MODULE 9: Inventory Management Policies

• It is a stock or items a business keeps on hand to meet customer demand and buffer against supply chain issues.

  Inventory
• Types of Inventory

  • Raw Materials
  • Work-in-Process (WIP)
  • Finished Goods
  • Maintenance, Repair, and Operating (MRO) Supplies
• Materials acquired for use in production but not yet transformed.

  Raw Materials
• Partially completed goods that are still in the production process.

  Work-in-Process (WIP)
• Products that are completed and ready for sale to customers.

  Finished Goods
• Items used in supporting production and maintenance activities but not part of the final product.

  Maintenance, Repair, and Operating (MRO) Supplies
• Relevant Inventory Costs

  • Holding Costs
  • Ordering Costs
  • Shortage Costs
  • Purchase Costs
• Costs for storing and managing inventory, including warehousing and insurance.

  Holding Costs
• Costs associated with placing orders and receiving goods.

  Ordering Costs
• Costs incurred when inventory levels cannot meet demand, leading to lost sales or production delays.

  Shortage Costs
• The cost of buying inventory, often varying with quantity ordered.

  Purchase Costs
• Policies governing how an organization manages its stock of goods to balance supply and demand efficiently.

  Inventory Management Policies
• Importance of Inventory Management Policies (IMPs)

  • Balancing Supply and Demand
  • Cost Efficiency
  • Preventing Waste and Obsolescence
  • Supporting Smooth Operations
  • Enhancing Customer Satisfaction
  • Improving Decision Making
  • Mitigating Risks in Supply Chains
  • Aligning with Business Goals
  • Adapting to Market Changes
• Inventory Management Models

  • Just-in-Time
  • Economic Order Quantity (EOQ)
  • Reorder Point
  • Safety Stock Model
  • Single Period Inventory
  • ABC Analysis
• Stocks are replenished only when needed


  Just-in-Time
• Determines the optimal order quantity minimizing total costs.

  Economic Order Quantity (EOQ)
• Signals when to reorder stock based on lead time and demand

  Reorder Point
• Extra inventory kept to buffer against unexpected demand or supply chain disruptions.

  Safety Stock Model
• It can be used for items with limited selling periods or shelf lives, focus on ordering the optimal quantity to minimize leftovers or stockouts.

  Single Period Inventory
• Categorizes inventory based on value

  ABC Analysis
• High value, low quantity (e.g., luxury watches)

  A-items
• Moderate value and quantity

  B-items
• Low value, high quantity (e.g., office supplies)

  C-items
• It calculates the ideal order quantity that minimizes total inventory costs, including holding and ordering costs.

  Economic Order Quantity (EOQ)
• It balances the trade-off between the costs of ordering frequently and holding large quantities of stock.

  Economic Order Quantity (EOQ)
• FORMULA OF EOQ

  $EOQ=$$\sqrt{\frac{2DS}{H}}$
• D in EOQ means...

  Annual Demand (units per year)
• H in EOQ means...

  Holding cost per unit per year
• This sets a specific inventory level at which a new order is placed to replenish stock before it runs out.

  Reorder Point
• FORMULA of Reorder Point

  $ROP\ =$$\ \left(d\ \cdot\ L\right)\ +$$\ Safety\ Stock$
• d in ROP means...

  Daily demand
• L in ROP means...

  Lead time in days
• It is an extra inventory kept to buffer against unexpected demand or supply chain disruptions.

  Safety Stock
• FORMULA of Safety Stock

  $Safety\ Stock\ =$$\ Z\ \cdot\ \sigma_d\cdot\sqrt{L}$
• Z in Safety Stock means...

  Service level factor
• $\sigma_d$ in Safety Stock means...


  Standard deviation of daily demand
• L in Safety Stock means...

  Lead time in days
• This inventory is used for items with limited selling periods or shelf lives.

  Single Period Inventory
• FORMULA of Single Period Inventory

  $Q\ =$$\ \frac{Cu}{Cu\ +\ Co}$
• $Cu$ in Single Period Inventory means...


  Cost of underestimating demand (a.k.a, profit per unit)