MANAGEMENT TRAINING AND ADVISORY CENTER (MTAC)

Building Capacity for Enterprise Development

RECORDS KEEPING AND INFORMATION MANAGEMENT

STORES KEEPING AND MATERIALS MANAGEMENT

COURSE WORK ASSIGNMENT

GROUP MEMBERS

NAME REGNO: SIGNATURE

ALUPO DIANAH

ISAAC TAREMWA

NASOZI GRACE

Question:

1. a) Economics order quantity is one of the major inventory control method. Take a graphical
and mathematical display of the method operations.

b) Describe the other inventory control methods and specifically exhaust the objectives of one of
the best methods of your choice?
1 A) Definition
Inventory control
Inventory control means to monitor the stock of goods used for production, distribution and
captive (self) consumption.

Economic order quantity

In inventory management, economic order quantity (EOQ) is the order quantity that minimizes
the total holding costs and ordering costs. It is one of the oldest classical production scheduling
models.(the size of the lot to be purchased which is economically viable)
Economic order quantity (EOQ) may also be defined as an equation for inventory that
determines the ideal order quantity a company should purchase for its inventory given a set cost
of production, demand rate and other variables. This is done to minimize variable inventory
costs, and the formula takes into account storage, or holding, costs, ordering costs and shortage
costs.

In determining the EOQ, this mathematical model has assumed that the costs of managing an
inventory item consist solely of two parts:

(1) Ordering cost and

(2) Carrying cost, ignoring the idle time or stock-out cost, which cannot be altogether ruled out.

(3) Stock-out Costs

a) Ordering cost (Costs Associated with purchasing or ordering of materials):

This is the additional cost of placing an order or re-order. Its characteristic is that it is
independent of the order size. It increases with the number of orders and is not influenced by the
size of the order.

They include costs incurred on communicating the order, traveling allowance and daily
allowance to purchase officers, printing and stationary, salary of purchase department, cost of
inspection, cost of receiving the material, transportation cost etc. all above cost, other than
transport costs remain unchanged per order irrespective of the order size.

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Illustration of the Ordering cost:

b) Carrying cost (Costs for holding inventories):

It is the cost incurred for holding inventory in hand. They include interest on the money locked
up in stocks, storage costs, deterioration spoilage costs, insurance. evaporation, go down rent,
pilferage, shrinkage, obsolescence, other overhead of stores department etc. They are assumed to
be constant per unit of inventory. The large the volume of inventory, the higher will be the
inventory carrying cost and vice versa.

On the other hand, the characteristic of the carrying cost is that it increases with the volume of
inventory irrespective of the number of orders. It is linearly related with the quantum of
inventory. The cost of inventory carrying is generally expressed as an annual percentage of the
unit purchase cost. From the above graph, it will thus be noticed that the above two costs are
opposite in nature. The former varies with the number of orders and the latter varies directly with
the volume of inventory. Thus, if purchases are made frequently and in small lots, carrying cost
can be kept low, but the order or re-order cost will be higher. It will, therefore, be appreciated
that when the slope of the order cost curve meets the rising carrying cost curve, that is to say,
where the marginal ordering cost is equal to the marginal carrying cost, the total minimum cost
point is reached. In other words, this is the point where we hold the optimum inventory meet this
point the order cost curve begins to rise again.

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Illustration of the Carrying cost:

c) Stock-out Costs

Stock-out Costs: The stock-out costs are associated with running out of stock which includes the
following:
Lost contribution through the lost sales caused by the stock-out.
Loss of future sales because customers go elsewhere.
Loss of customer goodwill.
Cost of production stoppages caused by stock-outs of WIP or raw material.
Labour frustration.
Over stoppages.
Extra costs associated with urgent replenishment purchases of small quantities

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Illustration of the EOQ

Limitations of the EOQ formula

However, the very restrictive nature of the assumptions made in the EOQ formula restrains the
use of the formula in many cases of practical inventory situations. The cost-analyses on the basis
of which the formula has been developed are merely notional rather .than actual in some cases.
In practice, unit cost of purchase of an item varies, lead times are uncertain and also
requirements or demands of inventory items are not perfectly predictable in advance. Rate of
consumption varies greatly in many cases. As such, the Application of the formula often becomes
difficult and complicated.

Mathematical display of EOQ method

To be able to calculate a basic EOQ certain assumptions are necessary:
That there is a known, constant stockholding cost.
That there is a known, constant ordering cost.
Those rates of demand are known and constant.
That there is a known, constant price per unit, i.e., there are no price discounts.
That replenishment is made instantaneously, i.e., the whole batch delivered at once.

The following formula is used in calculation of EOQ:

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Basic EOQ calculation

EOQ = 2QO
CS
Where,
Q = Annual consumption C = Cost per unit
O = Cost of placing an order S = Storage and other inventory carrying cost.

EOQ WITH DISCOUNTS

A particularly unrealistic assumption with the basic EOQ calculation is that the price per item
remains constant. Usually some form of discount can be obtained by ordering increasing
quantities. Such price discounts can be incorporated into the EOQ formula, but it becomes much
more complicated. A similar approach is to consider the costs associated with the normal EOQ
and compare these costs with the costs at each succeeding discount point and then ascertain the
best quantity to order. Price discounts for quantity purchase have three financial effects, two of
which are beneficial and one adverse.

Beneficial effects - Savings will come from:

(a) Lower price per item, and

(b) The large order quantity means that fewer orders need to be placed and hence, ordering costs
are reduced.
Adverse effects - Increased costs arise from the extra stockholding costs caused by the average
stock level being higher due to the larger order quantity.

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B) Other inventory control methods and their objectives

1. ABC Analysis
In this technique, the items of inventory are classified according to value of usage. The higher
value items have lower safety stocks, because the cost of production is very high in respect of
higher value items. The lower value items carry higher safety stocks. ABC analysis divides the
total inventory list into three classes A, B, and C using the rupee volume, as follows:
Items in class 'A' constitute the most important class of inventories so far as the proportion in
the total value of inventory. The 'A' items consists of approximately 15% of the total items,
accounts for 80% of the total material usage.
Items in class B' constitute an intermediate position, which constitute approximately 35%of
the total items, accounts for approximately 15% of the total material consumption.
Items in class 'C are quite negligible. It consists remaining 50% items, accounting only 5%
of the monetary value of total material usage.

The numbers are just indicative and actual break-up will vary from situation to situation. The
above categorization is represented in the table given below:

Class of items %of items %of value

A 15 80
B 35 15
C 50 5
100 100

The ABC analysis of inventory class 'A' is made up of inventory items which are either very
expensive or used in massive quantities. Thus these items, though few in number contribute a
high proportion of the value of inventories. Class 'B' items are not so few in number, but also
they are not too many either. Value wise also, they are neither very expensive nor very cheap.
Moreover, they are used in moderate quantities. Class 'C contains a relatively large number of
items. But they are either very inexpensive items or used in very small quantities so that they do
not constitute more than a negligible fraction of the total value of inventories.

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The control of inventory through ABC analysis is exercised as follows:
'A' class items merit a tightly controlled inventory system with constant attention by the
purchase and stores management. A larger effort per item on only a few items will cost only
moderately, but the effort can result in large savings.
'B' class items merit a formalized inventory system and periodic attention by the purchase
and stores management.
For 'C class items still relaxed inventory procedures are used.

2. VED Analysis

VED analysis divides items into three categories in the descending order of their critically as
follows:

V stands for vital items and their stock analysis requires more attention, because out-of-
stock situation will result in stoppage of production. Thus, 'V items must be stored
adequately to ensure smooth operation of the plant.
'E' means essential items. Such items are considered essential for efficient running but
without these items the system would not fail. Care must be taken to see that they are always
in stock.
'D stands for desirable items which do not affect the production immediately but availability
of such items will lead to more efficiency and less fatigue.

VED analysis can be very useful to capital intensive process industries. As it analyses items
based on their critically, it can be used for those special raw materials which are difficult to
procure.

3. FNSD Analysis
Age of inventory indicates duration of inventory in organization. It shows moving position of
inventory during the year. If age of inventory is minimum it means, the turnover position of that
particular item of inventory is satisfactory. If the age of any particular item of inventory, it
indicates the slow moving of stock which may be due to lower demand for the product,

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inefficiency in shocking policy, excessive stocking etc. The excessive investment in stocks high
investment is locked-up in inventory leads to lower profitability of the firm due to excess
carrying costs. FNSD analysis divides the items into four categories in the descending order of
their usage rate as follows:

'F' stands for fast moving items and stocks of such items are consumed in a short span of time.
Stocks of fast moving items must be observed constantly and replenishment orders be placed in
time to avoid stock-out situations.

'N' means normal moving items and such items are exhausted over a period of a war or so. The
order levels and quantities for such items should be on the basis of a new estimate of future
demand to minimize the risks of a surplus stock.

'S' indicates slow moving items, existing stock of which would last for two years or more at the
current rate of usage but it is still expected to be used up.

Slow moving stock must be reviewed very carefully before any replenishment orders are placed.

'D' stands for dead stock and for its existing stock no further demand can be foreseen. Dead stock
figures in the inventory represents money spent that cannot be realized but it occupies useful
space. Hence, once such items are identified, efforts must be made to find all alternative uses for
it. Otherwise, it must be disposed off.

Conclusion
The EOQ is very useful tool for inventory control it may be applied to finished goods
inventories, work-in progress inventories and raw material inventories. It regulate of purchase
and storage of inventory in such a way so as to maintain an even flow of production at the same
time avoiding excessive investment in inventories.
However , the ABC Analysis is More Efficient Cycle Counts Since in the ABC inventory
analysis method, you can allocate your resources more efficiently during cycle counts. A cycle
count is the process of counting only certain items on scheduled dates. The ABC analysis method
also saves time and labor counting only the inventory required by the cycle for the class of
inventory versus counting all inventory items each cycle.

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 REFERENCES

S. K. Goyal, Economic Order Quantity under Conditions of Permissible Delay in Payments, The
Journal of the Operational Research Society, Vol. 36, No. 4 (Apr., 1985), pp. 335-338

Aju Mathew, Demand Forecasting For Economic Order Quantity in inventory Management,
International Journal of Scientific and Research Publications, Volume 3, Issue 10,
October 2013

Tien-Yu Lin and Ming-Te Chen, An economic order quantity model with screening errors,
returned cost, and shortages under quantity discounts, African Journal of Business
Management Vol. 5(4), pp. 1129-1135, 8 February, 2011

Milad Elyasi. Farid Khoshalhan and Mohammad Khanmirzaee, International Journal of

Industrial Engineering Computations , Volume 5 Issue 2 pp. 211 - 222,2014

Sarbjit Singh, An Economic Order Quantity Model for Items Having Linear Demand under
inflation and Permissible Delay, International Journal of Computer Applications (0975
8887) Volume 33 No.9, November 2011

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