8. Functions of Inventory
1. To decouple or separate various parts of
the production process.
2. To decouple the firm from fluctuations in
demand and provide a stock of goods that
will provide a selection for customers.
3. To take advantage of quantity discounts.
4. To hedge against inflation.
9. Inventory management refers to the process of ordering,
storing and using a company's inventory: raw materials,
components and finished products.
10. Overall concerns of Inventory Management
replenishment lead time,
carrying costs of inventory,
future inventory price forecasting,
available physical space,
replenishment, returns and defective goods,
and demand forecasting.
11. Objective of Inventory Management
How inventory items can be classified.
How accurate inventory records can be maintained.
13. Unnecessary tying down of firm’s
funds and loss of profit.
Excessive carrying costs.
Risk of liquidity- difficult to convert
Physical deterioration of inventories
while in storage due to mishandling
and improper storage facilities.
What if we over react?
14. Production hold-ups – loss of labor hours.
Failure to meet delivery commitments.
Customers may shift to competitors
which will amount to a permanent loss to
May affect the goodwill and image of the
What if one is too cool!
15. Inventory control is the means by which materials of the
correct quality and in correct quantity are made available
as and when required with due regard to economic in
storage and ordering cost.
Inventory Control Systems
18. Objectives of inventory control
• To ensure smooth flow of stock.
• To provide for required quality of materials.
• To control investments in stock.
• Protection against fluctuating demand.
• Protection against fluctuations in output.
• Minimization of risk and uncertainty.
• Risk of obsolescence.
• Minimization of material cost.
19. Scope of inventory control
• Determination of inventory policies.
• Determining various stock levels
• Determining economic order size
• Safety or buffer stock
• Determining lead time
• Examining the work of inventory policy
EOQ is the order quantity that minimizes the
total holding cost and ordering cost.
22. 1. Only one product is involved.
2. Annual demand requirement is known.
3. Demand is spread evenly throughout the years so
that the demand rate is seasonally constant.
4. Lead time does not vary.
5. Each order is received in a single delivery.
6. There are no quantity discounts.
Assumptions of Basic EOQ Model
23. Production Quantity Model
EPQ is the quantity of a product that should be
manufactured in a single batch so as to minimize
the total cost that includes setup costs for the
machines and inventory holding costs.
24. 1. Only one item is involved.
2. Annual demand is known.
3. The usage rate is constant.
4. Usage occurs continually, but production occurs
5. The production rate is constant.
6. Lead time does not vary.
7. There are no quantity discounts.
Assumptions of Production Quantity
27. 1.1. Order preparation & transmittal.Order preparation & transmittal.
2.2. Order receipt & order quantity.Order receipt & order quantity.
3.3. Order processing.Order processing.
4.4. Warehouse picking & packing.Warehouse picking & packing.
5.5. Order transportation.Order transportation.
6.6. Customer delivery & unloading.Customer delivery & unloading.
6 components of order cycle
28. Reorder Point
Reorder Point is the Level of inventory at
which a new order is placed.
R = dL
Where •d = demand rate per period
•L = lead time
29. Lead time
The time required to purchase, produce,
or assemble an item.
For production – the sum of the order,
wait, move, setup, store, and run times.
For purchased items –the time between
the recognition of a need and the
availability of the item for production.
30. Material Requirement Planning (MRP)
• MRP is a dynamic system.
• Facilitates replanning when changes occur.
• System nervousness can result from too many
changes many changes.
• Time fences put limits on replanning.
• Pegging links each item to its parent allowing
effective analysis of changes.
31. Benefits of MRP
1. Better response to customer orders Better
response to customer orders
2. Faster response to market changes.
3. Improved utilization of facilities and labor.
4. Reduced inventory levels
33. Enterprise Resource Planning
An extension of the MRP system to tie in customers and
suppliers is called Enterprise Resource Planning. It also
coordinates business from supplier evaluation to
1. Allows automation and integration of many business
2. Shares common data bases and business practices
3. Produces information in real time.
34. Advantages of ERP Systems
1. Provides integration of the supply chain,
production, and administration.
2. Creates commonality of databases.
3. Can incorporate improved best processes.
4. Increases communication and collaboration
between business units and sites.
5. Has an off-the-shelf software database.
6. May provide a strategic advantage.
35. Disadvantages of ERP Systems
1. ERP is very expensive to purchase and to customize.
2. Implementation may require major changes in the
company and its processes.
3. It is so complex.
4. Involves an ongoing, possibly never completed, process
5 Expertise is limited with ongoing staffing problems.
36. ERP in the Service Sector
ERP systems have been developed for health
care, government, retail stores, hotels, and
Also called efficient consumer response (ECR)
Objective is to tie sales to buying, inventory,
logistics, and production