Inventory Management

Inventory Management
Inventory Management - 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
Types of Inventory Raw materials and purchased parts
I. Work-in-process (WIP)
II. Finished goods inventories or merchandise
III. Tools and supplies
IV. Maintenance and repairs (MRO) inventory
V. Goods-in-transit to warehouses or customers (pipeline inventory)
Inventory Functions Inventories serve a number of functions such as:
➢ To meet anticipated customer demand

➢ To smooth production requirements
➢ To decouple operations
➢ To protect against stockouts
➢ To take advantage of order cycles
➢ To hedge against price increases
➢ To permit operations
➢ To take advantage of quantity discounts
Objectives of Inventory Control
Inventory management has two main concerns:
Level of customer service - Having the right goods available in the right quantity in the right place at the right time
Costs of ordering and carrying inventories
Effective Inventory Management
➢ A system to keep track of inventory

➢ A reliable forecast of demand
➢ Knowledge of lead times
➢ Reasonable estimates of
• Holding costs
• Ordering costs
• Shortage costs
➢ A classification system
Effective Inventory Management: Inventory Counting Systems
➢ Periodic System –
• Physical count of items made at periodic intervals
• a physical count of items in inventory is madeat periodic, fixed intervals (e.g. weekly, monthly) in order to decidehow much
to order of each item. Used by many small retailers
Advantage
✓ orders for many items occur at the same time, which can resulting economies in processing and shipping orders*
Disadvantages
✓ lack of control between review

✓ the need to protect against shortages between review periods by carrying extra stock
➢ Perpetual Inventory System

• System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
• (Continuous review system) keeps track removals from inventory on a continuous basis, sothe system can provide
information on the current level foreach item.
Advantages
✓ control provided by the continuous monitoring of inventory withdrawals

✓ with the fixed order quantity, management can determinant optimal order quantity
Disadvantages
✓ added cost of record keeping

✓ physical count of inventory must still be performed periodically to verify records because of periodic errors,pilferage,
spoilage, and other factors that can reduce the effective amount of inventory
Effective Inventory Management: Inventory Counting Systems (Example of Perpetual Inventory System)
➢ Bank transactions - such as customer deposits and withdrawals

➢ Two-bin system- Two containers of inventory; reorder when the first is empty
➢ Point-of-sale (POS) system - -electronically record items at time of sale
➢ Universal product code (UPC) - Bar code printed on a label that has information about the item to which it is attached
➢ Radio frequency identification (RFID) tags - A technology that uses radio waves to identify objects, such as goods, in supply
chains
Inventory Costs-
1. Purchase cost - The amount paid to buy the inventory

2. Holding (carrying) costs- Cost to carry an item in inventory for a length of time, usually a year
3. Ordering costs - Costs of ordering and receiving inventory
4. Shortage costs - Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit
5. Setup costs
• The costs involved in preparing equipment for a job
• Analogous to ordering costs
Effective Inventory Management: ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
A - very important
B - moderately important
C - least important
ABC Classification System
A items (very important)
• 10 to 20 percent of the number of items in inventory and about 60 to 70 percent of the annual dollar value
B items (moderately important)
C items (least important)
• 50 to 60 percent of the number of items in inventory but only about 10 to 15 percent of the annual dollar value
Effective Inventory Management: Cycle Counting
➢ A physical count of items in inventory

➢ Cycle counting management
a. How much accuracy is needed?
• A items: ± 0.2 percent
• B items: ± 1 percent
• C items: ± 5 percent
b. When should cycle counting be performed?
c. Who should do it?
Economic Order Quantity
Economic order quantity models identify the optimal order quantity by minimizing the sum of annual costs that vary with order size
and frequency
a. The basic economic order quantity model

b. The economic production quantity model
c. The quantity discount model
Basic EOQ Model
The basic EOQ model is used to find a fixed order quantity that will minimize total annual inventory costs
Assumptions:
• Only one product is involved

• Annual demand requirements are known
• Demand is even throughout the year
• Lead time does not vary
• Each order is received in a single delivery
• There are no quantity discounts
The Inventory Cycle
Total Annual Cost
Total Cost = Annual Holding Cost + Annual Ordering Cost

𝑸 𝑫
= 𝒉+ 𝑺
𝟏 𝑸
Where:
Q = Ordering Quantity in Units
H = Holding (Carrying) cost per unit, usually per year
D = Demand, usually in units per year
S = Ordering Cost per Order
EOQ: Cost Minimization Goal

Goal: Total Cost Minimization
24 Deriving EOQ
➢ 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.
𝟐𝑫𝑺 𝟐 (𝑨𝒏𝒏𝒖𝒂𝒍 𝒅𝒆𝒎𝒂𝒏𝒅)(𝒐𝒓𝒅𝒆𝒓 𝑪𝒐𝒔𝒕)

𝑸𝒐 = √ =√
𝑯 𝑨𝒏𝒏𝒖𝒂𝒍 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝒉𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕
25 EOQ: Comments
➢ Annual demand, holding and ordering costs are estimated

➢ EOQ values are imprecise and are roundable
➢ EOQ is pretty robust
26 EOQ: Economic Production Quantity (EPQ)
➢ We buy parts in EOQ, but what if we produce manufacture parts and use them simultaneously?
➢ Production done in batches or lots
➢ Capacity to produce a part exceeds the part’s usage or demand rate
➢ Assumptions of EPQ are similar to EOQ except orders are received incrementally during production
27 Economic Production Quantity (EPQ)
The batch mode is widely used in production. In certain instances, the capacity to produce a part exceeds its usage (demand rate)
Assumptions
• Only one item is involved

• Annual demand requirements are known
• Usage rate is constant
• Usage occurs continually, but production occurs periodically
• The production rate is constant
• Lead time does not vary
• There are no quantity discounts
EOQ: Economic Production Quantity Assumptions
EPQ – Total Cost
EPQ
𝟐𝑫𝑺 𝒑
𝑸𝒑 = √ √𝒑−𝒖
𝑯
When to Order or Produce
Reorder point - the point in time when a new order should be placed
Lead time - the time required to receive the economic order quantity once an order is place or a setup is initiated
Reorder point - Rate of usage * Lead time
Determinants of the reorder point
• The rate of demand

• The lead time
• The extent of demand and/or lead time variability
• The degree of stockout risk acceptable to management
Because the demand for a product is not known with certainty, the possibility of a stock-out exits. Safety stock can help avoid this.
Safety stock - extra inventory carried to serve as insurance against fluctuations in demand
Reorder point - (Average rate of usage * Lead time) +Safety stock

Normal time usage = Normal Lead Time x Average Usage
Safety Stock = (Maximum Lead Time-Normal Lead Time) x Average Usage
Total Order Cost = (Annual Demand/ EOQ) x Order Cost Total
Carrying Cost = (EOQ/2) x Carrying Cos
Reorder Point: Under Certainty
ROP = d x LT
Where:
d = Demand rate (Units per period, per day, per week)
LT = Lead Time (In same time units as d)
Reorder Point: Under Uncertainty
➢ Demand or lead time uncertainty creates the possibility that demand will be greater than available supply
➢ To reduce the likelihood of a stockout, it becomes necessary to carry safety stock
Safety stock - Stock that is held in excess of expected demand due to variable demand and/or lead time
ROP =Expected Demand during Lead Time + Safety Stock
Safety Stock?
➢ As the amount of safety stock carried increases, the risk of stockout decreases.
• This improves customer service level
➢ Service level
• The probability that demand will not exceed supply during lead time
• Service level = 100% - Stockout risk
How Much Safety Stock?
The amount of safety stock that is appropriate for a given situation depends upon:
• The average demand rate and average lead time

• Demand and lead time variability
• The desired service level
41 Safety Stock
How Much Safety Stock?
ROP = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐷𝑒𝑚𝑎𝑛𝑑 𝐷𝑢𝑟𝑖𝑛𝑔 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 +𝑧𝜎𝑑𝐿𝑇
Where:
Z = Number of Standard Deviations
𝜎𝑑𝐿𝑇 = The standard deviation of Lead Time Demand
Reorder Point
When to Reorder with EOQ Ordering: Reorder Point
Reorder point - the point in time when a new order should beplaced
Lead time - the time required to receive the economic order quantity once an order is place or a setup is initiated
Reorder point - Rate of usage * Lead time
Reorder Point: Demand Uncertainty

Reorder Point: Lead Time Uncertainty
How Much to Order: FOI
➢ Fixed-order-interval (FOI) model

• Orders are placed at fixed time intervals
➢ Reasons for using the FOI model
• Supplier’s policy may encourage its use
• Grouping orders from the same supplier can produce savings in shipping costs
• Some circumstances do not lend themselves to continuously monitoring inventory position
Fixed-Quantity vs. Fixed-Interval Ordering
How Much to Order: Fixed-Interval Disadvantages
• Requires a larger safety stock

• Increases carrying cost
• Costs of periodic reviews
FOI Model
Single-Period Model
A. Single-period model
• Model for ordering of perishables and other items with limited useful lives
B. Shortage cost
• Generally, the unrealized profit per unit
𝑪𝒔𝒉𝒐𝒓𝒕𝒂𝒈𝒆 = 𝑪𝒔 = Revenue per unit – Cost per unit
C. Excess cost
• Different between purchase cost and salvage value of items left over at the end of the period
𝑪𝒆𝒙𝒄𝒆𝒔𝒔 = 𝑪𝒆 = Cost per unit – Salvage value per unit
Single-Period Model
The goal of the single-period model is to identify the order quantity that will minimize the long-run excess and shortage costs
Two categories of problem:
1. Demand can be characterized by a continuous distribution

2. Demand can be characterized by a discrete distribution
Single Period Model
1. Continuous stocking levels

• Identifies optimal stocking levels
• Optimal stocking level balances unit shortage and excess cost
2. Discrete stocking levels
• Service levels are discrete rather than continuous
• Desired service level is matched or exceeded
Single Period Model: Optimal Stocking Level

Single Period Model: Example
Ce = $0.20 per unit
Cs = $0.60 per unit
Service level = Cs/(Cs+Ce) = .6/(.6+.2)
Service level = .75
Service Level = 75%
Stockout risk = 1.00 – 0.75 = 0.25
Single Period Model: Example
Single Period Model: Operations Strategy
Too much inventory
• Tends to hide problems

• Easier to live with problems than to eliminate them
• Costly to maintain
Wise strategy
• Reduce lot sizes

• Reduce safety stock
Just-in-Time and Lean Operations
Developments of JIT and Lean Operations
• 1960’s: Developed as Toyota Production System by Taiichi Ohno and his colleagues
• 1970’s: U.S. and European auto makers began to apply JIT to improve quality and productivity
• 1990’s and beyond: Expanded the JIT concept to streamline all types of operations
Definition of JIT
• A set of techniques to increase productivity, improve quality, and reduce cost of an operations
• A management philosophy to promote elimination of waste and continuous improvement of productivity
Expected Benefits of JIT
• Reduction in throughput times
• Reduction in WIP
• Improvement in quality
• Improvement in productivity
• Reduction in resource requirements
• Improvement in customer satisfaction
• improvements in return on assets
Main Elements of JIT
• Elimination of waste
• Quality at the source
• Balanced and flexible work flow
• Respect for people
• Continuous improvement (Kaizen)
• Simplification and visual control
• Focus on customer needs
• Partnerships with key suppliers
Wastes - Anything that exceeds the minimum resources needed for the appropriate value
Toyota’s seven deadly wastes:
• Overproduction (excessive production resources)
• Inventory
• Waiting
• Transportation
• Processing
• Motion
• Defective parts
Importance of Inventory Reduction
• Inventory costs money - carrying costs, obsolescence costs, and opportunity costs
• Inventory covers up problems and bottlenecks.
• Inventory reduction forces organization and employees to eliminate sources of problems and work as a team.
Quality at the Source
• Jidoka – autonomation (automatic detection of defects, e.g., Poka-yoke)
• Employee empowerment
• Statistical process control
• Prevention orientation (elimination of root causes through PDSA cycle)
Balanced and Flexible Work Flow
• Yo-i-don (ready, set, go) system
• Stable production schedule
• Set-up time reduction
• Flow-shop and cellular layouts
• Shojinka (flexible & multi-skilled workforce)
• Teamwork
• Total productive maintenance (TPM)
Respect for People
• Productivity improvement needs employee support
• Demonstrate by
• providing cross-training opportunities
• creating a safe and equitable work environment
• encouraging people to achieve their potential by giving them greater responsibility and authority
• promoting teamwork (formal and informal)
• developing partnerships with unions

Continuous of Improvement Kaizen
Employee suggestion system
Process improvement
5S’s
1. Seiri - organization
2. Seiton - tidiness
3. Seiso - purity
4. Seiketsu - cleanliness
5. Shitsuke - discipline
Simplification and Visual Control
• Standard and simple product designs
• Andon boards
• Kanban pull system
• Flag systems
• Music as signals
• Performance display systems
Focus on Customer Needs
• Customer needs determine the “value” of a product or service
• Be responsive to customers needs (present and future)
• Strive to “delight,” not just “satisfy” customers
Partnerships with Suppliers
• Reduce number of suppliers
• Use long-term contracts
• Emphasize price, delivery, and services
• Improve communication
• Share information
• Develop local just-in-time delivery
• Provide technical support to suppliers
JIT Implementation
• Top management commitment
• Steering committee
• Education program
• Pilot project planning
• Employee training
• Pilot implementation
• Pilot post mortem
• Feedback to steering committee
• Expansion to next project
Advancements in JIT (JIT II)
• Backwards Integration of staff and line functions to suppliers (e.g., purchasing)
• Requires EDI or web access to materials and logistics systems
• On-site supplier representative(s) with transaction processing authority
• Goal: link suppliers’ cycle to firm’s cycle to mutually reduce wait and move times
JIT for Non-Manufacturing Operations (Lean Operations)
• Implement demand-pull operations
• Eliminate unnecessary activities
• Standardize process flows
• Increase process flexibility
• Reorganize physical layouts
• Upgrade housekeeping and workplace organization
JIT for Non-Manufacturing Operations (Lean Operations)
• Develop supplier partnership networks
• Level work load
• Organize problem-solving groups
• Improve quality
• Develop effective suggestion systems
• Cross-train employees
• Promote teamwork
Toyota Production System (TPS)
Toyota Production System (TPS) is a holistic approach to efficiency, generating sustainable profits, and satisfying the customer with
the highest possible quality at the lowest cost in the shortest lead-time.
I. Reduced Setup Times
All setup practices are wasteful because they add no value and they tie up labor and equipment. By organizing procedures, using
carts, and training workers to do their own setups, Toyota managed to slash setup times from months to hours and sometimes even
minutes.
II. Small-Lot Production
Producing things in large batches results in huge setup costs, high capital cost of high-speed dedicated machinery, larger inventories,
extended lead times, and larger defect costs. Because Toyota has found the way to make setups short and inexpensive, it became
possible for them to economically produce a variety of things in small quantities.
III. Employee Involvement and Empowerment
Toyota organized their workers by forming teams and gave them the responsibility and training to do many specialized tasks. Teams
are also given responsibility for housekeeping and minor equipment repair. Each team has a leader who also works as one of them
on the line
IV. Quality at the Source
To eliminate product defects, they must be discovered and corrected as soon as possible. Since workers are at the best position to
discover a defect and to immediately fix it, they are assigned this responsibility. If a defect cannot be readily fixed, any worker can
halt the entire line by pulling a cord (called Jidoka).
V. Equipment Maintenance
Toyota operators are assigned primary responsibility for basic maintenance since they are in the best position to defect signs of
malfunctions. Maintenance specialists diagnose and fix only complex problems, improve the performance of equipment, and train
workers in maintenance.
VI. Pull Production
To reduce inventory holding costs and lead times, Toyota developed the pull production method wherein the quantity of work
performed at each stage of the process is dictated solely by demand for materials from the immediate next stage. The Kamban
scheme coordinates the flow of small containers of materials between stages. This is where the term Just-in-Time (JIT) originated.
VII. Supplier Involvement
Toyota treats its suppliers as partners, as integral elements of Toyota Production System (TPS). Suppliers are trained in ways to
reduce setup times, inventories, defects, machine breakdowns etc., and take responsibility to deliver their best possible parts.
CLASSIFICATION OF INDIVIDUAL TAXPAYERS- ALIEN
RESIDENT ALIEN
➢ An individual whose residence is within the PH and who is not a citizen thereof
➢ He/She is one who is actually present in the PH and who is not mere transient or sojourner.
➢ He/She is one who lives in the PH with no definite intention as to his/her stay.
➢ He/She is one who comes to the PH for the purpose that requires extended stay for its accomplishments , so he/she makes
makes his/her home temporarily in the PH
NON-RESIDENT ALIEN
➢ An individual whose residence is not within the PH and who is not a citizen thereof
➢ He/She is one who comes to the PH for a definite purpose, which in its nature maybe promptly accomplished.
➢ He/She is one who is a mere transient or sojourner.
A. Non-Resident Alien- Engaged in Trade or Business

➢ Aliens who have business income in the Philippines
➢ Aliens who have stayed in the PH for an aggregate period of more than 180 days during the taxable year
B. Non-Resident Alien- Not Engaged in Trade or Business

➢ Aliens who does not have business income in the Philippines
➢ Aliens who have not stayed in the PH for an aggregate period of more than 180 days during the taxable year
Special Employees
➢ Regional or area Head Quarters (RHQ’s) and regional operating headquarters (ROHQ’s) of multinational entities in the PH
that are engaged in the international trade with affiliates and subsidiary branch office in the Asia-pacific region
➢ Off-Shore banking units
INCOME TAX DUE COMPUTATION – INDIVIDUAL EARNING PURELY FROM COMPUTATION
TAXABLE INCOME
Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less the deductions, if any,
authorized for such types of income, by the Tax Code or other special laws.
Gross Income xxx Gross Income 430,000
Less: Deductions xx Less: Deductions 82,500
Taxable Income XXX Taxable Income 347,500
Deduction
• Mandatory Contributions
• De Minimis Benefits
• Other Benefits
Other Benefits
• Excess from the ceiling amount in De minimis benefits

• 13th month pay
• Other benefits given aside from your basic salary
Problem
Following are the information from Mr. Dela Cruz compensation during the taxable year 2022. Note that Mr. Dela Cruz is a resident
citizen and earning purely from compensation.
Information
Basic Salary 780,000
Overtime Pay 15,000
13th month pay 65,000
De minimis benefits 62,000
Mandatory Contributions 36,000
Total Computation
Overtime Pay 15,000
Total Computation 922,000

Net Taxable Income
Total Compensation 922,000
De minimis Benefits 62,000
Other Benefits 65,000
Total Net Taxable Income 759,000
Mandatory Contributions
We deducted the mandatory contributions because it is included in the computation of the basic salary.
Minimum Benefits
The amount given as De Minimis Benefits is the amount of the total De Minimis Benefits received by the employee. Assuming that all
given De Minimis Benefits did not exceed to the ceiling amount per benefit.
Other Benefits
The amount that should be deducted as other benefit is the amount of actual other benefit received or the 90,000 ceiling whichever is
lower. In our sample problem the actual number of other benefits received is 65,000, therefore the amount that we must deduct to get
the net taxable income is 65,000
Income Tax Tables under Train Law – Applicable from Year 2018 - 2022
ANNUAL INCOME BASIS AMOUNT AADDITIONAL TAX RATE OF EXCESS OVER

250,000 and below - 0%
Above 250,000 to 400,000 - 20% 250,000
Above 400,000 to 800,000 30,000 25% 400,000
Above 800,000 to 2,000,000 130,000 30% 800,000
Above 2,000,000 to 8,000,000 490,000 32% 2,000,000
Above 8,000,000 2.41 million 35% 8,000,000
Income Tax Tables under Train Law – Applicable from Year 2023 Onwards
ANNUAL INCOME BASIS AMOUNT AADDITIONAL TAX RATE TAX RATE

250,000 and below 0%
Above 250,000 to 400,000 15% 250,000
Above 400,000 to 800,000 22,500 20% 400,000
Above 800,000 to 2,000,000 102,500 25% over 800,000
Above 2,000,000 to 8,000,000 402,500 30% over 2,000,000
Above 8,000,000 2.2025 million 35% 8,000,000
Tax Due Computation
Net Taxable Income 759,000
Basic Tax 30,000
Tax Rate (25% of excess 400,000) 89,750
Tax Due - 2022 119,750

Problem
Following are the information from Mr. Dela Cruz compensation during the taxable year 2022. Note that Mr. Dela Cruz is a resident
citizen and earning purely from compensation.
Information
Basic Salary 420,000 Laundry Allowance 4,000
Overtime Pay 30,000 Medical Assistance 15,000
13th month pay 35,000 Awards 7,000
14th month pay 35,000 CBA 8,000
Uniform Allowance 3,000 Productivity Incentives 5,000
Unused Vacation Leave 5,000 Mandatory Contributions 38,400
Rice Subsidy 20,000 Commissions 100,000
De Minimis Benefits
14th month pay 35,000 CBA 8,000
Uniform Allowance 3,000 Productivity Incentives 5,000
Unused Vacation Leave 5,000 Mandatory Contributions 38,400
Unused Vacation Leave
Ceiling Amount Up to 10 days
Actual Amount 5,000
Rice Subsidy
Ceiling Amount 24,000
Actual Amount 20,000
Laundry Allowance
Actual Amount 400
Note: The excess of 400 from the ceiling amount will be added to the other benefits
Medical Assistance
Note: The excess of 5,000 from the ceiling amount will be added to the other benefits
Awards
Actual Amount 7,000
CBA + Productivity incentives
Uniform Allowance 3,000
Unused Vacation Leave 5,000
Rice Subsidy 20,000
Laundry Allowance 3,600
Medical Assistance 10,000
Awards 7,000
CBA & Productivity Incentives 10,000
Total De Minimis Benefit 58,600
Total Compensation
Overtime Pay 30,000
Commissions 100,000
13th + 14th month pay 70,000

Net Taxable Income
Total Net Taxable Income 511,600
Other Benefits
Excess in de minimis 8,400
Total Other benefits 78,400
Tax Due Computation – 2022
Basic Tax 30,000
Tax Rate (25% of excess of 400,000) 27,900
Tax Due 57,900
Tax Due Computation – 2023
Basic Tax 22,500
Tax Due 44,820
Assessment
Required: Compute for the amount of taxable income and tax due of an individual earning purely from compensation using the tax
table for 2018-2022
Information
13th month pay 35,000 Gifts received this year 7,000
14th month pay 35,000 Productivity Incentives 5,000
Uniform Allowance 3,000 Mandatory Contributions 38,400

Total Compensation
Overtime Pay 50,000
Commissions 200,000
13th + 14th month pay 140,000
Total Compensation 1,307,000
Net Taxable Income
Total Compensation 1,307,000
Total Net Taxable Income 1,122,000
Tax Due Computation
Net Taxable Income 1,122,000
Basic Tax 130,000
Tax Due 226,000
Other Benefits
excess in de minimis 22,000
Total Other Benefits 162,000

Assignment: Required: Compute for the amount of taxable income and tax due of an individual earning purely from compensation
using the tax table for 2018-2022
Information
Overtime Pay 12,000 Medical Allowance 3,000
14th month pay 22,000 Productivity Incentives 15,000
15th month pay 22,000 Mandatory Contributions 25,000
Rice Subsidy 20,000
Uniform Allowance
Rice Subsidy
Laundry Allowance
Actual Amount 1,500
Medical Allowance
Awards
Actual Amount 3,000
Productivity Incentives
Rice Subsidy 20,000
Laundry Allowance 1,500
Medical Allowance 3,000
Awards 3,000
Productivity Incentives 10,000
Total De Minimis Benefit 43,500
Excess in De Minimis 11,000
Total Other Benefits 77,000
Overtime Pay 12,000
Mandatory Contributions (25,000)
De minimis Benefits (43,500)
Other Benefits (77,000)
Basic Tax 30,000
Tax Rate (20% of excess over 250,000) 13,400
Tax Due - 2022 43,400

Inventory Management

Uploaded by

Copyright:

Available Formats

Inventory Management

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Inventory Management

Uploaded by

Copyright:

Available Formats

Inventory Management

Inventory Management - A stock or store of goods

Independent demand items- Items that are ready to be sold or used

Types of Inventory Raw materials and purchased parts

Inventory Functions Inventories serve a number of functions such as:

➢ To meet anticipated customer demand

Objectives of Inventory Control

Inventory management has two main concerns:

Costs of ordering and carrying inventories

Effective Inventory Management

➢ A system to keep track of inventory

Effective Inventory Management: Inventory Counting Systems

✓ lack of control between review

➢ Perpetual Inventory System

✓ control provided by the continuous monitoring of inventory withdrawals

✓ added cost of record keeping

➢ Bank transactions - such as customer deposits and withdrawals

1. Purchase cost - The amount paid to buy the inventory

Effective Inventory Management: ABC Classification System

ABC Classification System

A items (very important)

B items (moderately important)

C items (least important)

Effective Inventory Management: Cycle Counting

➢ A physical count of items in inventory

Economic Order Quantity

a. The basic economic order quantity model

Basic EOQ Model

• Only one product is involved

The Inventory Cycle

Total Annual Cost

Total Cost = Annual Holding Cost + Annual Ordering Cost

Q = Ordering Quantity in Units

H = Holding (Carrying) cost per unit, usually per year

D = Demand, usually in units per year

S = Ordering Cost per Order

EOQ: Cost Minimization Goal

𝟐𝑫𝑺 𝟐 (𝑨𝒏𝒏𝒖𝒂𝒍 𝒅𝒆𝒎𝒂𝒏𝒅)(𝒐𝒓𝒅𝒆𝒓 𝑪𝒐𝒔𝒕)

➢ Annual demand, holding and ordering costs are estimated

26 EOQ: Economic Production Quantity (EPQ)

27 Economic Production Quantity (EPQ)

• Only one item is involved

EOQ: Economic Production Quantity Assumptions

EPQ – Total Cost

When to Order or Produce

Reorder point - Rate of usage * Lead time

Determinants of the reorder point

• The rate of demand

Reorder point - (Average rate of usage * Lead time) +Safety stock

Safety Stock = (Maximum Lead Time-Normal Lead Time) x Average Usage

Total Order Cost = (Annual Demand/ EOQ) x Order Cost Total

Carrying Cost = (EOQ/2) x Carrying Cos

Reorder Point: Under Certainty

d = Demand rate (Units per period, per day, per week)

LT = Lead Time (In same time units as d)

Reorder Point: Under Uncertainty

ROP =Expected Demand during Lead Time + Safety Stock

How Much Safety Stock?

• The average demand rate and average lead time