Directorate of distance education

UNIT – IV
Unit Structure
Lesson 4.1 - Supply Chain Inventory Management
Lesson 4.2 - Multichannel Inventory System
Lesson 4.3 - Supply Chain Facility Layout
Lesson 4.4 - Capacity Planning
Lesson 4.5 - Inventory Optimisation
Lesson 4.6 - Routing and Scheduling
Lesson 4.1 - Supply Chain Inventory Management
Learning Objectives
After reading this lesson you should be able to:
➢ Understand the basic tenets of the Supply chain Inventory 
Management System
➢ Discern the underlying concept of Economic Order Quantity(EOQ)
➢ Analyse the assumptions and derive the EOQ
➢ Acquire knowledge on Reorder Point Models
Introduction
One of the most paramount factors in supply chain management’s 
success is squarely dependent on Supply Chain Inventory Management. 
The two primary attributes which determine the vitality of this are 
Economic Order Quantity (EOQ) and Reorder Point System. In this 
chapter we can envisage the basic tenets of these concepts by delving a bit 
on the applications of the same in practice.

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Notes
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The Economic Order Quantity Model
The Economic Order Quantity (EOQ) model is classic independent 
demand inventory system that provides many useful ordering decisions. 
The basic order decision is “What is the correct order size to minimize 
total inventory costs?’’ This issue revolves around the trade-off between 
annual inventory holding costs and annual order costs. When order sizes 
for an item are small, orders have to be placed on frequent basis, causing 
high annual ordering cost. However, the firm has a low average inventory 
level for this item, resulting in low annual inventory holding cost. When 
order sizes for an item are large, orders are placed less frequently, causing 
lower annual order costs. Unfortunately, this also causes the average 
inventory level for this item to be high, resulting in higher expenses to 
hold the inventory. The EOQ model seeks to determine an optimal order 
quantity, where the sum of the annual order cost and the annual inventory 
holding cost is minimized.
Order cost is the direct variable cost associated with placing an 
order with the supplier, whereas holding cost or carrying cost is the cost 
incurred for holding inventory in strange. Order costs include managerial 
and clerical costs for preparing the purchase, as well as other incidental 
expenses that can be traced directly to the purchase. Examples of holding 
costs include warehousing expense, handling charge, insurance, pilferage, 
shrinkage, taxes, and the cost of capital.