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Assignment of Inventory Management

EOQ refers to the economic order quantity, which is the optimal order quantity that minimizes total inventory costs. It is calculated based on annual demand, carrying costs, ordering costs, and other assumptions like constant demand and lead times. Safety stock is calculated based on variations in demand and lead times to ensure sufficient stock levels to prevent stockouts. Inventory control is important to reduce costs, ensure optimal capital investment, smoothly manage production, reduce losses, and systematically record inventory levels. Techniques like EOQ help determine optimal stock levels to balance ordering and carrying costs. Classification of inventory also helps focus on high-cost items. Inventory control aims to maintain sufficient stock levels while avoiding excess inventory.

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Harsh Chauhan
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2K views3 pages

Assignment of Inventory Management

EOQ refers to the economic order quantity, which is the optimal order quantity that minimizes total inventory costs. It is calculated based on annual demand, carrying costs, ordering costs, and other assumptions like constant demand and lead times. Safety stock is calculated based on variations in demand and lead times to ensure sufficient stock levels to prevent stockouts. Inventory control is important to reduce costs, ensure optimal capital investment, smoothly manage production, reduce losses, and systematically record inventory levels. Techniques like EOQ help determine optimal stock levels to balance ordering and carrying costs. Classification of inventory also helps focus on high-cost items. Inventory control aims to maintain sufficient stock levels while avoiding excess inventory.

Uploaded by

Harsh Chauhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Q.1. What do you mean by EOQ ? Derive its formula. How safety stock is calculated.

Ans. EOQ : - Economic order quantity is the number of units that it an organisation should order each
time a requisition design of material is to be made to the supplier. Generally in an organisation buying
raw material was a routine decision no one has ever looked at its cost consequences till the advent of
economic order quantity as technique of minimising inventory cost. economic order quantity is that
amount of quantity if ordered will result in minimization of the total cost keeping in view certain
assumptions.

Assumptions : -

 Annual demand is uniform constant and continuous.


 The lead time is constant and known i.e. time gap between requisition and replenishment is
uniform and known.
 There is no constraint about how many times and order is made.
 There is no constant about the holding the purchased inventory in the stock.
 The cost of order is constant and is not dependent on the size of the order.
 No quantity discount is available.
 As soon as the stock richest reorder level and economic order quantity order is placed.

Generally, variable inventory cost comprises of two components i.e..

(a) Carrying or holding cost : - carrying cost is the cost of holding the inventory in the store. It is a
variable cost which is generally calculated as a percentage of the purchase price. Higher the
quantity order higher will be the carrying cost and vice versa.
It is calculated as under:
{Total carrying cost= EOQ or order quantity /2 (carrying cost per unit per year)}
(b) Ordering cost : - the cost associated with placing an order to a supply is called ordering cost.
Ordering cost always remain constant regardless of the magnitude of the order. For example if
your order cost is Rs. 1000/- it will remain same either you order 100units or 10000 units.
It is denoted by: -
{Total ordering cost=annual demand/EOQ or order quantity (ordering cost per order)}

Derivation of EOQ formula:-

At EOQ carrying cost and ordering cost are generally equal

Now,

{Carrying cost= EOQ/2(carrying cost per unit per year) = EOQ/2(C)}

{Ocering cost = annual demand /EOQ (ordering cost per order) D/EOQ(O)}

How safety stock is calculated: -

Formula for calculating safety stock is:-

 In case of variation in demand


Safety stock level= (maximum consumption rate - average consumption rate) x lead time

OR

 In case of variation in demand


Safety stock level= (maximum lead time – average lead time) x average consumption rate

OR
 In case of variation in both demand and lead time
Safety stock level= (maximum consumption rate x maximum lead time) - average
consumption rate x average lead time).

Q.2. What is inventory control? Explain its importance. How to achieve inventory control.

And. Inventory is the sum total of raw material work in progress and finished goods maintained by an
organisation to protect itself from future uncertainty or two to conduct and control the operations of a
business in a smooth manner without any disruption for delay. Inventory control system is a collection
of techniques that are used to determine how much stocks should be kept when to order which material
is to be taken care of more than others and how big the order should be.

According to Donald Waters “ stock consists of all the goods and materials that are stored by an
organisation. It is a story of items that is kept for future uses. An inventory is a list of the items held in
stock”.

Importance of an inventory control: -

1. Reduction in cost: - inventory control helps in reducing cost.


 By ensuring smooth and uninterrupted flow of production.
 It guarantees economics of scale by ensuring mass production.
 It has been taking benefit of quantity discount.
 Saves money by maintaining stock of seasonal items purchased at reasonable rates.
2. Ensure investment of optimum capital: - inventory control with the help of various inventory
control techniques such as economic order quantity discount model and production run model
of stocks and shows that stop be kept only of required minimum quantity. moreover it helps in
increasing inventory turnover leading to minimum in inventory.
3. Classification of inventory:- inventory in an organisation may contain thousands of items. It may
vary in terms of value, use ,size ,cost ,utility, lead time and technicality. Hence it is essential that
appropriate methods of classification and control may be used to monitor them. classifications
of inventory has inventory manager to cent rate on the cost that constitutes highest promotion
of total cost.
4. Smoothen the production process:- continuous supply of raw material is required for the
smooth flow of production. In absence of it the production may stop which will lead to
escalation of cost. inventory acts as an observer in case of shock or irregular demand for supply
of raw material.
5. Help reduce losses:- inventory control helps in proper maintenance of inventory and avoid
losses due to obsolescence, deterioration, leakage and evaporation.
6. Systematic record:- systematic record of inventory helps top management to make proper plan
for its best uses and maintenance. Evaluation analysis and examination of record help manager
and auditors to identify whether inventory policies being formed division or alteration.

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