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3 Inventory Management

The document discusses inventory management techniques, including the ABC inventory system, just-in-time (JIT) system, and Economic Order Quantity (EOQ) model. It highlights the importance of balancing inventory levels to minimize costs while ensuring production efficiency. Each technique has specific applications and considerations for managing inventory effectively.

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Rob Francisco
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21 views

3 Inventory Management

The document discusses inventory management techniques, including the ABC inventory system, just-in-time (JIT) system, and Economic Order Quantity (EOQ) model. It highlights the importance of balancing inventory levels to minimize costs while ensuring production efficiency. Each technique has specific applications and considerations for managing inventory effectively.

Uploaded by

Rob Francisco
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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General Disposition Toward Inventory Levels

Financial Manager Manufacturing


Manager
Marketing Purchasing
Keep them low! Manager Manager
Implement the
To ensure that the production plan so
firm’s money is Would like to have that it results in the Concerned solely
not being large inventories desired amount of with the raw
unwisely invested of the firm’s finished goods of materials
acceptable quality
in excess finished products. inventory.
available at a low
resources cost.
Common Techniques for Managing Inventory

The ABC inventory system is an inventory management technique


that divides inventory into three groups.

-The A group includes those items with the largest investment. Typically this
group consists of 20 percent of the firm’s inventory items but 80 percent of
its investment in inventory.

-The B group consists of items that account for the next largest investment in
inventory.

-The C group consists or a large number of items that require a relatively


small investment.
A just-in-time (JIT) system – materials arrive at exactly the time they are
needed for production.

-Because its objective is to minimize inventory investment, a JIT system


uses no (or very little) safety stock.

-Extensive coordination among the firm’s employees, its suppliers, and


shipping companies must exist to ensure that material inputs arrive on
time.

-Failure of materials to arrive on time results in a shutdown of the


production line until the materials arrive.

-Likewise, a JIT system requires high-quality parts from suppliers.


The Economic Order Quantity (EOQ) Model is an inventory management technique for
determining an item’s optimal order size, which is the size that minimizes the total of its order
costs and carrying costs.

- The EOQ model is an appropriate model for the management of A and B group items.

EOQ assumes that the relevant costs of inventory can be divided into ordering costs and
carrying costs.

Ordering costs – are fixed clerical costs of placing an item in inventory for a specific period of
time.

Carrying costs – are the variable costs per unit of holding an item in inventory for a specific
period of time.

The EOQ model analyzes the tradeoff between order costs and carrying costs to determine the
order quantity that minimizes the total inventory costs.
Economic Order Quantity

Where:
D = Annual demand
O = Ordering cost per order
C = Carrying cost per unit

Total ordering cost = Transaction cost per activity x no. of transactions


Annual carrying costs = (EOQ/2) x carrying cost per unit
Total cost of Inventory = Total Ordering cost + Annual carrying costs

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