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ABC Classification of Inventory Items

1. The document discusses inventory management techniques including ABC classification of inventory items based on annual demand, usage percentage, and cost. It also covers aggregate performance measures like average inventory investment and turnover ratio. 2. Formulas are provided for calculating total annual inventory costs, which are the sum of annual carrying costs and ordering costs. The optimal order quantity that minimizes total costs is graphically depicted. 3. An example is shown for calculating economic order quantity (EOQ) using annual demand, ordering cost, and holding cost variables. Total annual variable costs are also calculated for different order quantities. 4. A numerical example is provided for calculating EOQ values like reorder point and order intervals, as well as

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167 views8 pages

ABC Classification of Inventory Items

1. The document discusses inventory management techniques including ABC classification of inventory items based on annual demand, usage percentage, and cost. It also covers aggregate performance measures like average inventory investment and turnover ratio. 2. Formulas are provided for calculating total annual inventory costs, which are the sum of annual carrying costs and ordering costs. The optimal order quantity that minimizes total costs is graphically depicted. 3. An example is shown for calculating economic order quantity (EOQ) using annual demand, ordering cost, and holding cost variables. Total annual variable costs are also calculated for different order quantities. 4. A numerical example is provided for calculating EOQ values like reorder point and order intervals, as well as

Uploaded by

prajit2205
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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INVENTORY MANAGEMENT

ABC Classification of Inventory Items


Cumulative
Annual Unit Annual Dollar % Annual % Annual
Item Demand Cost Usage Dollar Usage Dollar Usage Classification

1 5,000 $ 30 $ 150,000 48.91 48.91 A


2 200 450 90,000 29.34 78.25 A
3 2,000 10 20,000 6.52 84.77 B
4 800 20 16,000 5.22 89.99 B
5 1,000 10 10,000 3.26 93.25 B
6 1,200 5 6,000 1.96 95.21 C
7 1,300 4 5,200 1.69 96.90 C
8 2,500 2 5,000 1.63 98.53 C
9 3,500 1 3,500 1.14 99.67 C
10 500 20 1,000 .33 100.00 C
306,700

(Exhibit 16.2) 1
INVENTORY MANAGEMENT
Aggregate Performance Measures
-Average inventory investment

-Turnover ratio
Annual cost of goods sold
Average inventory investment

- Days of inventory
Days per year
Turnover ratio

2
INVENTORY MANAGEMENT
Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost

Q + DS
TC = H
2 Q

3
Figure 1 INVENTORY MANAGEMENT
Cost Minimization Goal
The Total-Cost Curve is U-Shaped
Q D
TC = H + S
Annual Cost

2 Q

Ordering Costs

QO (optimal order quantity) Order Quantity


(Q)

4
INVENTORY MANAGEMENT
EOQ Model
D = Annual Demand rate
S = Variable ordering cost
H = Variable holding cost

2 DS
EOQ =
H
D = 1,000 units/year
S = $50 per order H= $5 per unit per year

2( 1,000 )( 50 )
EOQ =
5
= 20,000 = 141.42
5
INVENTORY MANAGEMENT
Total Annual Variable Cost
D
Annual variable ordering cost = S
Q

Q
2
Annual variable holding cost = H

Q D
Total annual variable cost = 2 H+ Q S

6
INVENTORY MANAGEMENT
Total Annual Variable Cost
D = 1,000 S = $50 H = $5
EOQ = 141.42
Total annual variable costs

EOQ: 141.42 1,000


(5) + (50) = $707.11
2 141.42

140 (5) + 1,000 (50) = $707.14


140:
2 140

145: 145 (5) + 1,000 (50) = $707.33


2 145

200: 200 (5) + 1,000 (50) = $750.00


2 200

7
INVENTORY MANAGEMENT
EOQ
Annual demand 2,400
Price $200
Order cost S $50
Holding cost percent % 0.1
Holding cost H $20
Number of working days per year 250
Order lead time 3
EOQ 109.5
Reorder point 28.8
Number of times to order per year 21.9
Order intervals (Days between orders) 11.4
Average inventory level 54.8
Average annual inventory holding cost $1,095
Average annual order cost $1,095
Average annual total cost $2,191
8

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