Inventory and Warehouse Management
This domain covers inventory types and costs, the two calculation formulas that recur in every paper (EOQ and reorder point), classification techniques, and warehouse operations from gate entry to dispatch.
Inventory basics
Types: raw material, work-in-progress, finished goods, MRO spares, safety stock, cycle stock and pipeline stock. Costs are ordering cost, carrying cost (typically 18-25% of value per year including capital, space, insurance and obsolescence) and stockout cost. ABC analysis ranks by annual consumption value, not quantity; XYZ or FSN ranks by variability and movement.
Formulas
- EOQ = square root of (2 x annual demand x ordering cost / holding cost per unit per year).
- Reorder point = (average daily demand x lead time in days) + safety stock.
- Inventory turnover = cost of goods sold / average inventory value.
Warehouse operations
Receiving and put-away, storage in bin locations, picking (zone, batch, wave), packing, dispatch and returns. FIFO suits general goods; FEFO (first expiry, first out) is mandatory for pharmaceuticals and food. Cross-docking bypasses storage, and cycle counting replaces annual shutdown stocktakes.
Worked example
Annual demand 12,000 units, ordering cost ₹250, holding cost ₹15 per unit per year. EOQ = square root of (2 x 12,000 x 250 / 15) = square root of 400,000 = 632 units. With daily demand 40 units, lead time 6 days and safety stock 150 units, the reorder point is (40 x 6) + 150 = 390 units. Note the logic: EOQ decides how much to order, the reorder point decides when.
Traps that cost marks
- Treating EOQ as the reorder point, or vice versa.
- Ranking ABC categories by unit quantity rather than rupee value.
- Assuming higher safety stock is always better; it raises carrying cost.
- Using FIFO where expiry dating requires FEFO.