Inventory Management

 Definition of Inventory
Tangible property owned by a company which is held for the purposes of sale in ordinary course of business.

 Why do businesses carry inventory?
Avail supplier discount To stabilize employment To avoid stock out Anticipatory demand Seasonal trends

Inventory Types  Classifications of Inventory Raw Material (RM) Work in Process (WIP) Finished Goods (FG)  Components of Inventory Cost Raw Material Labor Factory Overheads .

who. what and how much Modes of Transportation  Air. availability of RM and financial strength Supplier Search  Where. Sea. Rail or Road  Cost and availability considerations . WIP & FG  Depends on production cycle.Branches of Inventory Management  Inventory Planning Inventory Profiling  How much inventory to carry in RM.

When to purchase remains constant and how much to purchase varies.  Integrated Models  Answers both questions simultaneously .Branches of Inventory Management  Inventory Control  When to purchase  How much to purchase  Inventory Control Techniques  Periodic Review  Also known as fixed time models.  Continuous Review  When to purchase varies and how much to purchase is constant.

Inventory Control  Periodic Review  Reordering quantity is the crux of this model  Reorder Quantity = Max. At hand + Inv consumed during lead time – Order in Transit .  Lead time = Difference in time between ordering and receiving material  Therefore if lead time > review time our original formula will be modified as follows:  Reorder quantity = Max. Inventory level – Inventory in hand (if review time > lead time)  Review Time = Time that elapses before inventory is checked. Inv. Level – Inv.

Instantaneous receipt of goods C3 = Cost per order  Formula C1 = Holding Cost  EOQ = 2 C3 D per unit C1 D = Demand Total Cost = (No. of Orders x C3) + ((Average Inventory) x C1) Ordering Cost + Holding Cost      .Inventory Control  Continuous Review  Economic Order Quantity (EOQ)  Assumptions of EOQ Demand is deterministic and constant(determined with certainty) Purchase Price is constant Carrying cost and ordering cost is known No Stock out costs Where.

Inventory Control  Continuous Review (cont.)  Examples of Costs  Holding Cost (C1) • • • • • • • • Interest Insurance Obsolescence Warehousing Costs Purchase Order Phone Bank Charges Documentation Cost OC Qty HC  Ordering Costs (C3) EOQ .

Price of Rs.7 or 236 units. TC = 424. 6 per unit Find out EOQ and Total Cost Answers.26 . EOQ = 235.Question Demand = 2500 Units Ordering Cost = Rs. 20 per order Carrying Cost = 30% of Unit P.

7) x 20) + ((235.13 + 212.13 = 424. of Orders x C3) + (Avg.Answer . Inv x C1)  ((D / EOQ) x C3) + ((EOQ / 2) x C1) ((2500 / 235.Working  EOQ = 2 (20) (2500) (6 x 0.7 or 236 units  Annual Variable or Total Cost Total Ordering Cost + Total Holding Cost  (No.26 .7 / 2) x 1.30)  EOQ = 235.8)  212.

What is the minimum rate of return that we have to invest the excess cash to justify the reduction in the average inventory? .Decision Making in Inventory Question If we reduce our average inventory by 20% we will free up our cash.

10.90 from switching to OQ from EOQ  Decrease in investment in inventory = Rs. 435. 144 = 7.26 = Rs.10. Inv = 236 / 2 = 118  118 x 0.8)\  265.16  Increase in cost = 435.90 / Rs.56% .16 – 424.96 + 169.8 = 94 units (reduction of 24 units)  OQ = 94 x 2 = 188 units  ((D / OQ) x C3) + ((OQ / 2) x 1.Decision Making in Inventory Answer  Average Inventory is reduced by 20%  Avg.2 = Rs.8)  ((2500 / 188) x 20) + ((188 / 2 x 1.6 x 24 = Rs.144  Minimum acceptable return = Rs.

Additional Practice Questions  Yearly Demand = 10. Is it a viable proposition. 25 per order  Holding Cost = 25% of Purchase Price  Unit Purchase Price = Rs. 500 for 6 months the company can earn Rs. 162-163. Q4 . 10  There is an opportunity whereby investing Rs. If it is a viable proposition then what will be the source of the investment?  Iqbal Mathur Pg.000 units  Ordering Cost = Rs. 50. Q1. The borrowing rate is 16%.

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