 A stock or store of goods.

 The raw materials, component parts, work-

in-process, or finished products that are held
at a location in the supply chain
1. Economic Factors:
a. Setup cost:
• Fixed charge associated with the
placement of an order.
• Independent of the quantity ordered.
b. Purchase price:
• Parameter is of special interest when
quantity discounts or price breaks can be
secured.
c. Selling price:
• Unit selling price may be constant or variable
depending on whether quantity discount is
allowed.
d. Holding cost:
• The cost of carrying inventory in storage
• It includes the interest on invested capital,
storage, handling cost, depreciation cost, etc.
e. Shortage cost:
• The penalty cost incurred as a result of running
out of stock when the commodity is needed.
• Include costs due to loss in customers goodwill
and potential loss in income.
2. Demand:
a. Deterministic demand:
• It is assumed that the quantities needed
over subsequent periods of time are known
with certainty.
b. Probabilistic demand:
• The requirements over a certain period
of time are not known with certainty.
• Requirements pattern can be described
by a known probability distribution.
3. Ordering Cycle:
a. Continuous review:
• A record of the inventory level is updated
continuously until a certain lower limit is reached at
which point a new order is placed.
b. Periodic review:
• Orders are placed usually at equally spaced
intervals of time.
4. Delivery Lags or Lead Times:
• Time between the placement of an order and its
receipt is called delivery lag or lead time.
5. Stock Replenishment:
• The actual replenishment of stock may occur
instantaneously or uniformly.
6. Time Horizon:
• The time horizon defines the period over which
the inventory level will be controlled.
7. Number of supply Echelons:
• An inventory system may consist of several
stocking points.
8. Number of items:
• An inventory system may involve more than one
item.
2.Raw materials inventory:
- purchased but not processed
3. WIP (work in progress ) inventory:
-partially completed goods or goods that
undergone some change but not completed
4. MRO (Maintenance, Repairs, and operating
Supplies) inventory:
-Replacement parts, tools and supplies
necessary to keep machinery and processes
productive.
5. Finished-goods inventory (manufacturing
firm) or merchandise inventory(retail store):
-completed products for delivery or
shipment.
6. Pipeline inventory:
-Goods-in-transit to warehouses or
customers.
 To meet anticipated demand
 To smooth production requirements
 To project against stock-outs
 To help hedge against price increases
 To permit operations
 To take advantage of quantity discounts
 To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds
◦ Level of customer service
◦ Costs of ordering and carrying inventory
 There are two basic decisions that must be
made for every item that is maintained in
inventory. These decisions have to do with
the timing of orders for the item and the size
of orders for the item.
- How much to order.
- When to order.
 Some inventory items can be classified as
independent demand items, and some can be
classified as dependent demand items. The
manner in which we make inventory decisions
will differ depending upon whether the item
has independent demand or dependent
demand.
 Independent Demand: Finished Goods

 Dependent Demand: Raw Materials,

Component parts and etc.
 is the number of units that a company should
add to inventory with each order to minimize
the total costs of inventory—such as holding
costs, order costs, and shortage costs.
 is the ideal order quantity a company should
purchase for its inventory given a set cost of
production, demand rate and other variables.
 Only one product is involved
 Annual demand requirements known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single delivery
 Inventory Level = 0 when new order just
arrived
 There are no quantity discounts
D = annual demand
S = cost per order(amount of money per
order)
H = holding cost per unit per year (amount of
money to carry one unit in inventory for one
year)
Q = order quantity
TC = (D/Q)S + (Q/2)H

Total Annual Ordering cost = Annual Demand x Cost per order

Order Quantity

= D/Q x S

Total Annual Ordering cost = D/Q x S

Total Annual Holding Cost = Order Quantity x Holding cost per
unit per year

= Q/2 x H

Total Annual Holding Cost = Q/2 x H

Total Inventory Cost = Total Annual Ordering Cost + Total

Annual Holding Cost

= (D/Q ) S + (Q/2) H
Total Inventory Cost = (D/Q ) S + (Q/2) H
EOQ occurs when :

Total Annual Ordering Cost = Total Annual

Holding Cost
(D/Q ) S = (Q/2) H

Simplifying the equation, we have : Q^2 =

(2DS)/H
This can be written as : Q* = √2DS/H
Q* represents the optimal value for Q
 Given the following data for an inventory scenario
whose characteristic fit the assumption of the basic
EOQ model:
D = 15,000 units per year
S = $ 3 per order
H = $ 1 per unit per year
LT = Replenishment = lead time = 2 days
Operating days per year is assumed to be 300 days
 Find the following:
1. Average daily demand
2. EOQ
3. Number of orders placed per year
4. Total annual ordering cost
5. Total annual holding cost
6. Time between orders
7. Reorder point (in units)
8. Average inventory level
1. Average daily demand
15,000 units/yr ÷ 300 days/yr = 50 units per day
2. EOQ EOQ = √2DS/H = √(2)(15,000)(3)/(1)
= 300 units/order
3. Number of orders placed per year
D/Q = (15,000 units/yr)/(300 units/order)
= 50 orders/yr
4. Total annual ordering cost
(D/Q)(S) = [(15,000units/yr)/(300 units/order)]($3/order) =
$150/yr
5. Total annual holding cost
(Q/2)H = [(300 units/order/2)]($1/unit/yr) = $150/yr
6. Time between orders (Q/d)
= (300 units/order)/(50 units/day) = 6 days/order or
300days/yr÷50 orders/yr = 6 days/order
7. Reorder point (in units) ROP
= (daily demand)(Lead time) = (50 units/day)(2
days)
= 100units
8. Average inventory level
Q/2 = 300 units/2 = 150 units