Inventory management
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Transcript of Inventory management
![Page 1: Inventory management](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5c3401a28ab394e8b45fc/html5/thumbnails/1.jpg)
Inventory
Management
Inventory
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Inventory
•Necessary current asset that
permits the production-sale
process to operate.
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Two Aspects of inventory:
1.Types of inventory
2.Different viewpoints as to the
appropriate level of inventory
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3 basic types of inventory
Raw materials inventory- items purchased by the firm for
use in the manufacture of a finished product.
Work-in-process inventory- all items that are currently in
production.
Finished goods inventory- items that have been produced
but not yet sold.
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Inventory level’s viewpoint
• Financial manager- keeping the inventory levels low
• Marketing manager- would like to have large inventories of each of the
firms finished product.
• Manufacturing manager- making sure that the production plan is
correctly implemented and that it results in the desired amount of
finished goods of acceptable quality at a low cost.
• Purchasing manager- concerned solely with the raw materials inventories.
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Inventory as an investment
• Inventory is an investment in thesense that it requires that the firm tieup its money, thereby for going certainother earning opportunities.
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The relationship between inventory and
accounts receivable
• The level and the management of inventory andaccounts receivable are closely related.
• Generally, in the case of manufacturing firms, whenan item sold it moves from inventory to accountsreceivable and ultimately to cash.
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International Inventory management
• The production and manufacturing economies of
scale that would seem to come from selling products
globally may provide elusive if products must be
tailored for individual local markets, as very
frequently happens, or if actual production of goods
takes place in factories around the world.
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Techniques for managing inventory
1. Abc System
2. The Basic Economic Order Quantity (EOQ Model)
3. The Reorder Point
4. The Materials Requirement Planning (MRP System)
5. Just-in-time (JIT System)
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Abc System
• Inventory management technique that dividesinventory into 3 categories of descendingimportance based on the dollar investment ineach.
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Economic Order Quantity Model
• Inventory management technique fordetermining an items optimal orderquantity, which is the one that minimizesthe total of its order and carrying cost.
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Basic Cost
1.order cost
2.Carrying cost
3.Total cost
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Order cost
•Include the fixed clerical cost of
placing and receiving an inventory
order.
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Carrying cost
•The variable cost per unit ofholding an item in inventory fora specified time period.
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Total cost
•The sum of the order cost and the
carrying cost of inventory.
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Graphic Approach
•The economic order quantity can be
found graphically by plotting order
quantities on the X, or horizontal, axis
and cost on the y, or vertical, axis.
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Mathematical Approach
• A formula can be developed for determining the firms EOQ for a given inventory item, by letting
• S= usage in units per period
• 0= order cost per order
• C=carrying cost per unit per order
• Q=order quantity in units
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• The order cost can be expressed as the product of the cost perorder and the number of orders. Because the number of ordersequals the usage during the period divided by the order quantity(s/q), the order cost can be expressed as follows:
• Order cost= o (s/q)
• The carrying cost is defined as the cost of carrying aunit per period multiplied by the firms averageinventory.
• Carrying cost= c (q/2)
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• Total cost equation is obtained by combining the order and carrying cost.
• Total cost= order cost + carrying cost
• Because the EOQ is defined as the order quantity that minimizes the total cost function, the total cost equation must be solved for the EOQ.
• EOQ= (𝟐 𝒙 𝑺 𝒙 𝑶)/𝒄
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The Reorder Point
•The point at which to reorder inventory,
expressed equationally as:
Reorder point= lead time in days x daily usage.
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Safety Stocks
•Extra inventories that can be drawndown when actual lead times and/ orusage rates are greater than expected.
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Material Requirement Planning
• Inventory management system that usesEOQ concepts and a computer to compareproduction needs to available inventorybalances and determine when ordersshould be placed for various items on aproducts bill of materials.
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Just-in-time (JIT) System
• Inventory management system that minimizes
inventory investment by having material inputs
arrived at exactly the time they are needed for
production.