Page 113 - DMGT525_MATERIALS_MANAGEMENT

Materials Management Neha Tikoo, Lovely Professional University

Notes Unit 8: Inventory Management

CONTENTS
Objectives
Introduction

8.1 Different Costs of Inventory
8.1.1 Holding (or Carrying) Costs
8.1.2 Cost of Ordering

8.1.3 Setup (or Production Change) Costs
8.1.4 Shortage or Stock-out Costs
8.2 Inventory Models
8.2.1 Economic Order Quantity
8.2.2 EOQ Model with Purchase Discount

8.3 Fixed Order Period Model
8.4 Safety Stock/Buffer Stock
8.4.1 Optimum Level of Safety Stock

8.5 Summary
8.6 Keywords
8.7 Review Questions
8.8 Further Readings

Objectives

After studying this unit, you will be able to:

 Explain the Different Inventory Costs
 Discuss Inventory Models and EOQ

 Explain Safety Stock and Its Optimum Level
Introduction

Previous unit dealt with the concept of suppliers’ selection in materials management. It also
covered the topics of vendor rating techniques and vendors’ relationship. In this unit, you will
study about inventory management, EOQ, buffer stocks, safety stocks and its optimum level.
Inventory is the major source of cost in the supply chain and also the basis for improving
customer service and enhancing customer satisfaction.

Example: High inventory at retail outlets may help in making the goods easily available
to customers and also result in a growth in sales, but it will also increase costs and bring down
profitability. These are two major issues in conflict with each other that need to be resolved, in
order to optimize the inventory carried by the organization.

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