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Module 6- Inventory Management - Copy.pptx

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15 views

Module 6- Inventory Management - Copy.pptx

Module

Uploaded by

John Rick Padran
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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INVENTORY

MANAGEMENT
Module 6

Prepared by: John Rafael R. Pelo, CPA


Elements of Inventory Management
Inventory- defined as a stock of items kept
on hand by an organization to use to meet
customer demand.
Merchandising Manufacturing
Merchandise Inventory Raw Materials Inventory
Work in process inventory
Finished goods inventory

Bookstore Books, stationery supplies


Motor trade Motors, cars
Central Issue in
Inventory Management
The central issue in inventory management is to
maintain an optimum investment in inventories
that considers a risk-reward relationship based
on the following tradeoff:

1. overinvesting in inventory avoids shortages


but incurs costs
2. underinvesting in inventory saves on costs
but increases the risk of stock-out or
shortages.
Inventory Model
Inventory Models address inventory management
issues based on the ff. questions:

1. How many units to order? EOQ


• Ordering Costs (OC)
as order size increases, the total ordering costs would also decrease.
Example: Delivery, inspection, handling, purchasing, processing, receiving

• Carrying Costs (CC


as order size increases, the total carrying costs would also increase.
Example: Storage, insurance, spoilage, obsolescence, security
2. When to make an order?
Economic Order Quantity (EOQ)
ECONOMIC ORDER QUANTITY (EOQ) refers
to the order size (number of units) that
minimizes the sum of ordering costs and
carrying costs.
Notes to Remember:
D= this model was developed based on the study period of 360 day period.
Hence, this model is an annual model.
O= ordering cost every time you order. (one order)
C= cost of carrying one unit. Expressed per unit
Example:
Cha Eun Woo Company requires 40,000 units
for its signature product True Beauty. The
units will be used evenly throughout the year.
The cost to place one order is P 150 while the
cost to carry the inventory for one year is P 3
per unit.

Required:
a. Determine the optimal order quantity (EOQ)
b. How many and how often orders should be
placed within a year?
c. Determine the average inventory in units
d. Determine the annual inventory carrying
costs
e. Determine the annual inventory ordering
costs
Assumptions of the EOQ Model

1. Demand occurs at a constant rate throughout the year.


2. Lead time on the receipt of the orders is constant.
3. The entire quantity ordered is received at one time.
4. The unit costs of the items ordered are constant; thus,
there can be no discounts.
5. There are no limitations on the size of the inventory.
Inventory Model
Inventory Models address inventory management
issues based on the ff. questions:

1. How many units to order? EOQ

Reorder
2. When to make an order? Point
• Stockout Costs (SC)
opportunity costs and other costs incurred when inventory units run
out-of-stock (e.g., lost contribution margin on sales).

• Carrying Costs (CC


as order size increases, the total carrying costs would also increase.
Example: Storage, insurance, spoilage, obsolescence, security
Reorder Point
REORDER POINT refers to the number of units
at which goods should be re-ordered to
minimize on the sum of carrying costs and
stock-out costs.
Notes to Remember:

Lead Time- is period from the time an order is placed until such time the
same order is received.

Normal/Average lead time - this refers to the usual delay in the receipt of
ordered goods

Maximum lead time - this adds to normal lead time a reasonable


allowance for further delay.

Safety Stock- refers to the extra number of units maintained to protect


against stock-out costs during periods of uncertain lead time and
demand.
Example:
Lee Min Ho purchases 9,000 units of its
product every year. Lee Min Ho works 360
days per year. The normal purchase lead time
is 12 working days while maximum lead time is
16 working days.

Required:
a. Safety (buffer) stock
b. Reorder point
Example:
Each stock-out of a product sold by Park Seo
Joon Company costs P 2,000 per occurrence.
The carrying cost per unit of inventory is P 5
per year and the company orders 18 times a
year at a cost of P 200 per order. The
probability of a stock-out at various levels of
safety stock is:

What is the optimal level of safety stock?


a. 200 units
b. 400 units
THANK YOU
FOR YOUR ATTENTION

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