Name: Nourhan Yasser Abd Elrahim Moustafa

ID: 20221339
Course: Operation Management
Chapter: 13
Group: 2Q (Thursday lecture)
Reading Assignment
Inventory Management.

Inventory management is one of the important activities in the operation management for
any business and its supply chain, because it has a direct impact on operations,
marketing, and finance, and affects cost of production. Inventory is a stock or store of
goods, one of the main importance of managing your inventory effectively is that you
will reduce your costs and this will affect your organization’s pricing strategy, and you
can get from this a high competitive edge in the market.
Types of Inventories:
• Raw materials and purchased parts.
• (WIP) work in process: products still in the production process and not finished
yet.
• Finished goods inventory.
• Tools and Supplies.
• (MRO) Maintenance and repairs inventories.
• (Pipeline inventory) goods in transit to warehouses, distributors, or customers.
Functions of inventory
. To Meet the Expected Demand of Customers: Customers can be defined as any one
who walks on the street have the willingness and ability to buy goods or services from a
shop or business. In this case the organization must have inventory to cover this expected
demand from the customers.
. To Facilitate the Requirements of Production: Managing inventory to let the
production process be easier for the organization. Such as the firms who have seasonal
demand on their products/services, must produce lots of their products, or store their raw
materials during the preseason periods to meet the high demand during seasonal periods.
These stored inventories are called “seasonal inventories”.
. To Separate Operations: Historically, production firms have used their inventories and
raw materials as a temporary storage between continuous operations, to maintain
production consistency and continuously, fearing that the production process will be
disrupted due to some events such as; equipment failure. Recently, the inventory
management developed this point, and firms started to recognize the costs and the space
the stored inventories required, sometimes the production cost increased unnecessarily,
due to stocking the inventory.
. To Decrease the Risk of Shortage: Production firms can decrease this risk by storing
safety stocks (these are inventories in excess of expected demand, to reduce the risk of
stockout when unexpected increase in demand and lead time occurred), and trying to
prevent delayed deliveries.
. To Take Advantage of Order Cycles: To minimize production, and inventory costs,
firms buy huge quantities more than the expected requirements, and store some of them
to use later. Also firms use “economies of scale” the more units the firm produces, the
more saving in its production costs.
. To hedge against price increases: When the firm expects that, there is a huge increase
in the raw material prices will occur and purchase more than its normal amounts, to avoid
this price increase effect.
. To Permit Operations: Production process takes time, so this means that firms will
have some of the work in process inventory.
. To Take the Advantage of Quantity Discount: Always suppliers make discounts for
large orders.
Objective of inventory management
Keep inventory costs within reasonable bounds, while reaching a high level of customer’s
satisfaction. (Costs of ordering and carrying inventory, Level of customer service).
Helping the firm to balance its stocks and know well when the right time and how much
quantity must be ordered.
Requirements for managing inventory effectively:
It has two basic functions about inventory,
1) establishing a system to keep track of items in inventory.
2) Decision making about how much and when to order.
• System to keep track of inventory on hand and on order.
• A reliable demand forecasting(to satisfy customers’ requirements)
• Knowledge of lead times( its time between ordering and receiving order)
• Holding costs
• Shortage costs
• Ordering costs
• A classification system for inventory items.
Inventory counting systems: It can be periodic or perpetual;
• Periodic System: Physical count of items made at periodic intervals.
• Perpetual System: It is also called continual inventory system, it keeps
track of removals from inventory continuously, thus monitoring current levels of each
item.
Perpetual inventory system ranges between very simple to very sophisticated such
as:
• Two-Bin System - Two containers of inventory; reorder when the first is
empty
• Universal BarCode (UBC): Barcode printed on a label that has
information about the item to which it is attached.
• Point of sale (POS) Systems: Recording electronically items at the same
time of sale.
Inventory costs
• Purchase cost: Paid costs of buying inventory.
 • Holding costs: It also called carrying cost, cost to carry an item in
inventory for a length of time, usually a year (heat, light, rent, security, deterioration,
spoilage, breakage, depreciation, opportunity cost)
• Ordering costs: costs of ordering and receiving inventory (shipping cost,
cost of inspecting goods upon arrival for quality and quantity, moving the goods to
temporary storage)
• Setup costs: The costs resulting from preparing equipment for a job.
• Shortage costs: costs when demand exceeds supply (the opportunity cost
of not making a sale, late charges, the cost of loss of production or downtime).
Classification System: Items stored in inventory do not have equal importance, so it will
be un useful to give all of them equal attention. Therefore we get an approach in order to
allocate control efforts according to the relative importance of different items of
inventory, this approach is called A-B-C approach (A- very important, B- moderate
important, C- least important).

Sometimes inventory items count physically, this is called Cycle Counting.

Economic Order Quantity Models: Using EOQ model to determine how much to order
quantity, by reducing the annual costs which differ according to the order size. But it's
not determined when to order!
There are three order size models:
• Basic economic order quantity model.
• Economic production quantity model.
• Quantity discounts.
The Inventory Cycle:

Total Cost:
TC= Annual Carrying Cost + Annual Ordering Cost
When to reorder with EOQ Ordering? Reorder Point Ordering
ROP determines when to reorder the quantity. The item reordered when its quantity on
hand drops to the amount (which includes expected demand during lead time, and an
extra cushion of stock).
• Reorder Point: When the quantity on hand of an item drops to this
amount, the item is reordered
• Safety Stock: Stock that is held in excess of expected demand due to
variable demand rate and/or lead time.(ROP=expected demand during lead time + safety
stock)
• Service Level: Probability that demand will not exceed supply during lead
time.(service level= 100% – stockout risk)
There are four determinants of the reorder point quantity:
• The forecasted demand rate
• Lead time
• Changing in demand or lead time ( if both are constant, so ROP= D*LT)
• The acceptable degree of managing the risk of stockout.
FIXED ORDER INTERVAL MODEL
The fixed order interval (FOI) model is used when orders must be placed at fixed time
intervals (weekly, twice a month, etc.)
Determining the Amount to Order:
Amount to order=expected demand during protection interval+safety stock– amount on
hand at reorder time.
• Order quantity for next interval
• Suppliers might encourage fixed intervals
• May require only periodic checks of inventory levels
Fixed Interval Advantages are:
• Type A items are very controlled.
 • Items from the same supplier may have savings in (ordering, packing,
shipping costs).
• It works when inventories cannot be monitored accurately.
Fixed Interval Disadvantages:
• It required a larger safety stock.
• Increase carrying costs.
• Costs of periodic reviews.
The Single-Period Model
The single-period model (sometimes referred to as the newsboy problem ) is used to
handle ordering of fresh fruits, vegetables, seafood, cut flowers and items that have a
limited useful lifetime (newspapers, magazines, spare parts for specialized equipment). It
focuses on two costs:
• Shortage cost: the unrealized profit per unit.(Cs = revenue per unit – cost
per unit)
• Excess cost: the difference between purchase cost and salvage value of
items left over at the end of a period.(Ce= original cost per unit – salvage value per unit)

(Service level= Cs / Cs+Ce).

Continuous stocking levels:
• Identifies optimal stocking levels
• Optimal stocking level balances unit shortage and excess cost
Discrete stocking levels:
• Service levels are discrete rather than continuous
• Desired service level is equaled or exceeded
Operations Strategy:
Managing and improving inventory process effectively has positive effects on cost
reduction, and satisfaction level of the customers.
The areas that have potential are the following:
• Record keeping: Firms must have accurate inventory updated record, and
it should be periodically reviewed. because this accurate information will help in taking
accurate decisions; such as holding estimation, when to order, how much quantity the
firm need to order,…
• Variation reduction: try to decrease the errors, lead time variation, and
forecasting errors, should improve them because this variations have direct effects on
inventory management.
• Lean operation: Lean systems driven the demand by pulling goods
through the system to match the demand, instead of being pushed through without a
direct link to demand.
• Supply chain management: its very important because it is the handling
of the entire production flow of a good or service, starting from the raw materials of the
products until delivering it in final product to the consumers.
Too much inventory: Tends to hide problems, Easier to deal with problems than to
eliminate them, Costly to maintain.
Wise strategy-Reduce lot sizes, Reduce safety stock.

Presented to: * DR: KHALID SEIF