GROUP 9:

INVENTORY MANAGEMENT

RECTO, JEAN PAULINE

CAMANO, MA. REINA NINA
ILAGAN, KIMBERLEY
ARCE, HADJIA VENICE
REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT
Management has two basic functions concerning inventory. One is to establish a system
keeping track of items in inventory and the other is to make decisions about how much
and when to order. To be effective, management must have the following:
1. A system to keep track of the inventory on hand and on order.
2. A reliable forecast of demand that includes an indication of possible forecast error.
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding costs, ordering costs, and storage costs.
5. A classification system for each inventory items.

TWO BASIC INVENTORY COUNTING SYSTEMS

1. PERIODIC SYSTEM

 Physical count of items in inventory made at periodic intervals (weekly, monthly) in

order to decide how much to order each item.
 Many small retailers use this approach.
 An advantage of this type of system is that orders for many items occur at the same
time.
 Disadvantages of periodic review include lack of control between review and the
need to protect against shortages between review periods by carrying extra stock.
2. PERPETUAL SYSTEM

 Also known as continual system

 System that keeps track of removals form inventory continuously, thus monitoring
current levels of each item.
 An advantage of this type of system is the control provided by the continuous
monitoring of inventory withdrawals. Also, there’s fixed-order quantity;
management can determine optimal order quantity.
 Disadvantages of this system is that there’s an added cost of record keeping.
Moreover, a physical count of inventories must still be performed periodically to
verify records because of possible errors, pilferage, spoilage, and other factors.
TWO-BIN SYSTEM
 TWO CONTAINERS OF INVENTORY; REORDER WHEN THE FIRST IS EMPTY.
Items are withdrawn from the first bin until the contents are exhausted. It is time
to reorder. Sometimes an order card is placed at the bottom of the first bin. The
second bin contains enough stock to satisfy expected demand until the order is
filled, plus an extra cushion of stock that will reduce the chance of a stockout if the
order is late or if the usage is greater than expected.
ADVANTAGE:
There is no need to record each withdrawal from inventory.
DISADVANTAGE:
The reorder card may not be returned in for a variety of reasons.
BATCH SYSTEM
Inventory records are collected periodically and entered into the system
DISADVANTAGE:
A sudden surge in demand could result in reducing the amount of inventory below
the reorder point between the periodic read-ins.
SOLUTION:
Frequent batch collections can minimize the problem.
ONLINE SYSTEM
The transactions are recorded immediately.
ADVANTAGE: Always up-to-date
UNIVERSAL PRODUCT CODE
It’s a barcode printed on the label that has
information about the item to which it is
attached.
0
The zero on the left side of the bar code identifies
this is a grocery item, the first five numbers
indicate the manufacturer and the last five
21480 23208 numbers indicate the specific item.
 Items in small packages use a six-digit number.
ADVANTAGE: Using UPC scanner increases the speed and accuracy, gives managers
continuous information on inventories, reduce the need for periodic inventories
and order-size determinations, and improve the level of customer service.
RADIO FREQUENCY IDENTIFICATION (RFID) TAGS
Are also used to keep track of inventory in certain applications.
RFID stands for Radio-Frequency IDentification. The acronym refers to small
electronic devices that consist of a small chip and an antenna. The chip typically is capable
of carrying 2,000 bytes of data or less.

DEMAND FORECASTS AND LEAD-TIME INFORMATION

LEAD TIME – Time interval between ordering and receiving the order. The greater
the potential variability, the greater the need for additional stock to reduce the risk
of shortage between deliveries.
POINT-OF-SALE (POS) SYSTEMS – electronically record actual sales. By
relaying information about actual demand in real time, these systems enable
management to make any necessary changes to restocking decisions.

THREE BASIC INVENTORY COSTS

1. Holding or carrying costs- relate to physically having items in storage. Costs
to carry an item in inventory for a length of time, usually a year. Costs include
interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage,
pilferage, breakage, and warehousing costs.
Holding costs are stated in either of two ways: as a percentage of unit price or
as a peso amount per unit.

2. Ordering costs- are the costs of ordering and receiving inventory. They are the
costs that vary with the actual placement of an order.
 3. Shortage costs- are costs resulting when demand exceeds the supply of
inventory; often unrealized profit per unit. These costs can include the
opportunity costs of not making a sale, loss of customer goodwill, late charges,
and similar costs.

CLASSIFICATION SYSTEM
A-B-C APPROACH – classifies inventory items according to some measure of
importance, usually annual peso value and then allocates control efforts
accordingly.
THREE TYPICAL CLASSES OF ITEMS USED IN A-B-C
A. Very Important
B. Moderately Important
C. Least Important

HOW MUCH TO ORDER: ECONOMIC ORDER QUANTITY MODELS

THREE ORDER SIZE MODELS

1. The basic economic order quantity model.
2. The economic production quantity model.
3. The quantity discount level

1. BASIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

- Simplest of the three models.
- It is used to identify a fixed order size that will minimize the sum of the annual
costs of holding inventory and ordering inventory.
- The unit purchase price of items in inventory is not generally included in the
total cost because the unit cost is unaffected by the order size unless quantity
discounts are a factor.
Assumptions of the Basic EOQ model
1. Only one product is involved.
2. Annual demand requirements are known.
3. Demand is spread evenly throughout the year so that the demand rate is reasonably
constant.
4. Lead time does not vary.
5. Each order is received in a single delivery.
6. There are no quantity discounts.

The inventory cycle: profile of inventory lead over time