Module 05
How much should the system hold, where should it hold it, and what risk does that create?
Inventory is not a warehouse number. It is a policy that buys availability with cash, space, and the chance of being wrong.
This Arc
Tonight is policy. Case 3 is the decision.
01
Tuesday · Sep 22
6:00–7:20 PM
Module 5 live session
One online discussion lecture: inventory roles, ABC, EOQ logic, and Case 3 policy design.
02
Saturday · Oct 3
due
Case Study 3: Inventory
Define the product, assess stock, run ABC analysis, and recommend an order quantity for a raw material.
Course Roadmap
Forecast and capacity created the plan. Inventory decides what buffer we buy.
01
Orientation
Value system
02
Supply Chain
Flow design
03
Forecasting
Demand signal
04
Capacity
What we can deliver
05
Inventory
What buffer we hold
Tuesday · 6:00–7:20
One 80-minute discussion: from a stockout argument to a Case 3 policy.
6:00–6:08
Stockout or overstock?
Take a position on a live availability failure before any formula appears.
6:08–6:18
Why inventory exists
Roles, types, and where inventory sits in the operating system.
6:18–6:26
Costs that fight each other
Holding, ordering, shortage, and obsolescence as competing pressures.
6:26–6:38
ABC analysis
Sort SKUs by value and decide where tight control is worth the effort.
6:38–6:52
EOQ as a decision model
Feel the trade-off, then interpret what a quantity actually commits the firm to.
6:52–7:04
Reorder point and safety stock
Protect service when demand or lead time will not sit still.
7:04–7:20
Case 3 policy template
Turn tonight into a usable inventory policy for the project organization.
Learning Objectives
By 7:20 you should be able to defend an inventory policy, not recite a formula.
Explain why inventory exists as a buffer, a cost, and a strategic choice.
Classify inventory costs and see how they pull policy in opposite directions.
Apply ABC analysis to decide where management attention should go.
Use EOQ logic as a trade-off model, not as a calculator to worship.
Set reorder-point and safety-stock thinking under demand and lead-time uncertainty.
Draft an inventory policy template that Case 3 can actually use.
Predict
A flagship SKU stocked out on the weekend that mattered.
Finance sees excess inventory in the same category. Operations sees empty shelves. Take a position before we name a model.
Take a Position
A grocer ran out of a holiday staple on Saturday. The same buyer is sitting on 14 weeks of slower companion items.
What should the manager do first?
Learn
Inventory is a buffer we buy because the operating system is not perfectly timed.
Inventory covers demand between replenishments because ordering every unit is usually uneconomic.
A buffer absorbs uncertainty so a service promise can survive variation.
Seasonal builds, promotions, and shutdowns create inventory on purpose.
WIP and location buffers let one process keep working when another is slow or disrupted.
Learn
Name the pile before you set the policy.
Case 3 asks for a product and a raw-material order quantity. Those are different inventories with different risks, even inside one organization.
Case 3 often starts here: what must be on hand before the operation can run.
WIP is a symptom of process design, batching, and bottlenecks, not just a warehouse number.
This is the inventory customers actually feel as availability.
Maintenance items and goods in transit still consume cash and create risk.
Learn
Every inventory policy is a bet about which cost you are more willing to pay.
Capital, space, insurance, damage, shrinkage, and the opportunity cost of cash.
Purchase admin, receiving, changeovers, and the disruption of placing another order.
Lost sales, expediting, idle labor, missed promises, and reputation damage.
Markdowns, expiry, engineering changes, and inventory that will never become a sale.
Classify
Where does the pain land?
Decide which cost family each event belongs to before we talk EOQ.
Tap a bucket for the selected item
0/4 classified
Learn
ABC analysis is a management-attention model.
A small share of items usually creates most of the annual dollar usage. Tight control is expensive. Spend it where value and disruption risk concentrate.
Classify
Which control intensity does each item deserve?
Use value concentration and operating risk, not gut feel about what sounds important.
Tap a bucket for the selected item
0/4 classified
What is the most useful managerial reading of ABC analysis?
Learn
The economic order quantity is the lot size where holding cost and ordering cost stop fighting.
Larger lots mean fewer orders and more cash stuck in cycle stock. Smaller lots mean more replenishment work and a thinner pile. Move the quantity and watch the two costs trade places.
EOQ is a starting model. If demand is lumpy or trending, the quantity is a conversation, not a law.
If that cost falls, smaller and more frequent orders become attractive.
If capital is scarce or product ages quickly, the model should push quantity down.
Predict
Move the lot size and watch the two costs trade places.
Demand is 12,000 units a year. Each order costs $50. Holding one unit for a year costs $2.50. The formula can wait. The trade-off should not.
Order quantity
600 units
Annual inventory cost
Ordering cost
$1,000
20.0 orders / year
Holding cost
$750
Average cycle stock 300 units
Total relevant cost
$1,750
You are paying extra in ordering work to keep the pile thin.
Predict
Ordering cost just fell. A portal cut purchase-order time in half.
Do not reach for the square root yet. Say what the policy should do and why.
If it becomes cheaper to place an order, what should happen to the economic lot size?
LO · After Intuition
The square root is just the math for the trade-off you already felt.
When ordering becomes cheaper, EOQ falls. When holding becomes more expensive, EOQ also falls. The formula exists to quantify a policy commitment — not to replace judgment.
Formula Pattern
EOQ = sqrt( (2 × D × S) / H )
D = annual demand, S = order/setup cost, H = holding cost per unit-year
Average cycle stock ≈ EOQ / 2
Orders per year ≈ D / EOQ
Learn
EOQ answers how much. The reorder point answers when.
Expected demand during lead time is the starting reorder point. Safety stock is the extra inventory we hold because that expectation will be wrong.
Learn
Uncertainty is not a rounding error. It is the reason the buffer exists.
A forecast gives a center. Safety stock covers the spread around that center.
The same average demand becomes a bigger exposure when replenishment time stretches.
Higher service usually means more safety stock, more cash, and less customer pain.
Take a Position
The same plant also stocks hundreds of low-value supplies that can be replaced in a day.
A raw material can stop production if it stocks out. How should managers set the service target?
Apply
Case 3 is due Saturday, October 3. Leave with a template, not a vibe.
Name the product or raw material and why it matters to the customer promise.
Assess current stock: on hand, on order, where it sits, and how long it lasts.
Classify the item with ABC logic and say what control intensity that implies.
Estimate demand, order cost, and holding cost well enough to discuss an order quantity.
State the reorder logic and the uncertainty the safety stock is meant to cover.
Name the risk if the policy is too lean or too fat.
Hint: Name the item, its ABC class, the order-quantity logic, and the risk of being too lean or too fat.
Wrap-Up
Inventory policy is how operations chooses its risk.
Inventory is a policy: a chosen buffer with a cash and risk consequence.
Holding, ordering, shortage, and obsolescence costs pull the system in different directions.
ABC analysis tells managers where tight control is worth the attention.
EOQ is a trade-off model. Interpret the quantity; do not worship the square root.
Reorder points and safety stock exist because demand and lead time are uncertain.
Case 3 should leave with a product, an ABC call, an order-quantity logic, and a named risk.