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Inventory Management

The document discusses inventory management, including classifying inventory as raw materials, work in progress, or finished goods. It also covers inventory control techniques, costs associated with inventory like ordering and carrying costs, and basic stock terminology such as reorder level and economic order quantity. The economic order quantity model aims to minimize total inventory costs by balancing ordering and carrying costs.

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Blessed Panashe
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171 views13 pages

Inventory Management

The document discusses inventory management, including classifying inventory as raw materials, work in progress, or finished goods. It also covers inventory control techniques, costs associated with inventory like ordering and carrying costs, and basic stock terminology such as reorder level and economic order quantity. The economic order quantity model aims to minimize total inventory costs by balancing ordering and carrying costs.

Uploaded by

Blessed Panashe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Inventory management

• Inventory is essential in providing flexibility in operating a system or


organisation.
• Inventory takes the form of :
• Raw materials for production
• Work in progress /process to allow for product variation.
• Finished goods awaiting sale or dispatch.
• Consumables
• The classification of inventory depends upon the nature of the
organisation as finished goods for one company can be raw materials of
another company.
Inventory/Stock Control
• This is a quantitative control technique with strong
financial implications.
• Two important decisions are generally taken by
managers in relation to inventory namely:
• 1. When to replenish the inventory of an item.
• 2. how much of an item to order when the inventory
of that item is to be replenished.
Costs of inventory systems
• The following costs are associated with the inventory
system.
• 1. The purchase price per unit .e . The invoiced price
per item acquired.
• 2. Ordering costs per order-inverse to order size
• 3. carrying costs per unit-directly varies with order size.
• 4. shortage costs.
Basic Stock terminology
• 1. Lead/procurement time- period of time expressed in days, weeks
or months between ordering either externally or internally and
replenishment.
• 2.Demand- amount required for sales /production. It is usually
expressed as a rate of demand per week, month or year. Estimates
for the rate of demand during the lead time are very important in
inventory control systems.
• 3. Economic order quantity(EOQ) or Economic batch Quantity
(EBQ)- this the calculated ordering quantity which minimizes the
balance of costs between inventory holding costs and re-order
costs. It is the order size at which total costs of stock are minimized.
-cont-
• Physical stock- number of items physically in stock at a given time.
• Free stock – Physical stock + outstanding replenishments – unfulfilled
requirements.
• Buffer Stock or minimum stock – stock allowance to cover errors in
forecasting the lead time or demand during the lead time.
• Maximum stock- a stock level selected as a maximum desirable which is
used as an indicator to show when stocks have risen too high.
• Reorder Level – level of stock at which a further replenishment order
should be placed. It depends upon the lead time and the demand during
the lead time.
• Reorder quantity- this is the size of the replacement order. In some types
of inventory systems it is the EOQ.
Inventory control model
• The model assumes orders of equal size are placed at periodical
intervals. The items against an order are replenished
instantaneously and the items are consumed at a constant rate.
The purchase price is the same irrespective of the order size.
• The model components can be computed as follows:
• 1. No. of orders per year = D/Q*, where D – annual demand, and
Q* - order size.
• 2. Average inventory = Q/2
• 3. Cost of order per year D/Q X Co, where Co is the ordering cost
per order.
-cont-
• 4. carrying costs per year Q/2 x Cc, where Cc is the
carrying costs.
• 5. Purchase cost per year D x p, where p is the price, D-
demand.
• 6. Total inventory cost = D/Q .Co + Q/2 . Cc + D.p
• 7. Optimal order size = √2CoD/Cc
• 8. Time between the orders= Q/D.
Economic order quantity
• This is the ordering quantity which minimizes the
balance of costs between the inventory holding costs
and reorder costs. The computation of the EOQ has
the following assumptions.
• 1. there is a known constant stockholding costs
• 2. there is known constant ordering costs
• 3. rates of demand are known and constant
• 4. there is a known constant price per unit
• 5. replenishment is made instantaneously.
Illustration
• Beta industry estimates that it will sell 24 000 units of its
product for the coming year. The ordering cost is $150 per
order and the carrying cost per unit per year is 20% of the
purchase price per unit. The purchase price is $50.
• Compute the following:
• 1.Economic order quantity (EOQ).
• 2. Average stock
• 3. The number of orders per annum
• 4. The time (in days) between successive orders.
• 5. The total cost of stock per annum including the cost of
purchase.
Quantity discounts
• One of the unrealistic assumption of the EOQ model is
that the price per item remains constant. Usually
some form of discount can be obtained by ordering
increased quantities.
• A simple approach is used to consider the costs
associated with the normal EOQ and compare these
costs with the costs at each succeeding discount point
and so ascertain the best quantity to order.
Financial impact of discounts
• Price discounts for quantity purchases have two financial
effects. Some of the beneficial effects include:
• 1. savings from lower price per item.
• 2. The larger order quantity means that fewer orders
need to be placed hence ordering costs are also
reduced.
• However price discounts result in increased costs arising
from the extra stockholding costs caused by the average
stock level being higher due to the larger order quantity.
Illustration 1
• A company uses a special bracket in the manufacture of its product which
it orders from outside suppliers. The appropriate data is as follows:
• Annual demand = 2000 units
• Ordering costs =$20 per order
• Carrying cost = 20% 0f item price
• Basic item price = $10 per bracket.
• The company is offered the following discounts on the basic price:
• For order sizes: 400 – 799 less 2%
• 800 – 1599 less 4%
• 1600-and over less 5%
• Required: Establish the most economical quantity to order.
Illustration 2
• A company currently purchases one of its items for $2 per unit
without quantity discount. The ordering cost is $20 per order
and the carrying costs is 20% of its purchase price per unit per
year. The annual demand is 2500 units. A new vendor offers
quantity discount for the same item as per the following
quantity discount scheme. Find the best order quantity.
• Quantity Price($) per unit
• 0≤Q1 <1500 $2
• 1500≤Q2<2500 97% of price
• 2500≤Q3 95% 0f price

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