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Quality Management Assignment: Holding Cost Average Unit Holding Cost Per Unit

The document summarizes key performance indicators (KPIs) for inventory management. It chooses five KPIs: stock holding cost, inventory days of supply, inventory accuracy, inventory turnaround times, and lead time. It provides definitions and explanations of how to calculate each KPI. The writer decided to select these five KPIs because they determine the costs of inventory, how long inventory is held, ensuring accurate tracking of inventory items, when items will leave inventory, and how long items will be kept in inventory.

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Phillip Atkin
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34 views3 pages

Quality Management Assignment: Holding Cost Average Unit Holding Cost Per Unit

The document summarizes key performance indicators (KPIs) for inventory management. It chooses five KPIs: stock holding cost, inventory days of supply, inventory accuracy, inventory turnaround times, and lead time. It provides definitions and explanations of how to calculate each KPI. The writer decided to select these five KPIs because they determine the costs of inventory, how long inventory is held, ensuring accurate tracking of inventory items, when items will leave inventory, and how long items will be kept in inventory.

Uploaded by

Phillip Atkin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Quality Management Assignment

Student Name: Ossama Benlafquih

Question 1 : choose 5 Key Performance Indicators (KPI) in one of Logistic area: Supply, Inventory,
Distibution, Transport, Orders Management,

Answer : I chose 5 Key Performance Indicators (KPI) in Inventory management and they are  : Stock
holding cost, Inventory Days of Supply, Inventory Accuracy, Inventory turn-around times and Lead
time.

Question 2: write definitions and explain how calculate it.


Answer:

1- Stock holding cost


Otherwise known as carrying costs, holding costs refer to the costs that result from storing and
maintaining unsold inventory in your warehouse. Inventory maintenance costs usually include labor
and the materials needed to keep the warehouse up and running. The cost of damaged and spoiled
goods should also be included.

Holding cost = Average unit * Holding cost per unit

2- Inventory Days of Supply


Also known as " Days in inventory ", "Days Inventory Outstanding" or the "Inventory Period" is an
efficiency ratio that measures the average number of days the company holds its inventory before
selling it. The ratio measures the number of days funds are tied up in inventory. Inventory levels
(measured at cost) are divided by sales per day (also measured at cost rather than selling price.)

The formula for days in inventory is:

where DII is days in inventory and COGS is cost of goods sold. The average inventory is the average of
inventory levels at the beginning and end of an accounting period, and COGS/day is calculated by
dividing the total cost of goods sold per year by the number of days in the accounting period,
generally 365 days.
This is equivalent to the 'average days to sell the inventory' which is calculated as :

3- Inventory Accuracy
The Inventory Accuracy KPI compares the accuracy of your inventory by taking a headcount of items
in stock and comparing it to what's recorded in your database. This KPI requires you to perform a
headcount of inventory to ensure that your bookkeeping and data management practices are in
order. Inaccurate inventory tracking can result in higher costs, poor order accuracy rates, and
decreased customer satisfaction.

To calculate inventory accuracy, divide the number of completely accurate inventory test items
sampled by the total number of all inventory items sampled. An accurate inventory test item is
considered to be one for which the actual quantity, location, unit of measure, and part number
matches the information stated in the inventory record. If even one of these items is found to be
incorrect, then the entire item tested should be flagged as incorrect. The formula for inventory
accuracy is:

Inventory accuracy = Number of Completely Accurate Inventory Test Items ÷ Total Number of
Inventory Items Sampled

4- Inventory turn-around times


Also known as Inventory Turnover (Times) – an activity ratio measuring the efficiency of the
company's inventory management. It shows how many times a firm usually turns its inventory into
sales per year. It can be computed by dividing the cost of goods sold by the company's average
inventory.

The efficient inventory management means that the current level of the production supplies, goods
in process and finished goods allows the continuous production and sales process, but at the same
time minimum of financial resources is being used to finance the inventory. If the operational process
is continuous but the inventory level is significant, the firm's expenses will grow. The necessity to pay
the warehouse rent and the interest for the funds involved for the additional inventory purchase - all
this increases expenses of the enterprise.

Inventory turnover (Times) = Cost of Goods Sold ÷ Average Inventory

Inventory Turnover (Times) = 360 ÷ Inventory turnover (Days)


5- Lead time
Lead time in inventory management is the lapse in time between when an order is placed to
replenish inventory and when the order is received. Lead time affects the amount of stock a company
needs to hold at any point in time.

How to calculate lead time:

 Determine the supply delay.


 Determine the reordering delay.
 Sum supply delay and reordering delay

The first step in calculating lead time is to factor in the reordering delay. For example;

When considering the total amount of time for a purchase order to be delivered from a supplier,
factor in the time taken for the supplier to accept and process the order. So, if the supplier only
accepts reorders once a week and you place an order 4 days before the day the order will be
accepted by the supplier, your inventory will need to last an addition four days. This additional 4 days
is known as the reordering delay. The lead time is the sum of the supply delay, which is how long the
shipment takes to reach your inventory, plus the reordering delay.

Lead time directly affects your total inventory levels. The longer your lead time the more stock you
will need to hold in your inventory. Longer lead times make deliveries more unpredictable and force
a company to rely heavily on demand forecasts to make orders. Once you have calculated your lead
time, the next step is to employ corrective measures to reduce it.

Lead time = the sum of the supply delay and the reordering delay.

Question 3: explain why You decided to choose these 5

Answer: I decided to choose these 5 because, in my opinion, Stock holding cost, Inventory Days of
Supply, Inventory Accuracy, Inventory turn-around times and Lead time are the most essential KPIs in
one circulation of good from outside the inventory to outside the inventory.
They help us figure out how much the inventory costs will, for how long we will keep them, keep
track on every item accurately, be able to know when each item will leave and how long we’re going
to keep it for.

For me these 5 determinants are the keystones to keep in mind when managing an inventory;
however there are many more KPIs that are essential and complementary without which it is
impossible to have good inventory management.

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