OPERATIONS MANAGEMENT/

TIME QUALITY MANAGEMENT

INVEN
Managemen
TORY t
 TABLE
Conte
OF
nts
Definitions, Types and Functions
01
of Inventory
Inventory Management
02
Economic Order Quantity
ABC Analysis
Inventory Models
Inventory Models Requirement
Just In Time System
Inventory
• In the context of a company, comprises goods and
products available for sale.
• It is an essential aspect of managing a business as it
helps in tracking and monitoring stock levels, ensuring
that there is enough supply to meet customer demands.

• It encompasses the range of materials used in

production and the finished goods held during the
company's regular business operations.
• It's recorded as a current asset on the company's
balance sheet; however, too much inventory can
become a practical liability.
INVENTORY MANAGEMENT
INVENTORY MANAGEMENT
 RAW WORK IN
MATERIALS PROGRESS
• Materials that are • The partly processed raw
needed to turn your materials lying on the
inventory into a finished production floor.
product are raw material • undergone some change
• The materials used to but not completed
create and finish • A function of cycle time
products for a product
• Purchased but not • partially assembled but
processed are awaiting final details
Direct raw materials -
fabric, thread, dyes and like buttons, zippers, and
print designs to construct hemming.
a shirt.
Indirect raw materials-
this could be disposable
gloves, tape, protective
gears, tools used in
manufacturing a product.

INVENTORY MANAGEMENT
 FINISHED PACKING
GOODS MATERIAL
• Any product that is ready to • Packing material is the
be sold to your customers inventory used for
falls under this category. packing of goods. It can
• Completed product awaiting be primary packing and
shipment secondary packing.
• Primary packing is the
packing without which
MRO GOODS
the goods are not
• MRO stands for maintenance, usable.
repair, and operating supplies. • Secondary packing is the
They are used to repair packing done for
machinery in production. convenient
• Necessary to keep machinery transportation of goods
and processes productive • includes materials used
• Maintenance, repair, and for packing and
operating inventory includes protecting products for
the materials and supplies shipping or storage.
needed to keep a business
running smoothly.
INVENTORY MANAGEMENT
 FINANCIAL MANUFACTURIN

DIFFERIN MANAGER
• Their general disposition
toward inventory levels is to
keep them low. To ensure
G MANAGER
• They favor large
production runs for the
sake of lower unit

G
that the firm’s money is not production cost, which
being unwisely invested in would result in high
excess resources. finished goods
inventories.
MARKETING PURCHASING
MANAGER MANAGER

VIEWPOI
• They would like to have large
amounts of inventories. • To reach an amount for a
Making sure that all orders discount they may
could be satisfied, avoiding purchase larger
backorders for stock-outs. quantities of resources
than are actually needed.

NTS
INVENTORY MANAGEMENT
 COMMONLY
• ABC Inventory System
USED • Economic Order Quantity
TECHNIQUES (EOQ) Model
FOR • Just-in-Time (JIT) System
• Production Order Quantity
INVENTORY Model
MANAGEMENT • Quantity Discount Model

INVENTORY MANAGEMENT
 Inventories serve a number of functions.
Among the most important are the
following: Functions
INVENTOR
1. To meet These inventories are referred to
anticipated
customer
demand.
as anticipation stocks because they
are held to satisfy expected (i.e.,
average ) demand.
of
These inventories are aptly
Y
2. To smooth
production named seasonal inventories.
requirements. Companies that process fresh
fruits and vegetables deal with
seasonal inventories.

INVENTORY MANAGEMENT
 Functions
Inventories serve a number of functions.
Among the most important are the
following:
The buffers permit other
INVENTOR
operations to continue temporarilyof
3. To while the problem is resolved.

Y
decouple Inventory buffers are also
important in supply chains.
operation
Careful analysis can reveal both
s. points where buffers would be most
useful and points where they would
merely increase costs without
adding value.

INVENTORY MANAGEMENT
 Inventories serve a number of functions.
Among the most important are the
following: Functions
4. To
Delayed deliveries and
unexpected increases in demand
INVENTOR
of
increase the risk of shortages.

Y
protect The risk of shortages can be
against reduced by holding safety stocks,
stock which are stocks in excess of
outs. average demand to compensate
for variabilities in demand and lead
time.

INVENTORY MANAGEMENT
 Inventories serve a number of functions.
Among the most important are the
following:
To minimize purchasing and
Functions
inventory costs, a firm often buys
5. To take in quantities that exceed
advantag immediate requirements. This
INVENTOR
of
Y
e of order necessitates storing some or all of
cycles. the purchased amount for later
use.
The resulting stock is known as
cycle stock. Order cycles are not
The ability toalways
store extra goods also 6. To hedge
based on economic lot
allows a firm tosizes.
take advantage of against
price discounts for larger orders. price
increases.
INVENTORY MANAGEMENT
 Inventories serve a number of functions.
Among the most important are the
following: Functions
INVENTOR
The fact that production
operations take a certain amount of
time.
Intermediate stocking of goods—
of
Y
7. To
including raw materials, semi
permit
finished items, and finished goods at
operation
production sites, as well as goods
s. stored in warehouses—leads to
pipeline inventories throughout a
production-distribution system.
Little’s Law can be useful in
quantifying pipeline inventory.
INVENTORY MANAGEMENT
 Functions
Inventories serve a number of functions.
Among the most important are the
following:

INVENTOR
of
8. To take
advantag
e of
Suppliers may give
discounts on large orders
Y
quantity
discounts
.

INVENTORY MANAGEMENT
INVENTORY
MANAGEMEN
TInventory management is a systematic approach to sourcing, storing,
and selling inventory—both raw materials (components) and finished
goods (products).

In the realm of business, effective inventory management entails

maintaining the appropriate stock levels, in the right place, at the right
time, and at the right cost and price. It's the process by which you monitor
and regulate your business's inventory from the moment it's procured or
produced, stored, and ultimately used.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
The purpose of inventory management is to make operational tasks simpler.
Some of the primary objectives for which it is carried out are as follows:

OBJECTIVES

INVENTORY MANAGEMENT
 IMPORTANCE OF
INVENTORY
MANAGEMENT
The demand for a strong inventory management system has increased dramatically as a
result of shifting consumer preferences and developing technology. The following are some
of the main arguments in favor of it being advantageous for all business entities:

INVENTORY MANAGEMENT
 Following and managing goods as it travels from your suppliers
INVENTORY
to your warehouse to your clients is part of the inventory
management process. There are five primary steps to take: MANAGEMENT
1. Purchasing
This can mean buying raw materials to turn into
PROCESS
5 Key Stages
products, or buying products to sell on with no
assembly required.

Making your finished product from its

2. Production constituent parts. Not every company will get
involved in manufacturing — wholesalers, for
instance, might skip this step entirely.
Storing your raw materials before they’re
3. Holding manufactured (if required), and your finished
Stock goods before they’re sold.

Getting your stock into customers’ hands, and

4. Sales taking payment.

Businesses need to know how much it is selling,

5. Reporting and how much money it makes on each sale.

INVENTORY MANAGEMENT
KEY INVENTORY
Terms You Need To
MANAGEMENT Know
1. Maximum Stock Level
As the name implies, this is the level of stock
indicated by a number beyond which you simply
shouldn’t stock up on a particular product. This
number is influenced by several factors- the
perishability of goods, the amount of warehouse
space you have, changes in consumer preferences,
etc.

Maximum Stock Level = Reorder Level + Reorder

Quantity – (Minimum Consumption x Minimum
Reordering Period)
INVENTORY MANAGEMENT
 KEY INVENTORY
MANAGEMENT
Terms You
Know
Need To
2. Minimum Stock Level/Safety Stock
This is the absolute minimum number of products
you need to have in order to fulfill market demand.
The calculation for this number depends on the lead
time. Lead time is the amount of time it takes for
you to receive a product from the vendor, from the
time that you’ve placed an order for it. Another
factor that influences the Minimum Stock Level is
the rate at which your product is being sold during
the lead time.

Minimum Stock Level = Reorder Level – (Normal

INVENTORY Consumption x Reordering Period)
MANAGEMENT
MANAGEMENT
Terms You Need To
Know
3. Reorder Level
This number represents the point at which you must raise
a reorder request from your vendor so as to ensure that
you stay above the minimum stock level.
Reorder Level = Daily Consumption x Lead Time
4. Reorder Point
In the simplest of terms, the reorder point is that point in
time when you need to reorder stock for a product, to
avoid the risk of running out of stock. The crude way to
do this would be to keep an eye on your stock and order
whenever it is coming close to being over.
Reorder Point = (Average Daily Sales x Lead Time) +
INVENTORY Safety Stock MANAGEMENT
 INVENTORY MANAGEMENT
Formulas
1. Average Monthly Inventory
In order to estimate how much inventory you have on hand in a month,
quarter or year, you use the average monthly inventory
Average Monthly Inventory= (Inventory at month beginning + Inventory at
month ending) /2
2. Inventory Turnover Ratio
Stock turn or inventory turnover ratio is a measure of how many times you
have entirely replaced your existing stock with new ones.
Inventory Turnover = (Sales Made)/(Average Inventory)
3. Safety Stock
There are several ways to calculate safety stock levels, and the easiest to
use estimate is to take the two months in the year when the highest and
lowest number of products were sold, and subtract one from the other.
Safety Stock = Highest number of products sold in a month - Lowest number
of products sold in a month
INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
1. Bulk Shipments - This method banks on the notion that it is almost
always cheaper to purchase and ship goods in bulk.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
2. ABC inventory management - ABC inventory management is a technique that’s
based on putting products into categories in order of importance, with A being the
most valuable and C being the least.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
3. Backordering - Backordering refers to a company’s decision to take orders and
receive payments for out-of-stock products.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
4. Just in Time (JIT) - Just in Time (JIT) inventory management lowers the volume of
inventory that a business keeps on hand. It is considered a risky technique because
you only purchase inventory a few days before it is needed for distribution or sale.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
5. Consignment - Consignment involves a wholesaler placing stock in the hands of a
retailer, but retaining ownership until the product is sold, at which point the retailer
purchases the consumed stock.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
6. Dropshipping and cross-docking - Dropshipping and cross-docking are inventory
management methods that completely eliminate the need to hold inventory. With a
dropshipping arrangement, you can transmit customer orders and shipping information
directly to your manufacturer or wholesaler, who subsequently handles the shipment
of the products.

Difference Between Cross Docking and Drop Shipping

Drop shipping differs significantly from cross docking. Cross docking minimizes or
eliminates the need for a warehouse. Drop shipping reduces the role of a distributor to
an entity that simply provides shipping information. In drop shipping, the burden of
shipping is taken on by the manufacturer, which sends products directly to its
customers.

INVENTORY MANAGEMENT
 INVENTORY
MANAGEMENT
TECHNIQUES
7. Inventory Cycle counting - Cycle counting or involves counting a small amount of
inventory on a specific day without having to do an entire manual stocktake. It’s a type
of sampling that allows you to see how accurately your inventory records match up
with what you actually have in stock.

INVENTORY MANAGEMENT
 BEST PRACTICES FOR
CONDUCTING AN
INVENTORY ACCOUNT
 Count one category at a time – Ideally, you want to be able to cycle
through your entire inventory on a period basis. It’s best to focus on one
category at a time so you can count efficiently during business hours and
not be impeded by operational downtime.
 Choose count categories based on seasonality – The aim of
inventory counting is to be able to rectify any disparities in inventory as
and when they happen. It’s best to count products when they’re at their
peak to ensure you can fix any issues immediately.
 Mix up your cycle count schedule – It’s an unfortunate reality that
inventory shrinkage is sometimes due to staff theft, so aim to vary your
schedule to deter employees from “gaming the system.”

INVENTORY MANAGEMENT
 TYPES OF INVENTORY
CYCLE COUNT
PROCEDURE
 Control group cycle counting – This type of cycle counting focuses
on counting the same items many times over a short period. The
repeated counting reveals errors in the count technique, which can
then be rectified to design an accurate count procedure.
 Random sample cycle counting – If your warehouse has a large
number of similar items, you might randomly select a certain number
of items to be counted during each cycle count. This helps reduce the
disruption of any one category at once, meaning you can carry out a
count during business hours.
 ABC cycle counting – As mentioned above, ABC cycle counting uses
the ABC inventory management technique and Pareto principle to
classify items in A, B or C categories based on value. With this
approach, items are counted more frequently than B and C items.
INVENTORY MANAGEMENT
 ECONOMIC
ORDER
QUANTITY
• is the ideal quantity of units a company
should purchase to meet demand while
minimizing inventory costs such as holding
costs, shortage costs and order costs.
• is a calculation that companies represent
their ideal order size and allow them to
meet its demand without overspending.

INVENTORY MANAGEMENT
 BENEFITS CHALLENGES
& ECONOMIC
ECONOMIC ORDERORDER
QUANTITY QUANTITY
• IMPROVED ORDER • UNRELIABLE
FULFILLMENT DATA
• REDUCE EXCESSIVE • OBSOLETE
ORDERING SYSTEM
• REDUCED WASTAGE • NOT IDEAL FOR
• DECREASED COST ALL BUSINESSES
OF SHORTAGE • SEASONAL
INVENTORY DEMANDS MANAGEMENT
In determining the EOQ, it is assumed that the
cost of managing inventory is made up solely
ECONOMI
C ORDER
of two parts, the Ordering Cost and Carrying
cost/ Holding Cost.

It is cost
ORDERING associated
which
with
are
the
COSTS purchasing or ordering of
QUANTITY
materials.

Carrying costs also known as

CARRYING holding costs and inventory
COSTS carrying cost are the costs a
business pays for holding
inventory in stock.
INVENTORY MANAGEMENT
 Importanc
e of EOQ
EOQ is an inventory management
technique that helps make efficient
inventory management decisions. It is
essential for companies as it helps them
to manage their inventory efficiently.
Without these techniques, companies
may tend to hold too much inventory
during periods of low demand while also
holding too little inventory during periods
of high demand.
INVENTORY MANAGEMENT
HOW IS ECONOMIC ORDER
QUANTITY CALCULATED?
EOQ is derived from a formula that consists of Annual Demand D, Holding
Cost H, and Order Cost S. This formula aims at targeting the balance
between the amount that a business sells, and the amount being spent to
manage the inventory.
Where:
Annual Demand (D) - the number of units
that businesses sell annually.
Order Cost (S) - refers to the costs that are
involved with an order but cannot be
directly associated with the purchase cost.
Holding cost (H) - refers to all costs that
are involved in storing or handling the
items in the stores or warehouses.
Usually, holding costs are fixed in nature.

INVENTORY MANAGEMENT
 EXAMPLE OF ECONOMIC
ORDER QUANTITY
1. A retail clothing shop
carries a line of men’s
jeans, and the shop sells
Given:
1,000 pairs of jeans
D = 1,000
each year. It costs the
S= $2
company $5 per year to
hold a pair of jeans in H= $5
inventory, and the fixed
cost to place an order is
$2.
INVENTORY MANAGEMENT
 SOLVING ORDERING
COSTS AND CARRYING
COSTS
We can determine the ordering cost by calculating the number of orders in a
year, and multiply this by the cost of each order. To determine the number of
orders we simply divide the total demand (D) of units per year by Q, the size of
Number
each of Orders
inventory = (S)
order. D/ Q EXAMPLE: (using the example number 1)
Given: D = 1,000 Q = 28
We then multiply this amount
Number of orders = D/Q
by the order cost per order (S), = 1,000 / 28
to determine the ordering = 35.71 or 36
costs. Ordering Cost = Number of orders x order cost
per order (S)
Ordering Cost = Number of
= 36 x $2
orders x order cost per order
= $72
(S)
or
INVENTORY MANAGEMENT
Ordering Cost = S(D/Q)
 SOLVING ORDERING COSTS AND CARRYING COSTS
The cost of carrying inventory can be calculated by multiplying the cost
of carrying a unit of inventory by the average number of units carried,
usually for a year. If inventory is used at a steady pace, and restocked
when empty, then the average number of units held would be the order
size divided by 2.
H = Carrying cost per unit of
EXAMPLE: (using the example number 1)
inventory Given: H = $5
Q= Inventory order size Q = 28
(quantity) Carrying Cost = H(Q/2)
Carrying Cost = H (Q/2) =$5 (28 / 2)
= $70

INVENTORY MANAGEMENT
 REORDER POINT
The reorder point reflects the number of days of lead time the
firm needs to place and receive an order and the firm’s daily usage
of inventory item.
Reorder point = Days of lead time x Daily usage
For example, a firm knows it takes 3 Note that sometimes the days
days to place and receive an order, of lead time and the daily usage
is not precise so most of the firms
and if it uses 15 units per day of the have safety stock
inventory item, then the reorder .
point is 45 units of inventory. Safety stock is the extra
inventory that the firm has to
Reorder Point = 3 x 15
prevent stock outs of the
= 45 important materials.
INVENTORY MANAGEMENT
 ABC ANALYSIS
What is ABC Analysis?
• ABC Analysis is a technique of inventory Control
• ABC Analysis is based on Pareto Law which says that in any
large group there are “significant few” and “significant
many”.
• Materials are categorized in 3 categories ( A, B and C)
• It helps companies identify the most valuable products that
match their customers’ demand, control and allocate
resources efficiently, reduce obsolete inventory, and increase
sales.
• ABC inventory management is a technique that’s based on
putting products into categories in order of importance, with
A being the most valuable and C being the least.
INVENTORY MANAGEMENT
THE ABC ITEMS:
ABC Analysis classifies inventory items into three categories based on
their value and importance to the business:
• The A (high-value items) - the
most expensive and most
important should be managed
with extra care and attention.
• The B (medium-value items) - are
also important for the business’s
success, but not as much as A.
• The C (low-value items) - are not
as important for the business’s
success
INVENTORY MANAGEMENT
 IMPORTANCE OF ABC
INVENTORY SYSTEM:
• Ensures Control Over the Costly
Items
• Reduction in the storage expenses
• Resource Allocation
• Increased
A group Economy
items are tracked on a perpetual inventory
system that allows daily verification of each item’s
inventory level. B group items are frequently
controlled through periodic, perhaps weekly,
checking of their levels. C group items are monitored
with unsophisticated techniques, like the two bin
method, whereas the item is stored in two bins. As
an item is needed, inventory is removed from the
first bin. When that bin is empty, an order is placed
to refill the first bin while inventory is drawn from the
second bin. The second bin is used until empty, and
so on.
INVENTORY MANAGEMENT
 HOW IS ABC INVENTORY
ANALYSIS CALCULATED?
• ABC inventory analysis by multiplying the annual sales of a certain item by
its cost.
• The results tell which goods are high priority and which yield a low profit.
Formula for ABC inventory analysis:
• To get: Annual Consumption Value
(Annual Number of Units Sold) × (Cost Per Unit)
• To get: % of Annual Units Sold
(Annual Number of Units Sold) ÷ (Total of Annual Number of Units
Sold) × 100
• To get: % of Annual Consumption Value
(Annual Consumption Value) ÷ (Total of Annual Consumption Value)
x 100

INVENTORY MANAGEMENT
 HOW TO CALCULATE ABC
CLASSIFICATION?
1. Use this formula to calculate the annual consumption value of each item:
Annual number of units sold (per item) x cost per unit

INVENTORY MANAGEMENT
 HOW TO CALCULATE ABC
CLASSIFICATION?
2. List the products in descending order based on their annual consumption
value.

INVENTORY MANAGEMENT
 HOW TO CALCULATE ABC
CLASSIFICATION?
3. Total up the number of units sold and the annual consumption value.

INVENTORY MANAGEMENT
 HOW TO CALCULATE ABC
CLASSIFICATION?
4. Calculate the cumulative percentage of items sold and cumulative
percentage of the annual consumption values using the totals.

INVENTORY MANAGEMENT
 HOW TO CALCULATE ABC
CLASSIFICATION?
5. Determine the thresholds for splitting the data into A, B and C categories. The
threshold for determining the ABC split will be unique to your company and your product
mix, but typically it’s close to 80% / 15% / 5%.

INVENTORY MANAGEMENT
ABC INVENTORY
PROS CONS

MANAGEMENT • Aids demand forecasting by

analyzing a product’s
• Could ignore products
popularity over time that are just starting
• Allows for better time to trend upwards
management and resource • Often conflicts with
allocation
• Helps determine a tiered
other inventory
customer service approach strategies
• Enables inventory accuracy • Requires time and
• Fosters strategic pricing human resources

Why Use ABC Analysis?

• It helps better control working capital costs.

• Reduces obsolete inventory and can boost the
inventory turnover rate.

INVENTORY MANAGEMENT
 INVENTORY
MODELS
It is a
mathematica
l model that • production process
helps • managing frequency of ordering
business in • deciding on quantity of goods or
determining raw
the optimum materials to be stored
level of • tracking flow of supply of raw
inventories, materials and
that should goods to provide uninterrupted
be service to
INVENTORY MANAGEMENT
maintained customers without any delay in
 INVENTOR
Y MODELS
Introducing the key topics
of:
• Economic Order Quantity
(EOQ)
• Production Order
Quantity (POQ)
• Quantity Discount Model
(QDM)

INVENTORY MANAGEMENT
 ECONOMIC
ORDER QUANTITY
(EOQ)
This model calculates the optimal order quantity that
minimizes the total cost of holding inventory and ordering
Also referred to as 'optimum lot
size,' the economic order quantity,
new stock. It is a simple and widely used model, but it
or EOQ, is a calculation designed to
assumes that demand is constant and predictable.
find the optimal order quantity for
businesses to minimize logistics
EOQ is a calculation companies use to figure out the
costs, warehousing space,
optimal order quantity with the goal to minimize the
stockouts, and overstock costs. The
logistics costs, warehousing space, stockouts, and
formula is: EOQ = square root of:
overstock costs. The goal of the EOQ model is to determine
[2(setup costs)(demand rate)] /
the ideal order quantity you should have.
holding costs.

INVENTORY MANAGEMENT
 ASSUMPTIONS OF
ECONOMIC ORDER
QUANTITY (EOQ)
MODEL
 Ordering cost is constant.
 The rate of demand is known.
 The lead time is fixed.
 The purchase price of the item is constant.
 No discount is available.
 The replenishment is made
instantaneously, the whole batch is
delivered at once.

INVENTORY MANAGEMENT
 MINIMIZE MINIMIZE
WHY YOU SHOULD BE INVENTORY
COSTS
STOCKOUTS

EOQ can help you better

CALCULATING EOQ? Having extra items in understand how much you
your inventory can need to re-order and how
EOQ calculations for your business often. By calculating how
quickly increase storage
offer several benefits that impact much you need based on
costs. Inventory costs can
your bottom line. It’s a great way to also go up depending on how much you sell in a
grasp how much product needs to be how you order, what gets given period of time, you
purchased to maintain an efficient can avoid stockouts without
damaged, and what
having too much inventory
ecommerce supply chain while products never sell. If
on hand for too long. You
keeping costs down. you’re constantly re- may be surprised that
ordering products that ordering in smaller
Here are the top benefits of have low velocity, EOQ quantities may be more
calculating EOQ: can help determine how cost-effective for your
• Minimize Inventory Costs much to order in a certain business, or it could be the
• Minimize Stockouts time period. opposite — calculating EOQ
can help determine this.
INVENTORY MANAGEMENT
 EOQ
FORMULA Where:
Annual Demand (D) - the number of
units that businesses sell annually.
Order Cost (S) - refers to the costs
that are involved with an order but
cannot be directly associated with the
The EOQ formula is made up of three purchase cost.
variables: Holding Costs (H), Annual Holding cost (H) - refers to all costs
Demand (D), and Order Cost (S). This that are involved in storing or
formula aims at targeting the balance handling the items in the stores or
between the amount that a business warehouses. Usually, holding costs are
sells, and the amount being spent to fixed in nature.
manage the inventory.
INVENTORY MANAGEMENT
 EOQ (EXAMPLE)
Example: Holding Cost (H)
1) $0.75 in holding costs per
unit (H) Also known as carrying costs
2) Setup cost of $500 = S
3) demand rate of 10,000 per Refers to the total cost of holding inventory. Minimizing
year (D). inventory costs is an important retail supply chain
management strategy. How much do you spend on
You would use the following
holding and storing inventory, per unit, per year? In order
formula:
to properly calculate EOQ, you’ll first need to determine
your holding cost. To do so, you can refer to the simply
formula below:

which equals the order quantity

of 3,651 units for that specific
INVENTORY MANAGEMENT
product.
 Annual Demand (D) Order Cost (S)

How much demand do you Also referred to as ‘setup

get for a product each year? cost,’
By looking into historical
order data as well as, sales How much does an order cost
data, you can determine the per purchase?
number of units you sell year This is done on a per-order
over year. basis and includes both the
shipping and handling costs.
EOQ CONCLUSION
By using EOQ for your ecommerce business, you can improve your overall
inventory management process. By ordering the right amount of inventory
instead of guessing what to order, you can reduce costs, prevent stockouts, and
keep your supply chain operating smoothly.

INVENTORY MANAGEMENT
 PRODUCTION
ORDER QUANTITY
(POQ)
This model is similar to the EOQ model, but it is used for
production planning rather than inventory management. It
It includes the quantity of a
calculates the optimal production quantity that minimizes
product that should be
the total cost of production and holding inventory.
Production order quantity model answers how much to manufactured in a single batch
produce in a given situation and when to order a specific so as to minimize the total cost
quantity. and the inventory holding
costs. Production order
The POQ model is used by businesses to determine how
quantity model answers how
much to produce of a product at a time and how often to
much to produce in a given
produce it. This can help businesses to save money on
production and inventory costs, and to improve their situation and when to order a
customer service by ensuring that they have enough specific quantity.
products in stock to meet demand.
INVENTORY MANAGEMENT
 POQ To use the POQ model, businesses need to

FORMULA estimate the following values:

Setup cost: This is the cost of preparing the
production line to produce a new batch of
products. It may include costs such as labor,
machine setup, and materials.
Annual demand: This is the total number of units
of the product that are expected to be sold in a
year.
Holding cost: This is the cost of storing one unit
Where: of the product for one year. It may include costs
POQ = production order quantity such as rent, insurance, and taxes.
S = setup cost per production Unit cost of production: This is the cost of
run producing one unit of the product. It may include
D = annual demand for the costs such as materials, labor, and overhead.
product Once the businesses have estimated these
H = holding cost per unit per values, they can use the POQ formula to
year
INVENTORY calculate the optimal production order quantity.
MANAGEMENT

UC = unit cost of production

 POQ (EXAMPLE 1)
Example:
A company produces widgets. The setup cost for each
The POQ model is a
production run is $100, the annual demand for widgets is
valuable tool for 10,000 units, the holding cost per unit per year is $1, and
businesses to use to the unit cost of production is $5.
You would use the following formula:
minimize their
production and inventory
costs. It is relatively easy
to use and can be
implemented by
businesses of all sizes.

INVENTORY MANAGEMENT
 POQ (EXAMPLE 1)
Example:
A company produces widgets. The setup cost for each
The POQ model is a
production run is $100, the annual demand for widgets is
valuable tool for 10,000 units, the holding cost per unit per year is $1, and
businesses to use to the unit cost of production is $5.
You would use the following formula:
minimize their
production and inventory
costs. It is relatively easy
to use and can be
implemented by Therefore, the optimal production order quantity for
businesses of all sizes. widgets is 632 units.

INVENTORY MANAGEMENT
 Q = Number of pieces per
order
FORMULAS
H = Holding cost per unit per
Annual Inventory Holding Cost
year
= Average Inventory Level * Holding cost per unit
S = Setup Cost
per year
D = Annual Demand
t = Length of the production Annual Inventory Level
run in = Maximum Inventory Level/2
days
Holding Cost
p = Daily production rate Maximum Inventory Level
d== Maximum Inventory Level/2
Daily demand/usage rate = Total produced during the production run - total
(H)
used
= Q/2 [1 - (d/p)] H
during the production run
= 1/2 HQ[1 - (d/p)]
= pt - dt
Set-up Cost
= p (Q/p) - d (Q/p)
= (D/Q)S
= Q (1 - d/p)
INVENTORY MANAGEMENT
POQ (EXAMPLE
2)
A manufacturing company that makes
flashlights for toys. The company operates in a
production facility 300 days per year. Tt has
orders for about 12 000 flashlights per year
and the capacity of producing 100 per day.
Setting up the light production costs 50, and
the cost of each light is 1 dollar. The holding
cost is 10 cents per light per year
a. What is the optimal size of the production
run?
b. What is the average holding cost per
year?
c. What is the average setup cost per year?
d. What is the total cost per year, including
INVENTORY MANAGEMENT
the cost of the lights?
POQ (EXAMPLE 2)
INVENTORY MANAGEMENT
 QUANTITY
DISCOUNT MODEL
(QDM)
The Quantity Discount Model takes into account the This model takes into account quantity
following factors: discounts offered by suppliers. It
calculates the optimal order quantity
• Price breaks: These are the different price points that a that maximizes the savings from
quantity discounts while minimizing the
supplier offers for different order quantities. For
total cost of holding inventory.
example, a supplier may offer a discount of 10% for
orders of 100 or more units, and a discount of 20% for
It is a pricing strategy in which
orders of 200 or more units. companies offer lower prices to
• Holding cost: This is the cost of storing inventory. customers that purchase large
Holding costs can include things like warehouse space, quantities of a product. This is done to
insurance, and shrinkage. incentivize customers to buy more
• Order cost: This is the cost of placing an order with a products, which can lead to increased
supplier. Order costs can include things like shipping overall revenue and production cost
and handling fees. savings for the company.
INVENTORY MANAGEMENT
 QDM FORMULA The quantity discount model in inventory
management is a formula used to calculate
the optimal order quantity when quantity
discounts are offered. The formula takes
into account the following factors:

Quantity discounts: The quantity discounts

offered by the supplier.
The Quantity Discount Model (QDM)
Purchase cost: The cost of purchasing the
calculates the optimal order quantity by
item.
balancing the savings from quantity
Holding cost: The cost of holding the item in
discounts against the increased holding
costs of carrying a larger inventory. The
inventory.
optimal order quantity is the quantity that Ordering cost: The cost of placing an order.
minimizes the total cost of purchasing and Annual demand: The annual demand for the
holding inventory. item.
INVENTORY MANAGEMENT
 QDM Given:
D=816 case per year

(EXAMPLE)
Example:
The maintenance department of a large hospital uses
about 816 cases of liquid cleanser annually. Ordering
S = $12 per order
H = $4 per case per year

Range: Price
costs are $12, carrying costs are $4 per case a year, and 1 to 49 20
50 to 79 18
the new price schedule indicates that orders of less than
80 to 99 17 The formula is as
50 cases will cost $20 per case, 50 to 79 cases will cost 100+ 16 follows:

$18 per case, 80 to 99 cases will cost $17 per case, and Q = sqrt (2 * D * S /
Q= sqrt of: 2DS/H H)
larger orders will cost $16 per case. 2×816×12/ 4
= 69.9 where:
Determine the optimal order quantity and the total cost.
Q = 70 cases Q: The optimal order
To get the optimal order quantity, we need to determine quantity.
TC = Q×H /2 + D×S /Q + PD D: The annual
the total cost. The formula to calculate total cost is the demand for the item.
TC = 70×4 /2 + 816×12 /70 + S: The ordering cost.
following: TC (total cost) = Carrying Cost + Ordering Cost
18×816 H: The holding cost.
+ Purchasing Cost = $14,967.88
TC = Q×H /2 + D×S /Q + P D
where:
INVENTORY MANAGEMENT
P = unit price
 TC = 80×4 /2 + 816×12 /80 +
17×816
= $14,154 When to use the QDM:
The QDM should be used when a supplier offers
TC = 100×4 /2 + 816×12 /100 + quantity discounts for large orders and the
16×816 company's holding costs are significant. The QDM
= $13,353.92 can help companies save money on their
inventory costs by ensuring that they are
ordering the optimal quantity of products.
The optimal order quantity = 100
Limitations of the QDM:
case
The QDM assumes that the company's demand
The number of orders per year = for the product is constant and that the supplier's
demand / optimal order quantity price breaks are fixed. However, in reality,
NOTE: 816 ÷ 100 discount
The quantity = 8.16 model
orderis a useful tool for demand and price breaks can fluctuate.
businesses that are able to negotiate quantity discounts with
their suppliers. By using the model, businesses can minimize Therefore, it is important to monitor the
their total inventory costs. company's demand and the supplier's price

QDM
breaks on a regular basis to ensure that the QDM
is still providing the optimal order quantity
INVENTORY MANAGEMENT
INVENTORY MODELS

REQUIREMENTS
Introducing the key topics
of:

• Material Requisition
Planning (MRP)
• Bill of Materials (BOM)
INVENTORY MANAGEMENT
 MATERIAL REQUIREMENTS PLANNING
Definitions (MRP):
• Material requirements planning (MRP)
(MRP)
Objectives of MRP:
In MRP there are three primary objectives that the software
is a software-based integrated seeks to provide:
inventory and supply management
system designed for businesses to • To ensure that raw materials are readily available for
predict material requirements for production and products are readily available for delivery
production. to consumers.
• Companies use MRP to estimate • To sustain the lowest raw materials and finished product
quantities of raw materials, maintain
levels in store.
inventory levels, and schedule
• To organize manufacturing, delivery schedules, and
production and deliveries.
• MRP significantly improves inventory purchasing activities.
efficiency compared to manual As basic as the objectives sound, organizations would be
methods used before the advent of
significantly less productive if it weren’t for the
software-based systems like reorder
point (ROP) and reorder quantity
implementation of the MRP inventory system.
(ROQ).
INVENTORY MANAGEMENT
 MATERIAL REQUIREMENTS PLANNING (MRP)
How MRP Works: Using MRP, managers can determine their need for labor and
• MRP helps businesses and supplies and improve their production efficiency by inputting data
manufacturers define what is into the MRP scheme such as:
needed, how much is needed, and • Item Name or Nomenclature: The finished good title,
when materials are needed and work sometimes called Level "0" on BOM.
backward from a production plan for • Master Production Schedule (MPS): How much is required to
finished goods. meet demand? When is it needed?
• MRP converts a plan into a list of • Shelf life of stored materials.
• Inventory Status File (ISF): Materials available that are in stock
requirements for the subassemblies,
and materials on order from suppliers.
parts, and raw materials needed to
• Bills of materials (BOM): Details of materials and components
produce a final product within the
required to make each product.
established schedule.
• Planning data: Restraints and directions like routing, labor and
• MRP helps manufacturers get a grasp
machine standards, quality and testing standards, and lot
of inventory requirements and
sizing techniques.
ensure balance between supply and
demand.
INVENTORY MANAGEMENT
MRP STEPS AND
PROCESSES:

INVENTORY MANAGEMENT
MRP STEPS AND PROCESSES:

• Identifying requirements to meet demand: This step starts with inputting customer
orders and sales forecasts. MRP breaks down demand into individual components and
raw materials needed to complete the build while accounting for any required sub-
assemblies.
• Checking inventory and allocating resources: MRP checks demand against
inventory, allowing you to manage stock across multiple locations and track the status
of items. It also prompts reorder recommendations and manages inventory into their
proper locations.
• Scheduling production: Using a master production schedule, the system
determines time, labor, and machinery and workstations needed for each build step
which generates the appropriate work orders, purchase orders and transfer orders. It
also includes subassemblies if needed, the system takes into account how much time
each subassembly takes and schedules them accordingly.
• Identifying issues and making recommendations: MRP links raw materials to work
orders and customer orders, alerting teams to delays and making recommendations
INVENTORY MANAGEMENT
for existing orders: automatically moving production in or out, performing what-if
 MRP DATA
INPUTS Data REQUIREMENTS
Needed for MRP
Systems:
To successfully run an MRP inventory system in an organization, there is an assortment of data
required for successful use:

• End Item: The MRP system requires the user to describe what type of product is being created and
its specific demand level.
• Quantity: The required quantity needed of a user to input to meet specific demand schedules.
• Shelf Life: The amount of time that a product is able to remain in the warehouse is required for the
planning aspect of an MRP system.
• Inventory Record: Records of materials available for use, work in progress, and completed.
• Planning Data: Restraints and directions, such as labor, machine standards, testing, techniques,
and commands.
• Bill of Materials: Detailed accounts of materials and components used to make each of the
products.

After inputting all the data throughout the system, it can be run in a business.

INVENTORY MANAGEMENT
 MRP DATA REQUIREMENTS
OUTPUTS Data Needed for MRP
Systems:
• Using the provided inputs, the MRP calculates what materials are needed, how much is
needed to complete the build and when in the build process they are needed.
• With this information defined, businesses are able to execute on just-in-time (JIT)
production, scheduling production based on material availability.
⚬ This minimizes inventory levels and carrying costs, as inventory is not stored in the
warehouse for future production but arrives as needed. By scheduling materials to
arrive and production to begin soon after, businesses can move materials through
the workflow process without delay.

The MRP lays out the plan of when materials should arrive, based on when they’re needed
in the production process, and when subassemblies should be scheduled. Using a master
production plan and taking into account subassembly build times minimizes materials
sitting on shelves and bottlenecks in the build process (purchase orders, material plan,
workINVENTORY
orders and reports). MANAGEMENT
 MRP AND
MANUFACTURING
• Manufacturers manage
Manufacturing Resource Planning (MRP II):
• MRP II is an integrated information system used by
the types and quantities businesses.
• It evolved from early MRP systems by including the
of materials they purchase
integration of additional data, such as employee and
strategically and cost-
financial needs.
effectively to ensure that • This system is designed to centralize, integrate, and
they can meet current and process information for effective decision making in
future customer demand. scheduling, design engineering, inventory management,
and cost control in manufacturing.
• MRP helps companies
Note: Both MRP and MRP II are seen as predecessors to
maintain appropriate Enterprise resource planning (ERP), which is a process whereby
levels of inventory so that a company, often a manufacturer, manages and integrates the
manufacturers can better important parts of its business.
• MRP II is a computer-based system for coordinating
align their production with
production schedules by aligning material arrivals with
rising and falling demand. machine and labor availability using real-time data. It is
INVENTORY commonly used independently and as a partMANAGEMENT
of extensive
ERP systems.
MRP I VS. MRP
II:
For all intents and purposes,
MRP I MRP II

MRP II has effectively • master • master

replaced MRP I software. Most production production
MRP II systems deliver all of scheduling scheduling
the functionality of an MRP • bill of materials • bill of materials
system. But in addition to • inventory • inventory
offering master production tracking tracking
scheduling, bill of materials Note: MRP II includes the • machine capacity
three MRP I major
(BOM), and inventory scheduling
functionalities plus
tracking, MRP II provides additional functionalities. • demand
functionality within logistics, forecasting
marketing, and general • quality assurance
finance.
INVENTORY
• general MANAGEMENT
accounting
 BILLS OF MATERIALS
Definitions (BOM): (BOM)
• A Bill of Materials (BOM) is a detailed
Understanding a Bill of Materials (BOM):
• A bill of materials (BOM) is a centralized source of
list of raw materials, components, information for manufacturing a product. It includes a
and assemblies required to
list of required items and assembly instructions.
construct, manufacture or repair a
product or service.
Manufacturers use it to initiate the assembly process.
• It is a comprehensive inventory of • Creating an accurate bill of materials is vital because it
the raw materials, assemblies, ensures that parts are available when needed and that
subassemblies, parts and the assembly process is as efficient as possible.
components, as well as the • If the BOM is not accurate, it can cause production
quantities needed to manufacture a delays, which increases operating costs, as time is
product.
needed to locate missing parts, start another
• It can also be referred to as a
production order, or determine the correct process of
product structure, assembly
component list, or production recipe assembly.
in some industries.
INVENTORY MANAGEMENT
 BOM (EXAMPLE)
Example:
• For example, if a bicycle manufacturer
wants to build 100 bicycles, the bill of
materials will consist of all the individual
parts needed to build the bicycle. The list
would include the seats, frames, brakes,
handlebars, wheels, tires, chains, pedals
and cranksets, as well as the quantities of
each component and their cost. BOMs can
be created using physical products or a
software-as-a-service bill of materials
product.
INVENTORY MANAGEMENT
 BOM Note: A BOM is the foundation of
production planning systems,

S T R U CT U
• A BOM typically has a hierarchical
offering essential information for
various business processes,

RE
structure with the finished end
product at the top. It includes
such as manufacturing resource
planning, product costing,
material provision for production
product codes, part descriptions, and plant maintenance.
The BOM combines all the
quantities, costs and additional necessary information for
specifications. constructing a finished product
and is utilized across different
• Among the most common methods departments, including
of representing a BOM are single- engineering, design, sales,
material management, and plant
level BOMs and multilevel ones.
INVENTORY management. MANAGEMENT
 BOM
STRUCTURE
Single-level bill of materials:
• This is a simple list with each
assembly or subassembly needed
for a product shown once, with the
corresponding quantity required for
each product. This is an easy BOM
to develop. However, this type of
BOM is unsuitable for complex
products because it does not
specify the relationship between
parent and child parts and between
assemblies and subassemblies. If a
new product fails, a single-level
BOM makes it difficult to determine
which part needs to be replaced or
repaired.
INVENTORY MANAGEMENT
 BOM
STRUCTURE
Multilevel bill of materials:
• This BOM approach requires
more work to create but offers
greater details and specificity
on the parent and child parts
in the product. In a multilevel
BOM, the total material
required is shown. And the
product structure shows the
relationship between the
parent and child product, as
well as assemblies and
subassemblies.
INVENTORY MANAGEMENT
 MANUFACTURING SALES
THE TYPES OF
Bills of • A manufacturing bill of
materials (MBOM) includes
• A sales bill of materials
(SBOM) defines the details

Materials
a comprehensive list of all of the product prior to
the items and assembly in the sales stage.
subassemblies required to • It separates the list of
make a manufactured, finished products and their
ENGINEERING
shippable finished product. components in sales order
• An engineering bill of materials (EBOM) • It also includes information documents.
defines assemblies and parts designed by on parts that require • The finished product is
the engineering department. processing before assembly treated as a sales item, not
• It focuses on the functional perspective and explains how an inventory item.
and consists of a mechanical or technical components in a product Note: Each type of BOM will vary in
drawing of a product. are related. This information structure and level of detail. For
• It may have more than one version as the is shared with integrated example, an EBOM may list parts
design is revised by Engineers using business systems like ERP, related to a specific function of the
computer-aided design or electronic MRP and in some cases, a product, such as chips for a circuit
design automation tools. board. An MBOM lists every material
manufacturing execution
that goes into manufacturing a product.
system.

INVENTORY MANAGEMENT
 EFFECTIVE BILLS
Effective
BOM
OF MATERIALS
An effective BOM includes the following 11 core
components:

• Levels: A bill of materials often contains several levels. The BOM level number explains where the part fits
into the BOM hierarchy.
• Part name: A record of a part name helps manufacturers identify parts and provides information about
them.
• Part number: Part numbers are used as shorthand to refer to and identify parts. An intelligent or significant
part number denotes some information about the part. An insignificant or non-intelligent part number is an
arbitrary number assigned to a part.
⚬ For example, a screw might have an intelligent part number of HSC0424OP. The H means hardware, the
S stands for machine screw, the C0424 refers to the length of the screw, and OP refers to the screw's
head style. The same screw in an arbitrary numbering system may use the serial number
000383487349, which has no additional meaning beyond identifying the screw.
• Manufacturer name: Listing the manufacturer's name helps identify a part.
• Part phase: This indicates where each part is in the product life cycle.
⚬ For example, a new part would be in the unreleased or in-design phase. A revision level is sometimes
included in the part phase to indicate the version or revision of the part.

INVENTORY MANAGEMENT
 EFFECTIVE
Effective An effective BOM includes the following 11 core
components:
BILLS OF
BOM
MATERIALS
• Alternate parts: This tells the reader whether a part can be swapped for another one if the original
part is unavailable.
• Priority analysis: This defines which parts are critical and helps users prioritize purchasing.
⚬ For example, components with higher monetary values and longer lead times might get
priority.
• Description: This provides details of each part and helps the reader distinguish among similar parts
by color and dimensions.
• Quantity: This indicates the number of components needed. A unit of measurement should be
defined for each part type.
• Procurement specification: The procurement specification describes how parts are purchased and
made. The designations P, M and C are often used.
⚬ They stand for purchased (P), modified (M), and custom (C).
• Comments and notes: This is a place to document unexpected changes and take notes as the
project takes shape. Notes may include images and diagrams of a part or assembly.
INVENTORY MANAGEMENT
JUST IN TIME
SYSTEM
• Japanese Management philosophy
applied in practice since the early
1970’s
• Initially known as “Toyota Production
System”
• First developed and perfected in Toyota
Manufacturing by Taiishi Ohno

INVENTORY MANAGEMENT
JUST IN TIME SYSTEM
• Inventory management strategy that aligns raw-material
orders from suppliers directly with production schedules
• Philosophy designed to achieve high-volume production
through the elimination of waste and continuous improvement
• Minimizes inventory, increases efficiency
• Achieved through coordination of the flow of materials so that
the right parts arrive at the right place in the right quantity
• Requires working closely with suppliers so that raw materials
arrive as production is scheduled to begin, but no sooner

INVENTORY MANAGEMENT
JUST IN TIME SYSTEM
• The goal is to have the minimum amount of inventory on hand to
meet demand and to achieve high-volume production with
minimal inventory on hand and eliminate waste
• JIT inventory ensures there is enough stock to produce only what
you need when you need it
• Contrasts with Just-in-Case strategies. wherein producers hold
sufficient inventories to have enough product to absorb maximum
market demand
• Companies often adopt JIT inventory management as a cost-
cutting strategy
• Relies on steady production, high-quality workmanship, no
machine
INVENTORY breakdowns, and reliable suppliers MANAGEMENT
 2. PULL SYSTEM/ KANBAN

Concept
• The “nervous system” of JIT production

JUST IN TIME • Japanese scheduling system that is often used in conjunction with
lean manufacturing and JIT
• Controls work-in-progress production and inventory movement

s
• Crucial when it comes to eliminating manufacturing waste due to
overproduction
1. WASTE ELIMINATION • Creates more flexibility on the production floor because a
The JIT inventory management model company only produces goods based on actual orders
• Uses cards (paper or digital) to track the progress of production on
eliminates overordering and excess
a factory floor
of all
kinds
• Transportation
• Inventory
• Motion
• Waiting
• Overproduction
• Overprocessing
• Defects

INVENTORY MANAGEMENT
 3. UNINTERRUPTED WORKFLOW • 4. TOTAL QUALITY CONTROL

• The schedule for the final • In order to achieve zero

assembly must be smooth inventories, errors and
flowing defective components must
• Every process should be be eliminated in each task.
reduced to its simplest form Under TQC, all workers are
before considering responsible for ensuring that
mechanization or their work is defect-free
automation and the aim is to before proceeding to the
replace a complex and next stage of operation.
expensive process with one
that is simple and cheap
INVENTORY MANAGEMENT
 5. TOP MANAGEMENT AND 6. LONG TERM RELATIONSHIPS
EMPLOYEE COMMITMENT WITH SUPPLIERS
• The success of JIT implementation is
• The quality of the supplies
dependent to a great extent on the
purchased is a critical factor to
teamwork and commitment of every
the quality of anorganisation’s
employee.
• Each employee should be given
finished products. Hence, an
adequate training and responsibilities organization must treat supplier’s
in various areas like timeliness of alongterm business partners so
production and quality assurance. that the quality of materials
Employees should be able to set up delivered wills always is
and maintain various type of maintained at a high standard.
machinery. This would greatly reduce
• Involvement can be extended to paperwork, inventory levels and
suggestion schemes and participation storage space.
in quality improvement teams.
INVENTORY MANAGEMENT
 7. CONTINOUS IMPROVEMENT
/ KAIZEN

• Japanese business philosophy

that focuses on gradually
improving productivity by
involving all employees and by
making the work environment
more efficient
• Reducing waste and improving
quality
• Kaizen
• Japanese term meaning
“change for the better”

INVENTORY MANAGEMENT
 STEPS IN CYCLE OF
CONTINUOUS IMPROVEMENT
FOR JIT INVENTORY
• Design
The JIT process begins with a review of the essential manufacturing building blocks:
product design, process design, personnel and manufacturing planning. Then plans are
put into place to eliminate disruption, minimize waste and build a flexible system.
• Manage
A Total Quality Management (TQM) review ensures there is continuous improvement
throughout the process. A management review defines workers’ roles and
responsibilities, defines and measures statistical quality control, stabilizes schedules,
and checks out load and capacity schedules and levels.
• Pull
Educate the team on production and withdrawal methods using signaling methods like
Kanban. Review lot size policies and reduce lot sizes.

INVENTORY MANAGEMENT
 STEPS IN CYCLE OF
CONTINUOUS IMPROVEMENT
FOR JIT INVENTORY
• Establish
Vendor relationships are vital to the success of JIT. Review vendor lists. Settle on preferred suppliers,
negotiate contracts, discuss lead times, delivery expectations and usage metrics and measures.
Learn how to make the most of them in the supply chain.
• Fine-tune
Determine inventory needs, policies, controls and reduce inventory movements.
• Build
Inform your team about the skills and capabilities it needs to complete its work and conduct team
education and empowerment sessions to educate them.
• Refine
Reduce the number of parts and steps in production by refining, standardizing and reviewing the
entire process.
• Review
Define and implement quality measures and metrics and conduct a root cause analysis of any
problems. Emphasize improvements and track trends to improve every aspect of JIT.
INVENTORY MANAGEMENT
 JIT INVENTORY
METHODOLOGY
• Order
Maintain a high level of physical and organizational discipline.
• Better Quality
Eliminate defects through attention to detail and continuous improvements.
• Reduce Setup Time
Create flexible changeover approaches when setups need to adjust to meet
customer demand.
• Small Lot Size
The small size reduces in-process inventory, carrying costs, storage space, and
makes for easier inspection and rework.
• Load Uniformity
Leveling is a control mechanism that achieves a stable, level daily schedule.

INVENTORY MANAGEMENT
 JIT INVENTORY
METHODOLOGY
• Flow Balance
Flow scheduling organizes throughput for even distribution of energy and labor.
• Diversified Skills
Cross-trained workers can be deployed to different areas to keep production moving.
• Visibility for Control
Using communication tools, like those found in Kanban, keeps the entire team
informed of inventory levels.
• Ongoing Maintenance
Ongoing oversight and focus on detail, including the machinery and tools the
business uses every day, helps maintain a low defect, low problem environment.
• Use Fitness
JIT spaces designed to fit each process speeds up production. One workstation pulls
output from the one before it, as needed, based on a master schedule or customer
demand.
INVENTORY MANAGEMENT
 JIT INVENTORY
METHODOLOGY
• Logical Plant Layout
Product-oriented design makes assembly easier and more efficient
• Strong Supplier Network
Strong relationships with vendors make JIT inventory most effective
• Worker Immersion
Every team member should be dedicated to the process and colleagues to
achieve JIT goals
• Cell Manufacturing
Create an environment where groups can work as quickly as possible to
make as many products as they can and limit the waste they create
• Pull System
The process of only replacing products once they’ve been used in production
INVENTORY MANAGEMENT
Three Major • By focusing on value-added
processes, JIT is able to

ELEMENTS
achieve high-volume
production of high-quality,
low-cost products while
meeting precise customer

OF JIT
needs
1. Just in Time Manufacturing • JIT inventory and
• Production model in which items are manufacturing have a
created to meet demand, not created in similar principle: produce or
surplus or in advance of need receive a product only when
• Another way to view JIT is to think of it needed. They operate at
different points in the supply
as a philosophy of value-added
chain but can work together
manufacturing or independently.

INVENTORY MANAGEMENT
Three Major • Aims to hold all parties

ELEMENTS
involved in the production
process accountable for
the overall quality of the

OF JIT
final product or service.
2. Total Quality Management • Improve the quality of an
• Continual process of detecting organization's outputs,
and reducing or eliminating including goods and
errors in manufacturing services, through the
continual improvement of
internal practices

INVENTORY MANAGEMENT
Three Major • According to JIT,

ELEMENTS
genuine and meaningful
respect for employees
must exist for a

OF JIT
company to get the best
from its workers
3. Respect for People
• JIT organizations rely on
• Considered central to the JIT
all employees to work
philosophy together, including
management and labor

INVENTORY MANAGEMENT
 ADVANTAGES AND
Advantages of JIT
DISADVANTAGES
• As stock is only obtained when it is needed,
less working capital is tied up in stock
• Less space needed
With a faster turnaround of stock, you don’t need as much warehouse or storage space
to store goods
• Waste reduction
A faster turnaround of stock prevents goods becoming damaged or obsolete while
sitting in storage, reducing waste
• Reduce obsolete inventory and dead stock
Low inventory levels significantly reduce the risk of inventory going unsold and sitting
in the warehouse obsolete.
• Reduce defective product loss
Defective inventory items are easier to identify and fix when production levels are low,
which reduces scrap costs.

INVENTORY MANAGEMENT
 ADVANTAGES AND
Advantages of JIT DISADVANTAGES
• Improved Efficiency
- JIT eliminates the costs that come with extra raw materials, unneeded
inventory, and product storage
- Raise inventory turnover ratios
- Minimal inventory obsolescence
- Minimize raw materials on hand
- Local Sourcing
• Greater Productivity
- JIT enhances productivity by reducing the time and resources involved in
manufacturing processes.
- Faster product turnaround-
- Shorter production runs
- Simplify change orders

INVENTORY MANAGEMENT
 ADVANTAGES AND
Advantages of JIT DISADVANTAGES
• Smoother Production Flow
- Receiving goods on an as-
- JIT can eliminate bottlenecks and delays needed basis reduces inventory
across the entire production process costs
- Shorter production cycles - Reduce working capital
- Reduce produc defects - Lower holding costs
- Shorter production runs - Reduce large raw material
- More functional production cells spends
- Compressed operations - Reduce labor costs
• Smaller investments • Improve Quality
- JIT inventory management is ideal for - A flexible workforce can focus on
smaller companies that don’t have the making quality products with
funds available to purchase huge amounts lower defect rates.
of stock at once as JIT doesn’t require - Reduce work-in-progress goods
having a lot of stock on hand less damage
INVENTORY MANAGEMENT
certified quality
 ADVANTAGES AND
Disadvantages of JIT
DISADVANTAGES
• Production is very reliant on suppliers • Supply chain disruptions
A supplier who does not deliver goods on Disruptions in the supply chain can
time and in the right amounts can disrupt stall the production process.
the entire production process • Missed opportunities
• Risk of running out of stock With few or no finished goods on
By not carrying much stock, it is hand, a company may not be able
imperative you have the to meet massive and unexpected
correctprocedures in place to ensure orders immediately.
stock can become readily available, and • Unexpected price changes
quickly. In JIT, the cost for parts is constant.
• Lack of preparedness When costs rise, profit margins
The business’s entire workflow needs to drop.
convert to a lean framework. These
actions affect the organization and the
supply chain, which may need to change
INVENTORY MANAGEMENT
its procedures and practices.
 ADVANTAGES AND
Disadvantages of JIT
DISADVANTAGES
• Overreliance on forecasts • Time pressure
Adapting to sudden surges or Scheduling may increase the cost of
declines is difficult because of the goods sold (COGS) because there’s no
reliance on forecasting. guarantee a company will always
• Order issues have the best price for raw materials
Shortages and stock-outs can from a supplier.
disrupt inventory systems. • Undisciplined staff
• Local sourcing costs Team members that are not on board
JIT relies on local sourcing, which with JIT can affect productivity, quality
can cost more for a number of and other issues.
different reasons. This dependency • Acts of Nature
can also affect profitability in the A natural disaster that interferes with
pursuit of reliability. a vendor’s flow of goods can halt
production.
INVENTORY MANAGEMENT
Verticals that
JIT Use
INVENTORY
MANAGEMENT
• Apparel
JIT is an ideal way to lower the high cost of
inventory in the clothing business. Stocking
apparel is costly and risky because more
inventory needs to be carried to meet the
variety of styles, sizes and colors needed
to meet customer demand.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Aerospace
The risk of delay and cost overruns is
higher in this vertical than in many
other industries. JIT mitigates those
issues and saves valuable space in
plants.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT

• Automotive
JIT was born in the automotive space
to improve capacity and be more
competitive. The practice is still in use
today by car companies worldwide.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Big Box Retailers
Stores like Walmart and Target schedule the
arrival of merchandise — like back to school,
seasonal weather and Christmas goods — as
demand rises for specific items based on
forecasting and past experience. They clear
shelves to make room for the next season’s
goods when interest wanes.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Construction
In construction, waste is waiting, storing
inventory and moving materials
frequently. Proponents of the lean
methodology have adapted JIT to
mitigate these issues.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Fast Food
Franchises need to keep a substantial
inventory of ingredients on hand.
However, food is only made when there’s
an order. JIT procedures eliminate waste
and using fresh ingredients gives chains a
marketing advantage.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT

• Florists
A florist can use JIT by ordering flowers
only based on customer demand. When
florists shop the flower market, they
know the amount and specific items to
buy.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Health Care
Many health care organizations turn to
JIT inventory management to keep
supplies lean and expenses low. The
industry faces tighter profit margins tied
to care costs and rate cuts for
reimbursements.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Manufacturers
In manufacturing, speed to market and
production costs can make or break a
company. JIT helps reduce flow times
within production systems and improve
response times from suppliers and
customers.

INVENTORY MANAGEMENT
erticals that Use
JIT INVENTORY
MANAGEMENT
• On-demand Publishing
On-demand publishing is the epitome of
JIT inventory management. Book
manuscripts are printed and assembled
only when sold. JIT reduces wasteful
destruction of books and returns of
unsold inventory.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Publishing
Independent publishers and self-
publishers use just-in-time delivery to
print and assemble books on an as-
needed basis to reduce costs due to
unsold inventory.

INVENTORY MANAGEMENT
Verticals that Use
JIT INVENTORY
MANAGEMENT
• Retail
In the past, retailers carried a surplus so they
wouldn’t run out of desired items and lose out on
potential sales. However, this isn’t an option for
stores operating on a tight budget. With a JIT
model, the goal is to physically stock zero
inventory until a customer places an order.

INVENTORY MANAGEMENT
MAJOR CORPORATIONS THAT
UTILIZES JIT INVENTORY
MANAGEMENT
• Amazon
• Apple
• Dell Technologies
• Nike
• Tesla
• Toyota Motor Corporation

INVENTORY MANAGEMENT
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