INVENTORY MANAGEMENT

Objectives
1. Define Inventory & Inventory Management.
2. Describe the purpose of Inv Mgt.
3. Identify functions of inventory.
4. Differentiate dependant & independent
Inventory.
5. Understand ABC Classifications
6. Able to apply Independent Demand Model
7. Understand Material Requirement Planning
(MRP) concept.
 INVENTORY DEFINITION

Stock of items kept to meet

demand. It includes
materials, human, money,
energy, equipment and
physical items.
 TYPES OF INVENTORY
1. Raw materials.
2. Components : parts or
subassemblies.
3. Work-In-Process.
4. Finished goods.
5. Distribution/Pipeline Inventory.
6. Maintenance, Repair and
Operational (MRO) Inventory.
INVENTORY MANAGEMENT SYSTEM

Policies and control on inventory:-

1. What levels should be maintained?
2. When should be replenished?
3. How large an order should be?
 OBJECTIVES OF INVENTORY MANAGEMENT

1. Ability in providing desired level of

customer service is the measurement
of effectiveness to inventory
management.
2. To allow cost-efficient operations thru:
a) keeping buffer stocks
b) maintaining workforce level
c) taking advantage of price discount.
 FUNCTIONS OF INVENTORY
1. To meet anticipated demand.
2. To smooth production requirements
3. To decouple operations.
4. To protect against stock-out.
5. To hedge against price increase.
6. To permit operations.
7. To take advantage of discounts.
Dependent demand
Items used to produce final product, typically components
or raw materials.

Independent demand
finished products and the numbers are influenced by the
market conditions.

E.g: Tyres, steering, seats are dependent

demand.
The car itself is an independent
Demand.
 ABC INVENTORY CLASSIFICATIONS
Often classifies inventory according to dollar value
(RM/unit x annual usage rate).
The classification are:
100
90
80
A items
% of RM Value

70
60
50
40
30
B items
20
C items
10
0
10 20 30 40 50 60 70 80 90 100

% of Inventory Items
1. Purchase/Item cost (P)
2. Holding / Carrying cost (H)
a) Capital cost
b) Storage cost
c) Risk / Obsolescence / Shrinkage costs
3. Ordering cost (O)
4. Shortage / Stock-out cost
1. Basic Economic Order Quantity
(EOQ) Model
2. Quantity Discount Model
a) Constant Carrying Costs
b) Carrying Costs as a percentage of
prices
EOQ Assumptions:
1. Only one product involved.
2. Product Dd is known and constant.
3. Lead time (L) is known and constant.
4. When to place order can be determined (ROP).
5. No quantity discounts. Price is constant.
6. Ordering cost is fixed and constant.
7. All product demand are able to meet.
8. The ordered quantity is all received at once.
1. EOQ
Q* = 2DS
H

2. Annual carrying cost

= (Q/2) * H

3. Annual ordering cost

= (D/Q) x S

4. Total annual cost

= [(Q/2) * H] + [(D/Q) x S]
Pustaka Mutiara Sdn. Bhd. purchases pens from a supplier in
Lembah Klang. The supplier sells the pens to the bookstore at
RM2.00 per unit. The cost for the bookstore to place an order is
RM23 and the inventory carrying cost is RM0.10/unit/month. The
manager estimates that the daily sales will be 134 units and the
store is open for 240 days in a year. The lead time from the time of
order placement until receipt is 3 days. The company keeps 5 days
usage of safety stock. Based on the above information, determine
the following:-

S = RM23/order, H = RM0.10/unit/mth
d = 134 units, operation = 240 days
L = 3 days, SS = 5 days
P = RM2/unit, D = 134 units x 240 days
= 32160 unit/year
S = RM23/order, H = RM0.10/unit/mth
D = 32160 unit/year

EOQ, Q* = 2DS
H

= 2(32160)(RM23
RM0.10(12 mths)

= 1110.32 @ 1110 units

T = Q* X (working days)
D
@
= Working days
N (No. of order per year)

T = 1110 x 240 days

32160
= 8.28 @ 8 days
SS = Safety Stock Daily usage, d = 134 units Lead time = 3 days
= 5 days inventories

Reorder Point, ROP

= dL + SS
= 134 units (3 days) + 5 days (134 units)
= 402 units + 670 units
= 1072 units
Maximum level of inventory is equals to Q* + SS
= 1110 units + 670 units
= 1780 units .
TARC = Ordering cost + Holding cost
= [(D/Q*) x S] + [(Q*/2) + SS] x H
= 32160 x RM23 + 1110 + 670 X RM1.20
1110 2

= RM666.38 + RM1470
= RM2136.38
Annual usage, D = 2,500 units. The item costs, P
= RM20 each. The purchasing cost per order, S =
RM100 and its insurance and storage costs are
7% and 3% respectively on tied up capital, H =
(0.1*RM20 = RM2). If the company uses an
economic ordering system, the company has to
maintain a safety stock = 2 weeks (2500/50 =
500*2/week=1000units) and a lead time, L = 1
week. If the company operates 50 weeks per year
determine the following:
b) Time between orders. (2 marks)
T = Q* X (working days)
D
c) Annual total relevant inventory management cost.
(2 marks)
= [(D/Q*) x S] + [(Q*/2) + SS] x H
Material Requirement Planning
MRP is a computer-based system that
determines the quantity of material should
be purchased in each future period to
support Master Production Schedule.
MPS is a schedule of the quantity and
timing of all end items (product or service)
to be produced over a specific period of
time.
 Objectives of MRP
1. Improve customer service
2. Reduce inventory investment
3. Improve plant operating efficiency
4. Maintain priority
 Advantages of MRP
1. It is dynamic in nature since it
reacts well to changing market
conditions.
2. Company can reduce inventories
and its associated costs since it
carries only materials needed.
 Disadvantages of MRP
1. Dependent on MPS.It will not be
successful if there is no MPS or
inaccurate MPS.
2. Requires effective computer system
to cater for large volume of
materials and suppliers and the
speed to react to changing market
situation.
 Apr 2011(A3)
Oct 2010 (A2)
Apr 2010 (Nil)
Oct 2009 (Nil)
Apr 2009 (A4)
Oct 2008 (Nil)
Apr 2008 (Nil)
Oct 2007 (A1)
Apr 2007 (A4)
Oct 2006 (Nil)