Page 114 - DMGT525_MATERIALS_MANAGEMENT

Unit 8: Inventory Management

Excess inventory is a cost burden to industry in terms of capital tied up, the cost of obsolescence Notes
and the cost of servicing product in the supply chain. However, having the right amount of
inventory to meet customer requirements is critical. Inventory management is about two things:
not running out, and not having too much.

8.1 Different Costs of Inventory

The heart of inventory decisions lies in the identification of inventory costs and optimizing the
costs relative to the operations of the organization. Therefore, an analysis of inventory is useful
to determine the level of stocks. The resultant stock keeping decision specifies:
 When items should be ordered.
 How large the order should be.
 “When” and “how many to deliver.”

Notes It must be remembered that inventory is costly and large amounts are generally
undesirable. Inventory can have a significant impact on both a company’s productivity
and its delivery time.
Large holdings of inventory also cause long cycle times which may not be desirable as well.
What are the costs identified with inventory?
The costs generally associated with inventories are shown in Figure 8.1. The different components
of cost are discussed below:
Figure 8.1: Total Inventory Costs

600

500

) 400 Minimum
Cost of Stocking a Material (` 300 Total Inventory Total Inventory Costs

Costs

Carrying Costs
200

100 Stock-out Costs
Ordering Costs
EOQ

0 200 400 600 800 1000
Source: Uddin. Jahir (2010). “Materials Management”. Excel Books Pvt. Ltd.

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