C6 managing inventory
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Transcript of 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