C6 managing inventory

CHAPTER 6:

MANAGING INVENTORY

Inventory ManagementObjective:1. Maximize inventory turnover2. Carry sufficient inventories

EXCESSIVE

Heavy burden on cash

INSUFFICIENT

Lost sales, delay for customers

Terms: Lead Time- Time between start of activity, process and

completion (Start till the end process).

Stock Out- Production require the inventory, but stores

out of the inventory (Out of stocks).

Buffer- Maintaining the inventory and WIP for any

interruption of supply.

Re-order Quantity- Number of units in one order.

Re-order Level- Level of inventory, when should place an

order.

Economic Order Quantity- Replenishment order size, minimize

ordering costs and holding costs.

Types of Inventory1. Raw Materials- Mostly on credit or Accounts Payables

2. Work In Progress (WIP)- Consist partially finished goods.- Need add work before become finished

goods.

3. Finished Goods- Product completed but not sold yet.

Costs of InventoryThere are three other inventory costs:

1. Holding costs- Admin, staff costs, insurance & etc.

2. Order set up costs- Incurred each time a batch of inventory is ordered.

3. Stock out costs- Costs of running out inventory.

4. Purchase costs- Actual cost of buying inventory

Economic Order Quantity Model (EOQ)Definition:

1. Tools to determine the optimal order quantity that results in the lowest total in inventory cost.

2. Optimal order level will lead to minimal overall inventory cost.

EOQ2 Questions

can be answered

How much to order?

What quantity

should be ordered?

When to order?

How frequently should be

inventory be ordered?

Conflict among dept:

- Financial dept: low lvl of inventory

- Marketing dept: high lvl of inventory

- Production Dept: High lvl of inventory

More frequent – increase ordering cost, decrease holding cost

Less frequent – decrease ordering

cost, increase holding cost

EOQ Formula

ExampleAnnual demand – 30,000 barrels. Purchase in lot 5,000 barrels. Price is $12/each.Ordering cost is $200/per order.Holding cost is 10% of purchase price.

Calculate the total cost by using EOQ and without EOQ technique?

Without EOQTotal Cost = Holding Cost + Ordering Cost

= (Average Inventory x Ch/unit) +

(No. of orders x Co/order)= (Q/2 x Ch) + (D/2 x Co)= (5,000/2 x 1.20) + (30,000/5,000 x 200)= $ 3,000 + 1,200= $ 4,200