Activity:

Activity:

You are currently driving your Brand New

2024 Toyota Wigo 1.0 Automatic Car,
powered by a 3-Cylinder gas fed engine. It
is about to run out of gas, you estimated
that the remaining fuel will be enough to
get to the nearest gas station. When you
are about to arrived at the gas station, you
found out that there is a sign stating “OUT
OF FUEL” and the next gas station is still 2
Kilometers away, and your remaining fuel is
not enough.
Activity:

You are currently driving your Brand New

2024 Toyota Wigo 1.0 Automatic Car,
powered by a 3-Cylinder gas fed engine. It
is about to run out of gas, you estimated
that the remaining fuel will be enough to
get to the nearest gas station. When you
are about to arrived at the gas station, you
found out that there is a sign stating “OUT
OF FUEL” and the next gas station is still 2
Kilometers away, and your remaining fuel is
not enough.

What would you feel?

Activity:

As an aspiring Manager, would

you let this happen? (if your
operate a gas station)

If yes. Why?
if Not Why Not?
Activity:

As an aspiring Manager,(if
your operate a gas station)

what would you do in order

that this situation would not
repeat itself?
Activity:

You operate a small convenience store. you

also help in maintaining the cleanliness of
your store. However during cleaning a
portion of your stall, you have check a
stack of some “chichiryas” with a
Expiration date of November 15, 2024. This
chichiryas are considered slow moving
items. You estimated that it would not be
sold on or before November 15.
Activity:

You operate a small convenience store. you

also help in maintaining the cleanliness of
your store. However during cleaning a
portion of your stall, you have check a
stack of some “chichiryas” with a
Expiration date of November 15, 2024. This
chichiryas are considered slow moving
items. You estimated that it would not be
sold on or before November 15.

1. as the owner, what would you do in order

to sell the items?
Activity:

You operate a small convenience store. you

also help in maintaining the cleanliness of
your store. However during cleaning a
portion of your stall, you have check a
stack of some “chichiryas” with a
Expiration date of November 15, 2024. This
chichiryas are considered slow moving
items. You estimated that it would not be
sold on or before November 15.

2. as the owner, what would you do in order

the situation would not repeat itself.
 Businness whether big or
small, service, merchandising
or manufacturing should
consider managing its
inventories. Inventories has a
significant share in the balance
sheet of a company, or let us
say, it is the source of income
of a merchandising /
manufacturing company
 Businness whether big or
small, service, merchandising
or manufacturing should
consider managing its
inventories. Inventories has a
significant share in the balance
sheet of a company, or let us
say, it is the source of income
of a merchandising /
manufacturing company
> The management should
have a system to manage its
ABSTRACTION
INVENTORY
SYSTEM is the stock of any item or
Inventory
resource used in an organization and
can include: raw materials, finished
products, component parts, supplies,
and work-in-process
An inventory system is the set of
policies and controls that monitor
levels of inventory and determines
what levels should be maintained,
when stock should be replenished,
and how large orders should be
Again: what is the
Primary Goal in Financial
 Maximization of Shareholders Wealth
Management?
 In order maximize the shareholders
wealth management should:
1. Have a strategic plans and operations
which MAXIMIZE REVENUES or SALES

2. Have a strategic plans and operations

which MINIMIZE COST, EXPENSES AND
LOSSES
 INVENTORY COSTS to
Consider
Holding (or carrying) costs
Costs for storage, handling,
insurance, etc
Setup (or production change) costs
Costs for arranging specific
equipment setups, etc
Ordering costs
Costs of someone placing an
order, etc
Shortage costs
Costs of canceling an order, etc
 Inventory
Systems
Single-Period Inventory Model
One time purchasing decision
(Example: vendor selling t-shirts
at a football game)
Seeks to balance the costs of
inventory overstock and under
stock
Multi-Period Inventory Models
Fixed-Order Quantity Models
Event Triggered (Example:
running out of stock)
Fixed-Time Period Models
Time triggered (Example: Monthly
sales call by sales representative)
 Fixed-order quantity
model
 also called economic order
quantity (EOQ)
 an inventory control model where
the amount requisitioned is fixed
and the actual ordering is
triggered by inventory dropping to
a specified level of inventory
 Fixed-Order Quantity
Model
Assumptions

Demand for the product is constant and

uniform throughout the period

Lead time (time [number of days]

from ordering to receipt) is
constant

Price per unit of product is constant

 Fixed-Order Quantity
Model
Assumptions
Inventory holding [carrying] cost is
based on average inventory

Ordering or setup costs are

constant

All demands for the product will be

satisfied (No back orders are allowed)
 Basic Fixed-Order Quantity
Model and Reorder Point
1. You receiveBehavior
an order quantity Q. 4. The cycle then repeats.

Number
of units
on hand Q Q Q

R
L L
2. Your start using
them up over time. 3. When you reach down to
Time a level of inventory of R,
R = Reorder point
Q = Economic order you place your next Q
quantity sized order.
L = Lead time
 Cost Minimization
By addingGoal
the item, holding, and ordering costs
together, we determine the total cost curve, which in
turn is used to find the Qopt inventory order point that
minimizes total costs
There is a Direct Relationship between the Order Size and
Total Cost to Carry, when Order Size is decreases (few)
C the Total Cost to Carry also decreases, while Order Size
O Increases, total Cost to Carry also increases.
S Holding /Carrying
T Costs
There is an inverse relationship between the Order Size
and Total Cost per Order, if the Order Size decreases the
Total Cost per Order Increase, while if the Order Size Annual Cost of
Increases the total Cost per Order decrease.
Items (DC)
Ordering Costs

QOPT

Order Quantity (Q)

 Basic Fixed-Order
Quantity
(EOQ) Model TC=Total
annual cost
Total Formula
Annual Annua D =Demand
Annual Annual l C =Cost per
Purchase + Ordering unit
= Cost Cost Holdin
Q =Order
+ Cost g Cost
quantity S
=Cost of
placing an order
or setup cost
D Q R =Reorder
TC = DC + S+ point L =Lead
time H=Annual
H holding and
storage cost
Q per unit of
inventory
 Deriving the
EOQwe take the first
Using calculus,
derivative of the total cost function
with respect to Q, and set the
derivative (slope) equal to zero,
solving for the optimized (cost
minimized)
2D S value of Qopt
Q = 2(A nnual D em and)(O rdering Cost per Unit
O H
PT H olding C ost per Unit
=
_
We also need a R eorder point, R =
reorder point to dL
tell us when to _
d = average daily demand (constant)
place an order L = Lead time (constant)
 EOQ Example (1) Problem
Data
Given the information below, what are the EOQ and
reorder point?

Annual Demand = 1,000 units

Days per year considered in average
daily demand = 365
Cost to place an order = P10
Holding cost per unit per year =P2.50
Lead time = 7 days
Cost per unit = P15
 EOQ Example (1) Solution
2DS
= 2(1,000 )(10)
Q OPT H = 89.443 units or 90 units
2.50
=
1,000 units / year
d = = 2.74 units / day
365 days / year

_
Reorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 units

Analysis: In summary, you place an optimal order of

90 units. In the course of using the units to meet
demand, when you only have 20 units left, place the
next order of 90 units.
1. EOQ = 90 Units
2. Number of Orders per Year
3. Annual Ordering Cost
4. Annual Carrying Cost
5. Total Annual Cost
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year

3.Annual Ordering Cost = Cost per

Order x Orders Per Year
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year

3.Annual Ordering Cost = Cost per

Order x Orders Per Year
11 x 10 = P110
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year

3.Annual Ordering Cost = Cost per

Order x Orders Per Year
11 x 10 = P110

4.Annual Carrying Cost =Carrying

cost*EOQ/ 2
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year

3.Annual Ordering Cost = Cost per

Order x Orders Per Year
11 x 10 = P110

4.Annual Carrying Cost =Carrying

cost*EOQ/ 2
2.5 x (90 / 2) = P112.5
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year

3.Annual Ordering Cost = Cost per

Order x Orders Per Year
11 x 10 = P110

4.Annual Carrying Cost =Carrying

cost*EOQ/ 2
2.5 x (90 / 2) = P112.5
5.Total Annual Cost = Annual
1. EOQ = 90 Units
2.Number of Orders per Year = Annual
Demand / EOQ
1,000 / 90 = 11 Orders per Year

3.Annual Ordering Cost = Cost per

Order x Orders Per Year
11 x 10 = P110

4.Annual Carrying Cost =Carrying

cost*EOQ/ 2
2.5 x (90 / 2) = P112.5
5.Total Annual Cost = Annual
Order Size Number of Total Cost Average Total Cost To Total Cost to
Order per Order Inventory Carry Order and
(Order Size / Total Cost to
2) Carry

80
90 11 110 45 112.5 P222.5
100
Order Size Number of Total Cost Average Total Cost To Total Cost to
Order per Order Inventory Carry Order and
(Order Size / Total Cost to
2) Carry

80 12.5 125 40 100 P225

90 11 110 45 112.5 P222.5
100
Order Size Number of Total Cost Average Total Cost To Total Cost to
Order per Order Inventory Carry Order and
(Order Size / Total Cost to
2) Carry

80 12.5 125 40 100 P225

90 11 110 45 112.5 P222.5
100 10 100 50 125 P225
 EOQ Example (2)
Problem
Determine Data
the economic order quantity and the reorder
point given the following… (Compute on your seat)

Annual Demand = 10,000 units

Days per year considered in average daily
demand = 365
Cost to place an order = P10
Holding cost per unit per year = 10% of cost per
unit
Lead time = 10 days Holding Cost per unit =
Cost per unit = P15 P15.00 x 10% = 1.5
 EOQ Example (2) Solution
Q O PT = 2DS 2 (10 , 0 0 0 ) ( 1 0 )
H = 1 .5 = 365 .148 units, or 366 u n
its 0

10,000 units / year

d= 365 days / year = 27.397 units / day

_
R = d L = 27 .397 units / day (10 days) = 273 .97 or 274 units

Analysis: Place an order for 366 units. When in the

course of using the inventory you are left with only
274 units, place the next order of 366 units.
APPLICATION

The computation of Economic

Order Quantity and ReOrder Point will
entail us to understand what should
an Inventory Manager and staff
should do in order to properly
manage its inventories (raw
materials, work in progress, finished
goods and Goods In Transit) in order
to minimize its total cost in handling
inventories which will lead to a better
profit margin and position on its
In real life, example, if you are about to
engage in business, you will be addressing
the following situation/question.
1.How much stocks should I order and still
cost a little and avoid excessive and stock-
out of inventories?
2.It is really okay to purchase inventories
or supplies in advance?
In real life, example, if you are about to
engage in business, you will be addressing
the following situation/question.
1.How much stocks should I order and still
cost a little and avoid excessive and stock-
out of inventories?
2.It is really okay to purchase inventories
or supplies in advance?

The Economic Order Quantity will aide

businessmen to properly manage its
inventories in order to minimize its total
cost and maximize its profit margin to have
a better profitability position.
Problem Solving Quiz

The annual demand is 10,000 units, the

ordering cost is P30 per order, and the
carrying cost is 20% of the unit cost which
is P15. The order quantity is 600 units.

Compute for the following:

1.Economic Order Quantity
2.Number of Orders per Year
3.Annual Ordering Cost
4.Annual Carrying Cost
5.Total Annual Cost