1. Chapter 17
Inventory Control

2. Learning Objectives
Explain the different purposes for keeping inventory.
Understand that the type of inventory system logic that is appropriate for an item depends on the type of demand for that item.
Calculate the appropriate order size when a one-time purchase must be made.
Describe what the economic order quantity is and how to calculate it.
Summarize fixed–order quantity and fixed–time period models, including ways to determine safety stock when there is variability in demand.
Discuss why inventory turn is directly related to order quantity and safety stock.

3. Inventory
You should visualize inventory as stacks of money sitting on forklifts, on shelves, and in trucks and planes while in transit
For many businesses, inventory is the largest asset on the balance sheet at any given time
Inventory is often not very liquid
It is a good idea to try to get your inventory down as far as possible
The average cost of inventory in the United States is 30 to 35 percent of its value
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4. Definition of Inventory
Inventory: the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-process
Manufacturing inventory: refers to items that contribute to or become part of a firm’s product
Inventory system: the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be
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5. Purposes of Inventory To maintain independence of operations
To meet variation in product demand
To allow flexibility in production scheduling
To provide a safeguard for variation in raw material delivery time
To take advantage of economic purchase-order size
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6. Inventory Costs Holding (or carrying) costs
Costs for storage, handling, insurance, and so on
Setup (or production change) costs
Costs for arranging specific equipment setups, and so on
Ordering costs
Costs of placing an order
Shortage costs
Costs of running out
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7. Independent Versus Dependent Demand
Independent demand: the demands for various items are unrelated to each other
For example, a workstation may produce many parts that are unrelated but meet some external demand requirement
Dependent demand: the need for any one item is a direct result of the need for some other item
Usually a higher-level item of which it is part
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8. Inventory Control-System Design Matrix: Framework Describing Inventory Control Logic

9. Inventory Systems Single-period inventory model
One time purchasing decision (Example: vendor selling t-shirts at a football game)
Seeks to balance the costs of inventory overstock and under stock
Multi-period inventory models
Fixed-order quantity models
Event triggered (Example: running out of stock)
Fixed-time period models
Time triggered (Example: Monthly sales call by sales representative)
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10. Multi-Period Models
There are two general types of multi-period inventory systems
Fixed–order quantity models
Also called the economic order quantity, EOQ, and Q-model
Event triggered
Fixed–time period models
Also called the periodic system, periodic review system, fixed-order interval system, and P-model
Time triggered
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11. Key Differences
To use the fixed–order quantity model, the inventory remaining must be continually monitored
In a fixed–time period model, counting takes place only at the review period
The fixed–time period model
Has a larger average inventory
Favors more expensive items
Is more appropriate for important items
Requires more time to maintain
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12. Fixed-Order Quantity Model Models
Demand for the product is constant and uniform throughout the period
Lead time (time from ordering to receipt) is constant
Price per unit of product is constant
Inventory holding cost is based on average inventory
Ordering or setup costs are constant
All demands for the product will be satisfied
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13. Basic Fixed–Order Quantity Model
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14. Basic Fixed-Order Quantity (EOQ) Model Formula
TC=Total annual cost
D =Demand
C =Cost per unit
Q =Order quantity
S =Cost of placing an order or setup cost
R =Reorder point
L =Lead time
H=Annual holding and storage cost per unit of inventory
Total
Annual =
Cost
Annual
Purchase
Cost
Annual
Ordering
Cost
Annual
Holding
Cost + + 12

15. Annual Product Costs, Based on Size of the Order
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16. We also need a reorder point to tell us when to place an order
Deriving the EOQ
Using calculus, we take the first derivative of the total cost function with respect to Q, and set the derivative (slope) equal to zero, solving for the optimized (cost minimized) value of Qopt
We also need a reorder point to tell us when to place an order 13

17. EOQ Example Example Data
Given the information below, what are the EOQ and reorder point and Total Inventory Cost?
Annual Demand = 1,000 units
Days per year considered in average
daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15 14

18. Establishing Safety Stock Levels
Safety stock: amount of inventory carried in addition to expected demand
Safety stock can be determined based on many different criteria
A common approach is to simply keep a certain number of weeks of supply
A better approach is to use probability
Assume demand is normally distributed
Assume we know mean and standard deviation
To determine probability, we plot a normal distribution for expected demand and note where the amount we have lies on the curve
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19. Fixed–Order Quantity Model with Safety Stock
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20. Fixed–Order Quantity Model with Safety Stock
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21. Fixed–Time Period Inventory Model
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22. Inventory Control and Supply Chain Management
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23. Price Break Models Selling price varies with order size Steps
Determine Q
Determine if feasible or not
Calculate TC
Choose min TC

24. Example : The Data and Order Quantities
i = 20 percent
Cost per unit…
1-499 $5.00
$4.50
1,000 and up $3.90
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25. ABC Classification
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26. Inventory Accuracy and Cycle Counting
Inventory accuracy: refers to how well the inventory records agree with physical count
Cycle counting: a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year
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27. Any Questions?