Inventory Management

Oxford University Press 2007, All rights

reserved.

Uses of Inventory
To satisfy the
expected customer
demand
(Anticipation
Inventory)
To protect
against price
increases and
to take
advantage of
Quantity
Discounts

Inventory

To avoid stock
outs (Safety
Stock or Buffer
Stock)

To minimize the
total cost by
ordering the
Economic
Order Quantity
(Cycle
Stock)

To provide buffer
between successive
operations (Decoupling
Inventory or Work-inprocess Inventory)

To satisfy periods of
seasonal high demand
(Seasonal Inventory)

To act as a buffer between

various elements of the
Supply-Chain (SuppliersProducers-DistributorsWholesalers-RetailersCustomers) (Pipeline or
Transit Stock)

Oxford University Press 2007, All rights

reserved.

Role of Other Functional Departments in

Inventory Management
Finance Department

Demand
forecast of
finished goods
so that raw
materials can
be procured
accordingly
Marketing
department
Information
regarding changes
made in the
materials quality to
enhance the quality
of finished goods

Salaries &
wages of
employees
in the
materials
department

Formulation
of annual
budget for

Feedback
regarding quality
requirements of
finished goods
and thus the
materials used

Installation
of ERP or
other
software in
the materials
department

materials

Information
regarding
payments to
be made to
suppliers

Materials
Department
Training of
employees in
the materials
department
regarding use of
ERP and other
software

Information
systems
department

Information
regarding the
ordering cost
and carrying
cost figures to
be used in
order size
calculations

Recruitment
of
employees
in the
Materials
Department

Performance
appraisal of
employees in
the materials
department
Human
resources
department

Training &
development of
employees in
the materials
department
Requirement
of suitable
software in
the materials
department

Oxford University Press 2007, All rights

reserved.

Types of Inventory Management Systems

Inventory Management
Systems

Independent Demand Inventory

Management Systems

For Retailers

For Manufacturers

ABC
Classification
of Items

Category A
Items

EOQ Model for

Manufacturers

Category
B Items

Basic Economic
Order Quantity
(EOQ) Model

EOQ Model
with Quantity
Discounts

Dependent Demand
Inventory Management
Systems

Material
Requirements
Planning (MRP)
Systems

Category
C Items

Just-In-Time
(JIT)
Systems
Hybrid MRP-JIT
Systems

Periodic
Review
System

EOQ Model with

Differential
Discounting

EOQ Model
with Safety
Stock

EOQ Model
with Intentional
Shortages

Oxford University Press 2007, All rights

reserved.

The Retailers Model of Inventory

Management
(Economic Order Quantity, EOQ Model)
Inventory decreases at a
constant rate
In
v
e
n
t
o
r
y

Level of Maximum Inventory

L
e
v Q
e
l

Ist Inventory
Cycle

IInd Inventory
Cycle

IIIrd Inventory
Cycle

IVth Inventory
Cycle

0
t

t
Time

Ist order is placed &

immediately the goods
are received

IInd order is placed &

immediately the goods
are received

IIIrd order is placed &

immediately the goods
are received

Oxford University Press 2007, All rights

reserved.

Safety Stock
Inventory decreases at a
constant rate
In
v
e
n
t
o
r
y

Level of Maximum Inventory

L
e
v Q
e
l

R E O R

D E R

L E V E L

500 units

0
Lead time
(10 days)
Ist order is placed

IInd order is
placed

The goods are received

IIIrd order is
placed
The goods are received

Time

The goods are

received

Oxford University Press 2007, All rights

reserved.

Inventory decreases
at a constant rate
I
n
v
e
n
t
o
r
y Q
L
e
v
e
l 0

Level of Maximum Inventory

Inventory
decreases at
a faster rate
R E O R
500
units

D E R

L E V E L

Stock-out

Ist order is placed

Lead time
IInd order
(10 days)
is placed
The goods are
received

The goods are

received

IIIrd order
is placed

The goods are

received

Time

EXCESSIVE CONSUMPTION OF INVENTORY DURING LEAD TIME

Inventory decreases
at a constant rate
I
n
v
e
n
t
o
r
y Q
L
e
v
e
l

Level of Maximum Inventory

LEAD TIME
UNDULY
STRETCHED BY
THE SUPPLIER
R E O R
500
units

D E R

L E V E L

Stock-out

0
Ist order is placed

Normal
Lead time
(10 days)

IInd order
is placed
The goods are
received

The goods are

received

Time

Oxford University Press 2007, All rights

reserved.

Inventory decreases
at a constant rate
Level of Maximum Inventory

I
n
v
e Q
n
t
o
r
y
L
e
v
e
l

Inventory
decreases at
a faster rate
R E O R

D E R

L E V E L

500
units

200
units

IInd order
is placed

Ist order
is placed

S A F E T Y

S T O C K

Time

Inventory decreases
at a constant rate
Level of Maximum Inventory
I
n
v
e Q
n
t
o
r
y
L
e
v
e
l

R E O R

D E R

L E V E L

LEAD TIME
UNDULY
STRETCHED BY
THE SUPPLIER

500
units
200
Normal
units
Lead time
Ist order (10 days) The goods are
is placed
received

S A F E T Y

S T O C K
Time

Oxford University Press 2007, All rights

reserved.

Safety stock determination when DDLT

follows Normal Distribution Curve
Inventory decreases at a
constant rate

Level of Maximum Inventory

In
v
e
n
t
o Q
r
y
L
e
v
e
l

R E O R

D E R

L E V E L

S A F E T Y
0

S T O C K

(1-)
Time

Inventory decreases
at a faster rate

Out-of-stock
situation

Lead time

Oxford University Press 2007, All rights

reserved.

Service Level

Service level

Average
DDLT

Safety stock
D
D
L
T

(1- )
Out-of-stock situation

Oxford University Press 2007, All rights

reserved.

10

EOQ Model with Intentional

Shortages
Inventory decreases at a
constant rate d
In
v
e
n
t
o
r
y

Level of Maximum Inventory

L
e
v
e Q
l

(Q-S)
t2

0
t1
S

t
Time
The goods are received

Oxford University Press 2007, All rights

reserved.

11

Production Model of Inventory Management

(Manufacturers Model)
Rate of
production (p)

LEVEL OF MAXIMUM INVENTORY

Only sales of
Items taking
place at rate (d)
Ist Inventory
cycle

IInd Inventory
cycle

Producton & sales

simultaneously at
rate (p-d)

0
t1
Ist production
run

Time

t2
Production halts

IInd
production
run

Oxford University Press 2007, All rights

reserved.

12