INVENTORY CONTROL: FUNDAMENTALS

Operations Manager usually develop a

Plan specifying DESIRED levels for
materials and they organize jobs to carry
out this Plan. The basics of inventory
control are simply an application of
control theory. Inventory control relates
closely to planning and organizing.

The concept of Independent and
Dependent Demand.

Information flows are essential to a
control system. Without them, a system
simply cannot exist or if it does, it is
certainly inoperable.
INVENTORY CONCEPTS
Inventory Defined Inventory is stores of goods and
stocks. In manufacturing, inventories are called
stock-keeping items and are held at a stock (storage)
point. Stock-keeping items usually consist of:

1. Raw materials

2. Work-in-progress

3. Finished products and

4. Supplies.

I nventory Control is the technique of maintaining a
stock-keeping items at desired levels
Why Inventories?
The fundamental reason for carrying inventories is that
it is physically impossible and economically impractical
for each stock item to arrive exactly where it is needed
exactly when it is needed.
Reasons:
Primary Physically impossibility of getting right amount
of stock at exact time of need.
Economically impractical of getting right amount of
stock at exact time of need.
Secondary favorable return on investment
Buffer to reduce uncertainty
Smooth operations
smooth production
reduce material handling costs
Price advantage (bulk purchases)
Independent demands originates in a market
and generates requests for end products
(finished goods). The demand comes from
many sources: retailers and wholesalers,
specific customers, other manufacturing plants,
and replacement uses.
Even though the demand from each individual
customer is variable in both timing and
quantity, the sum of the demand from all
customers tends to be quite predictable.
The basic decisions in Inventory management
can be simplified to two main questions:

1. When do I place an order for replacement of
inventory (When do I order?)
2. How much should I order?

Finance and accounting have an important stake in inventory
because it represents economic value and significant costs
in providing it.
Many of the models for inventory system, such as
Economic Order Quantity (EOQ) model, rely heavily on
economic evaluations. EOQ minimizes the sum of the
holding cost and the ordering costs.

Formula:
1. Total Inventory Cost Model:
C = (Q/2( (H) + (D/Q) (S)
Where C = Total annual cost of holding inventory and ordering
inventory when it is ordered in lot sizes of Q units.
D = Annual demands, in units per year
H =Cost of holding one unit in inventory for one year.
S = Ordering cost for one order or setup cost for one production lot.
Expressed per order placed.
Q = Average lot size, in units.
Q/2 = Average Inventory. It is the mid-value between the highest
inventory level, (Q) and the lowest inventory level.
D/Q = Average number of orders placed per year.

EOQ Model
The Economic Order Quantity (EOQ)
Model:
EOQ = 2DS/H Where

D = Annual demand
S = Ordering or Setup Costs
H = Holding cost per unit per year