Inventory Management McGrawHill/Irwin Copyright © 2012 by The McGrawHill Companies, Inc. All rights reserved You should be able to: Define the term inventory, list the major reasons for holding inventories, and list the main requirements for effective inventory management Discuss the nature and importance of service inventories Explain periodic and perpetual review systems Explain the objectives of inventory management Describe the ABC approach and explain how it is useful Describe the basic EOQ model and its assumptions and solve typical problems Describe the economic production quantity model and solve typical problems Describe the quantity discount model and solve typical problems Describe reorder point models and solve typical problems 10 Describe situations in which the singleperiod model would be appropriate, and solve typical problems Student Slides 13-2 Inventory A stock or store of goods Independent demand items Items that are ready to be sold or used Inventories are a vital part of business: (1) necessary for operations and (2) contribute to customer satisfaction A “typical” firm has roughly 30% of its current assets and as much as 90% of its working capital invested in inventory Student Slides 13-3 Management has two basic functions concerning inventory: Establish a system for tracking items in inventory Make decisions about When to order How much to order Student Slides 13-4 Periodic System Physical count of items in inventory made at periodic intervals Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item An order is placed when inventory drops to a predetermined minimum level Twobin system Two containers of inventory; reorder when the first is empty Student Slides 13-5 Purchase cost The amount paid to buy the inventory Holding (carrying) costs Cost to carry an item in inventory for a length of time, usually a year Ordering costs Costs of ordering and receiving inventory Setup costs The costs involved in preparing equipment for a job Analogous to ordering costs Shortage costs Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit Student Slides 13-6 Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q The total cost curve reaches its minimum where the carrying and ordering costs are equal QO Student Slides DS H 2(annual demand)(order cost) annual per unit holding cost 13-7 ... and as much as 90% of its working capital invested in inventory Student Slides 13-3 ? ?Management? ?has two basic functions concerning inventory: Establish a system for tracking items in? ?inventory Make decisions about... You should be able to: Define the term? ?inventory, list the major reasons for holding inventories, and list the main requirements for effective? ?inventory? ?management Discuss the nature and importance of service inventories... Periodic System Physical count of items in? ?inventory? ?made at periodic intervals Perpetual? ?Inventory? ?System System that keeps track of removals from? ?inventory? ? continuously, thus monitoring current levels of each item