Inventory Management
Inventory -- stored resource (raw material, work-in-process, finished goods) that is used to satisfy present or future demand Show Inventory management -- determine how much to order? When to order? ABC Analysis -- classify inventory into 3 groups according to its annual dollar volume/usage Annual dollar volume = annual demand x cost An example:
Exercise Pg.541 Problem 13, 27 Purposes of inventory 1. Smooth-out variations in operation performances 2. Avoid stock out or shortage 3. Safeguard against price changes and inflation 4. Take advantage of quantity discounts Inventory costs 1. Holding or carrying costs: storage, insurance, investment, pilferage, etc.
Annual holding cost = average inventory level x holding cost per unit per year = order quantity/2 x holding cost per unit per year
Annual ordering cost = no. of orders placed in a year x cost per order = annual demand/order quantity x cost per order
Assumptions 1. Order arrives instantly 2. No stockout 3. Constant rate of demand What is the order quantity such that the total cost is minimized? 1. Total cost = holding cost + ordering cost = (order quantity/2) x holding cost per unit per year + (annual demand/order quantity) x cost per order
4. Time between orders = No. of working days per year / number of orders 5. Reorder point = daily demand x lead time + safety stock Example: Given: Annual Demand = 60,000Then, it can be computed: Q* = 1000 Total cost = $3000 Number of orders = 60000/1000 = 60 Time between orders = 240/60 = 4 days Daily demand = 60000/240 = 250 If lead time = 3 days (lead time < time between orders) Reorder point = (60000/240)x3=750
Reorder point = 250x5 = 1250
Pg.540, Problems 10 EOQ = sqrt(2*2000*10/5) = 89 Exercise Pg. 539, Problem 1, 7a Quantity Discount Model 1. Total cost = holding + ordering + purchasing 2. Holding cost is a % of the purchasing cost Case 1 Ordering cost = 45 per order Holding cost = 20% of cost of item
Case 2 Same as case 1 except:
Need to compare: Total cost (Q=54) and Total cost (Q=100) Total cost (Q=54) = (100/54)x45 + (54/2)x(0.2x16) + 16x100 =1780.53 Total cost (Q=100) = (100/100)x45 + (100/2)x(0.2x12) + 12x100 = 1425 à Order 100 units Case 3 Same as case 1 except:
Need to compare: Total cost (Q=50), Total cost (Q=56) and Total cost (Q=100) Total cost (Q=50) = (100/50)x45 + (50/2)x(0.2x18) + 18x100 = 1980 Total cost (Q=56) = (100/56)x45 + (56/2)x(0.2x16) + 16x100 =1781.16 Total cost (Q=100) = 1425 à Order 100 units Pg.540, problem 7b Exercise What is the carrying cost using the economic order quantity?Compute your Economic Order Quantity
Order Cost Also known as fixed cost. This is the amount you have to spend on setup, process, and so on. Holding Cost Also known as carrying cost. This is the cost to hold one unit per product in inventory.
How do you calculate annual carrying cost?To determine inventory carrying costs, first add up the expenses outlined above—capital, storage, labor, transportation, insurance, taxes, administrative, depreciation, obsolescence, shrinkage—over one year. Then divide those carrying costs by total inventory value and multiply the number by 100 for a percentage.
Are annual ordering and carrying costs always equal at the EOQ?c) Except for rounding, annual ordering and carrying costs are ALWAYS equal at the EOQ.
Is ordering cost equal to carrying cost in EOQ?Ordering costs are costs that are incurred to obtain additional inventories, whereas carrying costs are the costs incurred to hold inventory on hand. The total inventory cost is the ordering cost plus the carrying cost.
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