bab 10

1. Chapter
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
10
Inventory
Management

2. 21-2
1)Inventory Management
• Inventory can be a large percentage of a
firm’s assets
• There can be significant costs associated
with carrying too much inventory
• There can also be significant costs
associated with not carrying enough
inventory
• Inventory management tries to find the
optimal trade-off between carrying too
much inventory versus not enough

3. 21-3
2)Types of Inventory
• Manufacturing firm
• Raw material – starting point in production
process
• Work-in-progress
• Finished goods – products ready to ship or sell
• Remember that one firm’s “raw material”
may be another firm’s “finished good”
• Different types of inventory can vary
dramatically in terms of liquidity

4. 21-4
3)Inventory Costs
• Carrying costs – range from 20 – 40% of
inventory value per year
• Storage and tracking
• Insurance and taxes
• Losses due to obsolescence, deterioration or theft
• Opportunity cost of capital
• Shortage costs
• Restocking costs
• Lost sales or lost customers
• Consider both types of costs and minimize the
total cost

5. 21-5
4)EOQ Model
• The EOQ model minimizes the total inventory cost
• EOQ assumptions: constant/uniform demand, constant
unit price, constant carrying cost, constant ordering cost,
instantaneous delivery & independent orders.
• Total carrying cost = (average inventory) x (carrying cost
per unit) = (Q/2)(CC)
• Total restocking cost = (fixed cost per order) x (number of
orders) = F(T/Q)
• Total Cost = Total carrying cost + total restocking cost =
(Q/2)(CC) + F(T/Q)
CC
TF
Q
2*
=

6. 21-6
Figure 21.3

7. 21-7
Example: EOQ
• Consider an inventory item that has
carrying cost = $1.50 per unit. The fixed
order cost is $50 per order and the firm
sells 100,000 units per year.
• What is the economic order quantity?
2582
50.1
)50)(000,100(2*
==Q

8. 21-8
Extensions
• Safety stocks
• Minimum level of inventory kept on hand
• Increases carrying costs
• Reorder points
• At what inventory level should you place an
order?
• Need to account for delivery time

9. Example
• Consider the following inventory information:
-order can be placed only in multiple of 100 units
-annual unit usage is 300,000. (assume a 50-week in your
calculation)
-the carrying cost is 30% of the purchase price of the goods.
-the purchase price is $10 per unit.
-the ordering cost is $50 per order.
-the desired safety stock is 1,000. (this does not include delivery-
stock)
-delivery time is 2 weeks.
• Given this information:
a. what is the optimal EOQ?
b. how many orders will be placed annually?
c. at what inventory level should a reorder be made? (keown et al 2011)
9

10. a) EOQ = √2SO/C = √[2(300,000)($50)]/$3 = 3,162 unit (but
because orders must be placed in 100-unit lots, the effective
EOQ becomes 3,200
b) Total usage/EOQ = 300,000/3,200 = 93.75 orders per year
c) Inventory point = delivery-time stock + safety stock
= (2/50) x 300,000 + 1,000
= 12,000 + 1,000
= 13,000 units.
10

11. Inflation and EOQ
11
Inflation affects the EOQ model in 2 ways
1) EOQ model can be modified when price
increases-modified by anticipatory buying
2) Inflation also pushes the interest up and will
increases the carrying cost.

12. Other Inventory Management
Techniques
• Derived-Demand Inventories
• Materials Requirements Planning (MRP)
- a set of procedures used to determine
inventory levels for demand-dependent
inventory types such as work-in-progress and
raw materials.
• Just-in-Time Inventory (JIT)
- a system for managing demand-dependent
inventories that minimizes inventories holding.
12

13. 13
Inventory Management - ABC
• Classify inventory by cost, demand and
need
• Those items that have substantial shortage
costs should be maintained in larger
quantities than those with lower shortage
costs
• Generally maintain smaller quantities of
expensive items
• Maintain a substantial supply of less
expensive basic material