Exercise 1.

Inventory Management
Kathrina Ardan
Kristiana Mikaela Ayeng
Christian Balanquit
Trisha Gatdula

Abstract
Introduction
Inventory is a stock of items kept by an
organization to meet internal or external
customer demand (1). It is usually perceived as a
stock of finished product but actually can be
composed of different types mainly:
a) Raw material inventory
b) Work-in-process inventory (WIP)
c) Maintenance/repair/operating inventory
d) Finished goods inventory (2).

Significance to the Industry and To Your

Everyday Life
Inventory is one of the basic but most important
part of the operations . Example kung bakit.
Having a good inventory management can make
the firms operations flexible. Through inventory,
a firm can be able to provide the anticipated
customer demand. It also allows a smooth
operation process with the use of WIP when the
operation experiences disruptions. If the
production encounters supplier shortages,
quality or delivery problems, the inventory can
protect the firm form providing varied products.
Basically, there are two types of inventory
system: Periodic and Perpetual Inventory
Systems. The main difference between the two
inventory methods is the frequency of (inventory)
data updates. Periodic Inventory System is
usually conducted by businesses that sell many
small products. The inventory data are recorded
in a specified interval (usually once ayear) and
the sold merchandises are not considered as
cost of goods sold (CoGS). Perpetual Inventory

System on the other hand deducts the sold

products from the inventory instantly. Inventory
data are updated every time sales occur, which
is why it is also referred to as point-of-sale
system.
Companies select the inventory system that they
will use based on sales rate and demand.
Moreover, inventory control models depend
whether the demand for an item is either
dependent or independent. An item has an
independent demand if its demand is
determined by the market place. Its demand
cannot be associated to the demand of another
item. Unlike if an item has a dependent demand,
its demand is controlled directly or associated
with the demand of another item. For example,
the demand for the paper is independent to the
demand of the shampoo while the demand of the
conditioner is dependent on the demand of the
shampoo.

Key Terms To Remember and Formula

Review
Key Terms:

Inventory
Managementis
the
supervision of inventories, mainly to keep
it in an adequate amount to meet
customer demand and also be costeffective.
Inventory System- is the guidelines which
keep the inventory in track.
Independent Demand the demand of an
item is not tied to the demand of another
item
Dependent Demand the demand of an
item is tied to the demand of another
item

Periodic Inventory System conducted

on a specified time interval, usually once
a year
Perpetual Inventory System conducted
every time a good is sold
Economic Order Quantity
Production Order Quantity

B. Product Order Quantity (POQ)

Assumptions:
1. When inventory builds up over a period of
time after an order has been placed.
2. when units are produced and sold
simultaneously. (2)

Formulas:

Single Period Inventory Model:

Fixed Order Quantity Models

Q =d avg + z
where Q=optimum order quantit y
d avg=average demand
z=tabular value of the probabillity P

FOQ models are

independent demand.

inventory

models

for

A. Economic Order Quantity

Descriptions ng EOQ

=standard deviation of demand

u
Co +C

C
Where P= u
C o=Excess cost per unit
Cu =Shortage cost per unit
Figure 1: Annual cost versus Order Quantity

Multi Period Inventory System:

1) Fixed-Order Quantity Models (FOQ)

A. Economic Order Quantity (EOQ)
Assumptions:
1. Demand is known, constant and independent.
2. Lead time is known and constant.
3. Receipt of inventory is instantaneous and
complete.
4. Quantity discounts are not possible.
5. Ordering/set-up cost and holding cost are the
only variable costs.
6. Stockouts can be completely avoided if orders
are on time. (2)

Minimizing total cost is the objective of inventory

models. With the assumptions on EOQ as stated
before, it can be concluded that minimizing the
set-up and holding cost will also minimize the
total cost given that the cost for the inventory is
held constant. Figure 1 shows the relationship
between the total cost curve, holding cost curve,
set-up/ordering cost curve. The total costs is
graphed as a function of the order quantity.
For the set-up or order cost curve, the setup/ordering cost decreases as the order quantity
increases because as the quantity ordered
increases, the total number of orders placed per
year will also decrease. While for the holding
cost curve, the holding cost increases as the
order quantity increases. Larger number of
inventories are maintained resulting for a larger
holding cost.

At the point of intersection of the order cost

curve and the holding cost curve, the optimal
order quantity occurs. This is where the ordering
cost is equal to the holding cost. It can also be
seen from the graph that at the optimal order
quantity, Q*, the total cost is at its minimum.
Thus, reducing the order or holding cost will
reduce the total cost curve. Also, reducing the
total cost curve reduces the optimal order
quantity.
B. Product Order Quantity
Descriptions ng POQ

36000
2000
(25)+
( 0.45)
2000
2

TC=$ 3150 0

Plugging in

TC=DC +

Q (using purchase price) in TC

D
Q
S+ H
Q
2

TC=( 36000 ) (0.82)+

The three types of FOQ with safety stock

36000
6000
(25)+
(0.45)
6000
2

TC=$ 31020
Therefore, Cesar Rogo Computers should take
the discount, as it will reduce the total cost for
purchasing the disks.

Application
3. Given:
D = 36000
S = $25
H = $0.45
Purchase Price = $0.85
Discount Price = $0.82
Quantity needed to qualify
discount = 6000 disks

TC=( 36000 ) (0.85)+

4. Given:
D = 20000
S = $40
H = 0.2 c, i = 0.2
Purchase Price:
for

the

Using Purchase Price:

Q=

2 ( 36000 )( 25 )
2 DS
=
=2000 disks
H
0.45

Using Discount Price:

Q =6000
Plugging in

TC=DC +

Q (using purchase price) in TC

D
Q
S+ H
Q
2

Conclusions and Areas for Further

Investigation
References

(1) R. Russel and B. Taylor III, Operations

Management, 3rd ed., Multimedia Version, Upper
Saddle River, N.J.: Prentice Hall, 2000, pp 588620.
(2) Heizer, J. and Render