Forms of Inventories

1. Raw materials
2. Maintenance, repair, and operating supplies
3. Work-in-process (WIP)
4. Finished goods
Inventory-Related Costs
1. Ordering or setup costs
2. Inventory carrying or holding costs
3. Stockout costs
4. Opportunity costs
5. Cost of goods
Functions of Inventories
1. Transit Inventories
2. Buffer Inventories (safety stocks)
3. Anticipation Inventories
4. Decoupling Inventories
5. Cycle Inventories
Priorities for Inventory Management: The ABC Concept
a. A items-15-20% of items that account for 75-80% of annual inventory value
b. B items-30-40% of items that account for 15% of annual inventory value
c. C items-40-50% of items that account for 10-15% of annual inventory value

The Economic Order Quantity (EOQ)

Assumptions
1. Constant rate of demand
2. Shortages not allowed
3. Stock replenishment can be scheduled to arrive exactly when inventory drops to zero
4. Purchase price, ordering cost, and per unit holding cost are independent of quantity
ordered
5. Items are ordered independently of each other

Q = order quantity
U = annual usage
CO = order cost per order
CH = annual holding cost per unit