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Inventory Planning 
& 
Control
Inventory planning & control
Inventory Planning 
• The process of determining the optimal quantity and 
timing of Inventory for the purpose of aligning it 
with sales and production capacity . 
•Inventory planning has direct impact a company's 
cash flow and profit margins especially for 
smaller businesses that rely upon a quick turnover 
of goods or materials.
Objectives of Inventory 
Planning 
Objectives of Inventory Planning 
 Customer Satisfaction 
 Forecasting Needs 
 Controlling Costs 
 Successful Storage 
Customer Satisfaction 
Forecasting Needs 
Controlling Costs 
Successful Storage
Advantages of inventory planning 
 You know your stock levels 
 You can conduct stock rotation 
 You can optimize and reduce stock of items that don’t 
move that quickly 
 You can move you quick moving items to the front 
thereby speeding up picking 
 You can quick identify items that are not moving that 
you can remove from your inventory
Disadvantages of inventory 
planning 
 It doesn’t stop staff stealing stock 
 It can waste a lot of effort if not implemented and 
maintained correctly 
 It doesn’t replace incompetent management 
 It can be very expensive and the return on investment 
can take a long time 
 It requires a lot of staff training and you may loose 
some staff on the way
Inventory planning & control
Material Requirement Planning 
 Material requirements 
planning (MRP) is a 
production planning 
and inventory control system 
used to manage 
manufacturing processes. 
Most MRP systems 
are software-based, while it is 
possible to conduct MRP by 
hand as well.
What can MRP do ? 
 Reduce Inventory Levels 
 Reduce Component shortages 
 Improve Shipping Performance 
 Improve Customer Service 
 Improve Productivity 
 Simplified and Accurate Scheduling 
 Reduce Purchasing Cost 
 Improve Production Schedules
Conti…. 
 Reduce Manufacturing Cost 
 Reduce Lead Times 
 Less Scrap and Rework 
 Higher Production Quality 
 Improve Communication 
 Improve Plant Efficiency 
 Reduce Fright Cost 
 Reduction in Excess Inventory 
 Reduce Overtime
Three Basic Steps Of MRP 
 Identifying Requirements 
 Running MRP – Creating the Suggestions 
 Framing the Suggestions
Step 1: Identifying the 
Requirements 
 Quantity on Hand 
 Quantity on Open Purchase Order 
 Quantity in/or Planned for Manufacturing 
 Quantity Committed to Existing Orders 
 Quantity Forecasted
Step 2: Running MRP – Creating 
the Suggestions 
 Critical Items 
 Expedite Items 
 Delay Items
Step 3: Framing the suggestions 
 Manufacturing Orders 
 Purchasing Orders 
 Various Reports
Types Of MRP Reports 
 Primary MRP Reports 
 Secondary MRP Reports
Primary MRP Reports 
 Planned orders to be released at a future time. 
 Order release notices to execute the planned orders. 
 Changes in due dates of open orders due to 
rescheduling. 
 Cancellations or suspensions of open orders due to 
cancellation or suspension of orders on the master 
production schedule. 
 Inventory status data.
Secondary MRP Reports 
 Planning reports, for example, forecasting inventory 
requirements over a period of time. 
 Performance reports used to determine agreement 
between actual and programmed usage and costs. 
 Exception reports used to point out serious 
discrepancies, such as late or overdue orders.
What is Master Production 
Schedule ? 
 A Master Production Schedule or MPS is the plan that 
a company has developed for production, inventory, 
staffing, etc. It sets the quantity of each end item to be 
completed in each week of a short-range planning 
horizon. A Master Production Schedule is the master 
of all schedules. It is a plan for future production of 
end items.
 The Master Production Schedule gives production, 
planning, purchasing, and top management the 
information needed to plan and control the 
manufacturing operation. The application ties overall 
business planning and forecasting to detail operations 
through the Master Production Schedule.
Bill of Materials (BOM) 
 A listing of all the subassemblies, intermediates, parts, and 
raw materials that go into a parent assembly showing the 
quantity of each required to make an assembly. 
 Basically, a bill of material (BOM) is a complete list of the 
components making up an object or assembly. 
 Bills of materials come in different types specific to 
engineering (used in the design process), manufacturing 
(used in the manufacturing process), and so on. A 
manufacturing BOM is of vital importance in materials 
requirement planning (MRP) and enterprise resource 
planning (ERP) systems.
Benefits of a BOM 
 Improve material management by responding to changes 
in production. 
 Reduce inventory levels and obsolete parts. 
 Reduce manufacturing costs. 
 Minimize clerical and engineering efforts by optimizing 
the tasks of maintaining and changing multi-level bills. 
 Supports variable length part numbers and unlimited 
descriptive text. 
 Easy methods for accessing part information
Inventory Control is the supervision of 
supply, storage and accessibility of items in 
order to ensure an adequate supply without 
excessive oversupply
Objectives of inventory control 
 Protection against fluctuations in demand 
 Better use of men, material & machines 
 Protection against fluctuations in output 
 Control of stock volume 
 Control of stock distribution
Major activities of inventory 
control 
 Planning the inventories 
 Procurement of inventories 
 Receiving and inspecting the inventories 
 Storing and issuing the inventory 
 Recording the receipt and issues of inventories 
 Physical verification of inventories 
 Follow-up function 
 Material standardisation and substitution
Steps in Inventory Control 
 Deciding the maximum-minimum limits of 
inventory 
 Determination of Reorder point 
 Determination of Reorder quantity 
 ABC Analysis
ABC analysis (Inventory) 
ABC analysis is an inventory categorization 
method which consists in dividing items into three 
categories, A, B and C: A being the most valuable 
items, C being the least valuable ones. This method 
aims to draw managers’ attention on the critical 
few (A-items) and not on the trivial many (C-items).
The ABC approach states that, when reviewing inventory, a 
company should rate items from A to C, basing its ratings on the 
following rules: 
 A-items are goods which annual consumption 
value is the highest. The top 70-80% of the annual 
consumption value of the company typically accounts for 
only 10-20% of total inventory items. 
 B-items are the interclass items, with a medium 
consumption value. Those 15-25% of annual consumption 
value typically accounts for 30% of total inventory items. 
 C-items are, on the contrary, items with the lowest 
consumption value. The lower 5% of the annual 
consumption value typically accounts for 50% of total 
inventory items.
Purpose of inventory 
 To maintain independency of operation 
 To meet variation in product demand 
 To allow flexibility in product scheduling 
 To provide a safeguard for variation in raw material 
delivery time 
 To take advantages of economic purchase order size
Types of 
inventory 
control 
Independent 
Demand 
Dependent 
Demand
Independent Demand 
 An inventory of an item is said to be falling into the 
category of independent demand when the demand 
for such an item is not dependant upon the demand 
for another item. 
 Finished goods Items, which are ordered by External 
Customers or manufactured for stock and sale, are 
called independent demand items. 
 Independent demands for inventories are based on 
confirmed Customer orders, forecasts, estimates and 
past historical data.
Dependant Demand 
 If the demand for inventory of an item is dependant 
upon another item, such demands are categorized as 
dependant demand. 
 Raw materials and component inventories are 
dependant upon the demand for Finished Goods and 
hence can be called as Dependant demand inventories.
Difference between independent 
demand & dependent demand: 
 One of the biggest differences in inventory is between 
dependent and independent demand. Understanding 
this difference is important as the entire inventory 
policy for an item is based on this. 
 Independent demand is demand for a finished 
product, such as a computer, a bicycle, or a pizza. 
Dependent demand, on the other hand, is demand for 
component parts or subassemblies. 
 For example, this would be the microchips in the 
computer, the wheels on the bicycle, or the amount of 
cheese on the pizza.
Inventory System 
A set of policies and controls that monitors levels of 
inventory and determines what levels should be 
maintained, when stock should be replenished, and how 
large orders should be
Single Period Inventory Models 
 A single period inventory model is used to identify the 
amount of inventory to purchase given a perishable 
good or single opportunity to purchase. 
 The amount of the single order is based on balancing 
the cost of over- and under-estimating demand. This is 
a very common problem in areas such as: 
 Overbooking of airline seats or hotel rooms 
 Ordering of fashion items 
 Any type of one-time order (t-shirts for a sporting 
event)
Multi period inventory system 
 Demand for the product is constant and uniform throughout the period 
 Lead time (time from ordering to receipt) is constant 
 Price per unit of product is constant 
 Inventory holding 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)
Fixed- order 
quantity models/ 
EOQ(Economic 
Order Quantity) 
Fixed- time 
periods 
models/p-model 
multi period 
inventory 
system
Economic Order Quantity(EOQ) 
 Economic order quantity is the order quantity that 
minimizes total inventory holding costs and ordering 
costs. 
 The framework used to determine this order quantity 
is also known as Wilson EOQ Model or Wilson 
Formula 
 The model was developed by Ford W. Harris in 1913
Fixed-time periods models/p-model 
This is similar to the fixed–order quantity model; 
it is used when the item should be in-stock and ready to use. 
In this case, rather than monitoring the inventory level and 
ordering when the level gets down to a critical 
quantity, the item is ordered at certain intervals of time, 
for example, every Friday morning. This is often 
convenient when a group of items is ordered together. An 
example is the delivery of different types of bread to a 
grocery store. The bakery supplier may have 10 or more 
products stocked in a store, and rather than delivering each 
product individually at different times, it is much more 
efficient to deliver all 10 together at the same time and on 
the same schedule.
Assumptions 
 The ordering cost is constant. 
 The rate of demand is known, and spread evenly 
throughout the year. 
 The lead time is fixed. 
 The purchase price of the item is constant i.e. no 
discount is available 
 Only one product is involved.
Basic Fixed-Order Quantity (EOQ) Model Formula 
Total 
Annual = 
Cost 
Annual 
Purchase 
Cost 
To find EOQ 
TC=DC+D/S 
Q 
H 
2 
Annual 
Ordering 
Cost 
S + 
D 
Q 
TC = DC + 
Annual 
Holding 
Cost 
+ + 
17-40 
TC=Total annual 
cost 
D =Demand 
C =Cost per unit 
Q =Order quantity 
S =Cost of placing 
an order or setup 
cost 
R =Reorder point 
L =Lead time 
H=Annual holding 
and storage cost 
per unit of inventory
Deriving the EOQ 
Using calculus, we take the first derivative of 
the total cost function with respect to Q, and 
set the derivative (slope) equal to zero, 
solving for the optimized (cost minimized) 
value of Qopt 
Q = 
2DS 
H 
= 
2(Annual Demand)(Order or Setup Cost) 
Annual Holding Cost OPT 
_ 
Reorder point, R = d L 
_ 
d = average daily demand (constant) 
L = Lead time (constant) 
We also need a 
reorder point to 
tell us when to 
place an order 
17-41
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 = $10 
Holding cost per unit per year = $2.50 
Lead time = 7 days 
Cost per unit = $15 
17-42
EOQ Example (1) Solution 
Q = 
2DS 
H 
= 
2(1,000 )(10) 
= 89.443 units or OPT 90 units 
2.50 
d = 
1,000 units / year 
365 days / year 
= 2.74 units / day 
_ 
Reorder point, R = d L = 2.74units / day (7days) = 19.18 or 
20 units 
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. 
17-43
Carrying Cost Of Inventory 
 This is the cost a business incurs over a certain period 
of time, to hold and store its inventory 
 Businesses use this figure to help them determine 
how much profit can be made on current inventory. 
 It also helps them find out if there is a need to produce 
more or less, in order to keep up with expenses or 
maintain the same income stream.
Different Types of Inventory Costs 
1. HoldingCarrying cost 
2. Ordering costs: 
3. Storage costs: 
4. Setup/production change costs :
HoldingCarrying cost 
 They are expenses such as storage, handling, insurance, 
taxes, obsolescence, and interest on funds financing the 
goods. 
 These charges increase as inventory levels rise. To 
minimize carrying costs, management makes frequent 
orders of small quantities. 
 Holding costs are commonly assessed as a percentage of 
unit value, rather than attempting to derive monetary value 
for each of these costs individually. 
 This practice is a reflection of the difficulty inherent in 
deriving a specific per unit cost, for example, obsolescence 
or theft.
Ordering costs: 
 Ordering costs are those fees associated with placing 
an order, including expenses related to personnel in 
purchasing department, communications, and the 
handling of related paper work. 
 Lowering these costs would be accomplished by 
placing small number of orders, each for a large 
quantity. 
 Unlike carrying costs, ordering expenses are generally 
expressed as a monetary value per order.
Storage costs: 
 When the stock of the item is depleted, an order for 
that item must wait until the stock is replenished or be 
cancelled 
 There is a trade off between carrying stock to satisfy 
demand and the cost resulting from stock out
Setup/production change costs 
 To make each different product involves obtaining the 
necessary material, arranging specific equipment 
setup, filling out the required papers, appropriately 
charging time and materials, and moving out the 
previous stock of material 
 If there were no cost or loss of time in changing from 
one product to another, many small lots would be 
produced. 
 These would reduce inventory levels, with a resulting 
saving in cost.
Thank 
you

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Inventory planning & control

  • 3. Inventory Planning • The process of determining the optimal quantity and timing of Inventory for the purpose of aligning it with sales and production capacity . •Inventory planning has direct impact a company's cash flow and profit margins especially for smaller businesses that rely upon a quick turnover of goods or materials.
  • 4. Objectives of Inventory Planning Objectives of Inventory Planning  Customer Satisfaction  Forecasting Needs  Controlling Costs  Successful Storage Customer Satisfaction Forecasting Needs Controlling Costs Successful Storage
  • 5. Advantages of inventory planning  You know your stock levels  You can conduct stock rotation  You can optimize and reduce stock of items that don’t move that quickly  You can move you quick moving items to the front thereby speeding up picking  You can quick identify items that are not moving that you can remove from your inventory
  • 6. Disadvantages of inventory planning  It doesn’t stop staff stealing stock  It can waste a lot of effort if not implemented and maintained correctly  It doesn’t replace incompetent management  It can be very expensive and the return on investment can take a long time  It requires a lot of staff training and you may loose some staff on the way
  • 8. Material Requirement Planning  Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well.
  • 9. What can MRP do ?  Reduce Inventory Levels  Reduce Component shortages  Improve Shipping Performance  Improve Customer Service  Improve Productivity  Simplified and Accurate Scheduling  Reduce Purchasing Cost  Improve Production Schedules
  • 10. Conti….  Reduce Manufacturing Cost  Reduce Lead Times  Less Scrap and Rework  Higher Production Quality  Improve Communication  Improve Plant Efficiency  Reduce Fright Cost  Reduction in Excess Inventory  Reduce Overtime
  • 11. Three Basic Steps Of MRP  Identifying Requirements  Running MRP – Creating the Suggestions  Framing the Suggestions
  • 12. Step 1: Identifying the Requirements  Quantity on Hand  Quantity on Open Purchase Order  Quantity in/or Planned for Manufacturing  Quantity Committed to Existing Orders  Quantity Forecasted
  • 13. Step 2: Running MRP – Creating the Suggestions  Critical Items  Expedite Items  Delay Items
  • 14. Step 3: Framing the suggestions  Manufacturing Orders  Purchasing Orders  Various Reports
  • 15. Types Of MRP Reports  Primary MRP Reports  Secondary MRP Reports
  • 16. Primary MRP Reports  Planned orders to be released at a future time.  Order release notices to execute the planned orders.  Changes in due dates of open orders due to rescheduling.  Cancellations or suspensions of open orders due to cancellation or suspension of orders on the master production schedule.  Inventory status data.
  • 17. Secondary MRP Reports  Planning reports, for example, forecasting inventory requirements over a period of time.  Performance reports used to determine agreement between actual and programmed usage and costs.  Exception reports used to point out serious discrepancies, such as late or overdue orders.
  • 18. What is Master Production Schedule ?  A Master Production Schedule or MPS is the plan that a company has developed for production, inventory, staffing, etc. It sets the quantity of each end item to be completed in each week of a short-range planning horizon. A Master Production Schedule is the master of all schedules. It is a plan for future production of end items.
  • 19.  The Master Production Schedule gives production, planning, purchasing, and top management the information needed to plan and control the manufacturing operation. The application ties overall business planning and forecasting to detail operations through the Master Production Schedule.
  • 20. Bill of Materials (BOM)  A listing of all the subassemblies, intermediates, parts, and raw materials that go into a parent assembly showing the quantity of each required to make an assembly.  Basically, a bill of material (BOM) is a complete list of the components making up an object or assembly.  Bills of materials come in different types specific to engineering (used in the design process), manufacturing (used in the manufacturing process), and so on. A manufacturing BOM is of vital importance in materials requirement planning (MRP) and enterprise resource planning (ERP) systems.
  • 21. Benefits of a BOM  Improve material management by responding to changes in production.  Reduce inventory levels and obsolete parts.  Reduce manufacturing costs.  Minimize clerical and engineering efforts by optimizing the tasks of maintaining and changing multi-level bills.  Supports variable length part numbers and unlimited descriptive text.  Easy methods for accessing part information
  • 22. Inventory Control is the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply
  • 23. Objectives of inventory control  Protection against fluctuations in demand  Better use of men, material & machines  Protection against fluctuations in output  Control of stock volume  Control of stock distribution
  • 24. Major activities of inventory control  Planning the inventories  Procurement of inventories  Receiving and inspecting the inventories  Storing and issuing the inventory  Recording the receipt and issues of inventories  Physical verification of inventories  Follow-up function  Material standardisation and substitution
  • 25. Steps in Inventory Control  Deciding the maximum-minimum limits of inventory  Determination of Reorder point  Determination of Reorder quantity  ABC Analysis
  • 26. ABC analysis (Inventory) ABC analysis is an inventory categorization method which consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) and not on the trivial many (C-items).
  • 27. The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing its ratings on the following rules:  A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.  B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.  C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
  • 28. Purpose of inventory  To maintain independency of operation  To meet variation in product demand  To allow flexibility in product scheduling  To provide a safeguard for variation in raw material delivery time  To take advantages of economic purchase order size
  • 29. Types of inventory control Independent Demand Dependent Demand
  • 30. Independent Demand  An inventory of an item is said to be falling into the category of independent demand when the demand for such an item is not dependant upon the demand for another item.  Finished goods Items, which are ordered by External Customers or manufactured for stock and sale, are called independent demand items.  Independent demands for inventories are based on confirmed Customer orders, forecasts, estimates and past historical data.
  • 31. Dependant Demand  If the demand for inventory of an item is dependant upon another item, such demands are categorized as dependant demand.  Raw materials and component inventories are dependant upon the demand for Finished Goods and hence can be called as Dependant demand inventories.
  • 32. Difference between independent demand & dependent demand:  One of the biggest differences in inventory is between dependent and independent demand. Understanding this difference is important as the entire inventory policy for an item is based on this.  Independent demand is demand for a finished product, such as a computer, a bicycle, or a pizza. Dependent demand, on the other hand, is demand for component parts or subassemblies.  For example, this would be the microchips in the computer, the wheels on the bicycle, or the amount of cheese on the pizza.
  • 33. Inventory System A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be
  • 34. Single Period Inventory Models  A single period inventory model is used to identify the amount of inventory to purchase given a perishable good or single opportunity to purchase.  The amount of the single order is based on balancing the cost of over- and under-estimating demand. This is a very common problem in areas such as:  Overbooking of airline seats or hotel rooms  Ordering of fashion items  Any type of one-time order (t-shirts for a sporting event)
  • 35. Multi period inventory system  Demand for the product is constant and uniform throughout the period  Lead time (time from ordering to receipt) is constant  Price per unit of product is constant  Inventory holding 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)
  • 36. Fixed- order quantity models/ EOQ(Economic Order Quantity) Fixed- time periods models/p-model multi period inventory system
  • 37. Economic Order Quantity(EOQ)  Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs.  The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula  The model was developed by Ford W. Harris in 1913
  • 38. Fixed-time periods models/p-model This is similar to the fixed–order quantity model; it is used when the item should be in-stock and ready to use. In this case, rather than monitoring the inventory level and ordering when the level gets down to a critical quantity, the item is ordered at certain intervals of time, for example, every Friday morning. This is often convenient when a group of items is ordered together. An example is the delivery of different types of bread to a grocery store. The bakery supplier may have 10 or more products stocked in a store, and rather than delivering each product individually at different times, it is much more efficient to deliver all 10 together at the same time and on the same schedule.
  • 39. Assumptions  The ordering cost is constant.  The rate of demand is known, and spread evenly throughout the year.  The lead time is fixed.  The purchase price of the item is constant i.e. no discount is available  Only one product is involved.
  • 40. Basic Fixed-Order Quantity (EOQ) Model Formula Total Annual = Cost Annual Purchase Cost To find EOQ TC=DC+D/S Q H 2 Annual Ordering Cost S + D Q TC = DC + Annual Holding Cost + + 17-40 TC=Total annual cost D =Demand C =Cost per unit Q =Order quantity S =Cost of placing an order or setup cost R =Reorder point L =Lead time H=Annual holding and storage cost per unit of inventory
  • 41. Deriving the EOQ Using calculus, we take the first derivative of the total cost function with respect to Q, and set the derivative (slope) equal to zero, solving for the optimized (cost minimized) value of Qopt Q = 2DS H = 2(Annual Demand)(Order or Setup Cost) Annual Holding Cost OPT _ Reorder point, R = d L _ d = average daily demand (constant) L = Lead time (constant) We also need a reorder point to tell us when to place an order 17-41
  • 42. 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 = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15 17-42
  • 43. EOQ Example (1) Solution Q = 2DS H = 2(1,000 )(10) = 89.443 units or OPT 90 units 2.50 d = 1,000 units / year 365 days / year = 2.74 units / day _ Reorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 units 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. 17-43
  • 44. Carrying Cost Of Inventory  This is the cost a business incurs over a certain period of time, to hold and store its inventory  Businesses use this figure to help them determine how much profit can be made on current inventory.  It also helps them find out if there is a need to produce more or less, in order to keep up with expenses or maintain the same income stream.
  • 45. Different Types of Inventory Costs 1. HoldingCarrying cost 2. Ordering costs: 3. Storage costs: 4. Setup/production change costs :
  • 46. HoldingCarrying cost  They are expenses such as storage, handling, insurance, taxes, obsolescence, and interest on funds financing the goods.  These charges increase as inventory levels rise. To minimize carrying costs, management makes frequent orders of small quantities.  Holding costs are commonly assessed as a percentage of unit value, rather than attempting to derive monetary value for each of these costs individually.  This practice is a reflection of the difficulty inherent in deriving a specific per unit cost, for example, obsolescence or theft.
  • 47. Ordering costs:  Ordering costs are those fees associated with placing an order, including expenses related to personnel in purchasing department, communications, and the handling of related paper work.  Lowering these costs would be accomplished by placing small number of orders, each for a large quantity.  Unlike carrying costs, ordering expenses are generally expressed as a monetary value per order.
  • 48. Storage costs:  When the stock of the item is depleted, an order for that item must wait until the stock is replenished or be cancelled  There is a trade off between carrying stock to satisfy demand and the cost resulting from stock out
  • 49. Setup/production change costs  To make each different product involves obtaining the necessary material, arranging specific equipment setup, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of material  If there were no cost or loss of time in changing from one product to another, many small lots would be produced.  These would reduce inventory levels, with a resulting saving in cost.