12
CHAPTER 6: MANAGING INVENTORY

C6 managing inventory

Embed Size (px)

DESCRIPTION

 

Citation preview

Page 1: C6 managing inventory

CHAPTER 6:

MANAGING INVENTORY

Page 2: C6 managing inventory

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

EXCESSIVE

Heavy burden on cash

INSUFFICIENT

Lost sales, delay for customers

Page 3: C6 managing inventory

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.

Page 4: C6 managing inventory

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.

Page 5: C6 managing inventory

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.

Page 6: C6 managing inventory

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

Page 7: C6 managing 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.

Page 8: C6 managing inventory

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

Page 9: C6 managing inventory

EOQ Formula

Page 10: C6 managing inventory

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?

Page 11: C6 managing inventory

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

Page 12: C6 managing inventory