By :

Raman Preet Singh

 Definitions
• Inventory-A physical resource that a firm
holds in stock with the intent of selling it
or transforming it into a more valuable
state.

• Inventory System- A set of policies and

controls that monitors levels of inventory
and determines what levels should be
maintained, when stock should be
replenished, and how large orders should
be
Inventory
Def. A physical resource that a firm
holds in stock with the intent of
selling it or transforming it into a
more valuable state.
• Raw Materials
• Works-in-Process
• Finished Goods
• Maintenance, Repair and
Operating (MRO)
 Expensive Stuff
• The average carrying cost of inventory
across all mfg.. in the U.S. is 30-35% of
its value.
• What does that mean?
• Savings from reduced inventory result
in increased profit.
• Average Aggregate Inventory
Value:
How much of the company’s total
assets are invested in inventory?
• Ford:6.825 billion
 Methods of Inventory
Management
• ABC classification
• VED classification
• HML classification
• SDE
• FSN
• EOQ
• JIT
 ECONOMIC ORDER
QUANTITY
 What should be the size of the order?
• Small orders result in:
– low inventory levels & carrying costs
– frequent orders & higher ordering costs
• Large orders result in:
– higher inventory levels & carrying costs
– infrequent orders & lower ordering costs
• EOQ or Opt Q is the order quantity
at which the total cost , comprising
ordering cost plus carrying cost is
the least.
Typical assumptions made…
– Annual demand (D), carrying cost (C) and
ordering cost (S) can be estimated
– Demand for the product is constant and
uniform throughout the year
– Demand occurs at a uniform rate
– Orders are received all at once
– Ordering costs are constant
– Acquisition cost is fixed, i.e., no quantity
discounts
– Price per unit of product is constant
Graphical presentation of
EOQ

TOTAL
COST
CARRYING
COST (Q/2)H
Cost

ORDERIN
G COST
EOQ DS/Q

Order Quantity Size Q

 ECONOMIC ORDER
QUANTITY

• How to find the OPTIMAL QUANTITY

or EOQ?

• Q= 2DCo/Ch
D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of
inventory
¶ An auto industry purchases spark plugs at the rate of Rs. 25
per piece. The annual consuption of spark plug is 18,000 units.
If the ordering cost is Rs. 250 per order and carrying cost is
25% p. a. What would be the EOQ?
 Calculation of EOQ:
Annual demand (D) = 18000 units
Unit price (P) = Rs.25
Ordering cost per order (C0) = Rs.250
Carrying charges in % = 25% p. a.
Carrying charges per unit (Ch) = Rs 25 * .25
= Rs 6.25

EOQ = 2 *D *C0
Ch

= 2*18000*250
6.25
= 1200 units.