fixed order quantity that will
minimize total annual inventory costs
 Assumptions
 Only one product is involved
 Annual demand requirements are known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single delivery
 There are no quantity discounts
The Inventory Cycle
Total Annual Cost
Goal: Total Cost Minimization
Deriving EOQ
 Using calculus, we take the derivative of the total cost function and set
the derivative (slope) equal to zero and solve for Q.
 The total cost curve reaches its minimum where the carrying and
ordering costs are equal.
2 DS
2(annual demand)(or der cost)
Q 

H
annual per unit holding cost
*
EPQ: Inventory Profile
EPQ – Total Cost
When to Reorder
 When the quantity on hand of an item drops to this amount, the item is
reordered.
 Determinants of the reorder point
1. The rate of demand
2. The lead time
3. The extent of demand and/or lead time variability
4. The degree of stock out risk acceptable to management
Safety Stock

As the amount of safety stock carried increases, the risk of stock out
decreases.
 This improves customer service level
 The probability that demand will not exceed supply during lead
time
 Service level = 100% - Stock out risk