AEC 4204-

Agribusiness
Management
Lecture 8: Agricultural enterprise selection
and management.
Paul Aseete, PhD

October 22nd, 2021

 INVENTORY CONTROL/ MATERIALS
MANAGEMENT
• It deals with purchasing and controlling the materials used in the
production process.
• It can be defined as the excess of those raw materials, parts, or
finished products that can presently be needed or consumed by either
the production process, market and supply outlet.
• Inventory control is the process of keeping the right number of parts
and products in stock to avoid shortages, overstocks, and other costly
problems
• Inventory control, also called stock control, is the process of managing
a company’s inventory levels, whether that be in their own warehouse
or spread over other locations.
• It comprises management of items from the time you have them in
stock to their final destination (ideally to customers) or disposal (not
ideal). An inventory control system also monitors their movement,
usage, and storage.
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT

• Materials (goods) planning and control

• Decisions to be taken in this are
1. Amount of materials needed for output desired
2. Amount of inventory and its storage and recording
3. Vendor relations
4. Quality materials and price per unit
5. Quantity and time of order
6. Methods of receiving and transporting
7. Handling of defective materials and stock
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT
• Why keep inventory
1. It ensures a continuous link between production and sales of a
product. It checks against stock outs which could lead to plant
shutdowns.
2. It gives the farmer flexibility in both production and supply such
that if a farmer faces drastic upward changes in market
conditions, such as increase in demand, he can easily adjust
supply accordingly.
3. Some farm inputs may face fluctuation in supply, yet they are very
vital to enhance production. Inventory therefore helps the firm to
ensure consistent production by catering for supply rigidities and
managing production constraints.
4. Finished goods inventory allows a farm in its production
scheduling and marketing. This prevents future loss of
orders/customers, hence sales.
5. It lowers costs of production by ordering for more quantities per
order, thus, per unit costs will be lowered.
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT

• Types of inventory
1. Farm inputs like seeds, feeds, water etc.
2. Work in process, or those materials that are halfway done and
that have not completed gone through the production process
fully.
3. Finished products like, eggs, grains, etc. that are ready for the
market and are in the factory, warehouse or store
4. Repair parts for machines
5. Supplies for the office, shop or factory
6. Tools
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT
• Keeping inventory involve two major types of costs

1. Set up or ordering costs such as, paperwork involved,

communication costs such as telephone and fax costs, and
transportation costs for goods in transit, taxes, etc and;
2. Holding or carrying costs such as physical location for storage of
the commodities (rent for warehousing), security for the
commodities in storage, insurance costs for goods in storage
against fire, burglary etc., depreciation and obsolescence costs (
maintenance of the inventory in a useable state), etc.
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT
• Therefore, this raises concern of:
1. How much of an item should be ordered
2. When should that item be ordered

There is need to bear mind that too much inventory raises cost of
holding and too little inventory creates spill over effects of creating a
halt in production due to artificial shortages.

Therefore, the concern is at what level of inventory should the firm

order for more and how much should be ordered.
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT
• It should be noted that

• Set up or ordering costs will significantly reduce as the order

becomes bigger and bigger.

• The bigger the amount of inventory the higher the costs of carrying
that inventory.

Therefore, minimizing inventory costs or controlling inventory, firms

should determine.
• The user rate
• Determine the economic inventory quantity that best trades off
holding and ordering costs.
 INVENTORY CONTROL/ MATERIALS
MANAGEMENT
• The usage rate assumptions are that:
• Demand is known and constant
• The time between the placement of the order and the receipt of the
order is known and constant (lead time)
• Receipt of inventory is instantaneous. The inventory from an order
arrives in on batch at one time.
• The demand is constant over time therefore inventory reduces at
uniform rate overtime.
With all the above assumptions known, it becomes easy to determine
when to place in an order. In other words, at what point of the available
inventory should the farm order for more in order to continue
production and supply of output.
 INVENTORY CONTROL
Determining Economic Inventory Level

• Inventory Management Scheme The Fig 8.2 shows how the number of
units of a purchased item varies over a
period of time.

Q Q Q When a purchased item is received

Inventory Level

the inventory increases instantly (to Q

that is, the economic order quantity).

RP Lead time The units are removed from inventory,

as they are demanded. At certain
levels or when inventory falls to a
specific level, a purchase order is sent
to the vendor (RP).
Margin of safety
The order will be received sometime
Time in weeks later. In the meantime, more units
may be drawn from inventory. This
cycle is repeated for each item
Lead time in inventory management is the amount of time between
purchased.
when a purchase order is placed to replenish products and when the
order is received in the warehouse.
INVENTORY CONTROL
Economic order quantity: (optimal order quantity)
• Too little inventory may cause stock- -outs (shortage of the
material or product when it is required for production or sale
• The problem is to strike the optimum inventory to carry
converted in terms of Economic Order Quantity (EOQ) for
consumption materials and economic lot size for batch
production.
• This concept is very important in purchase of raw material,
storage of finished products (outputs) and the work in process
(WIP).
• Its a combination of usage rate forecast; ordering costs and
carrying costs.
INVENTORY CONTROL
• Economic order quantity: (optimal order quantity)
• For example
• Usage rate: Assuming that a given livestock farm consumes 24000 tons
of livestock concentrates, within 6 months then 100 tones will be required
per week.
6 months = 24 weeks
24000 tons = 6 months
= 24 weeks
1 week = 24000 /24
= 1000 tones
INVENTORY CONTROL
Ordering costs
• This refers to costs that a farm incurred while placing an order. e.g
communication time, paperwork, salaries apportioned to such personnel
etc. It is important to note that ordering cost per unit will progressively
reduce as the size of the order increase.

Carrying costs
• Looks at the cost per unit of inventory in terms of storage, handling,
insurance if any, we should note that these costs will continue to rise as
long as the order is becoming bigger and bigger.

Total cost of inventory

• is the total of ordering and holding/carrying cost.
Inventory control
• Farm manager is looking for that quantity (EOQ) that will balance off the
carrying costs, ordering costs, and total cost at this point, it should be
lowest.
INVENTORY CONTROL
Optimal inventory costs

In the Diagram Above; total cost

curve will continue to decline
because the ordering costs are
falling as the order becomes
bigger.

At a point where ordering cost

line meets the carrying cost line
the total cost will be lowest and
they will start to increase at a
rate almost equivalent to the
carrying cost.
INVENTORY CONTROL
• EOQ also can be derived by a formula

2𝑆𝑂
𝑄=
𝐶

• Where Q is EOQ
• S = total usage (Say annual requirements of the item)
• O = ordering cost
• C = Carrying costs (Inventory carrying cost per unit)
INVENTORY CONTROL
Example
• Assume that on a certain farm the total usage of livestock feeds is
2000 tonnes for 100 days, ordering costs are $ 100 an order, and
the carrying costs are $ 10 per unit per day. EOQ then is

2 2000 (100)
𝑄=
10

=200 UNITS
 INVENTORY CONTROL
Uses of the model (Equation)
• The model is an excellent guide in scientific inventory
management. This compels the manager to analyze the
requirements and cost of inventory holding.
• It is useful in the inventory management by fixing.
1. Maximum and minimum level of stock holding.
2. Ordering level (that is, the stock point when reordering is required, and
3. The most economic quantity to order.

The above is a simple and deterministic model, which assumes constant rate of
consumption, constant cost of ordering and holding inventory and uniform lead – time
(that is, the time lag between replenishment, action and actual supply or availability of
the items)
INVENTORY CONTROL
• FURTHER READING
Determining when to order
• The level of inventory at which an order should be issued is based on:
• The quantity to be used between times an order is issued and items are
received.
• A quantity needed to provide a margin of safety.
• The time to be allowed in (1) is determined by the time taken for
• Order to be processed by the firm
• Order to be transported to the vendor
• Vendor to make and pack the items
• Items to be transported to the firm
• Estimates of cost of carrying inventory ranges from 15% to over 100% of the
average inventory investment for a year. Values of 20% to 25 % are often
used.
• The recording point quantity can be estimated by computing various levels
and reordering points and adding the cost of carrying the inventory and cost
of running out of goods multiplied by the probability of running out. The
lowest cost is the best order point.
INVENTORY CONTROL
• Quantity Per Order
• The quantity per order affects the level of inventory and the time
between orders.
• Orders may be placed at certain intervals such as once in a week,
a month or quarter, when the amount ordered can bring the level
of inventory up to a predetermined standard mount.
INVENTORY CONTROL
• Ordering Procedure
• Many items can be ordered on a routine basis. The procedure starts
with need as reflected by the reorder points and requires keeping a
1. Perpetual inventory which records when the inventory has reached the
reorder point.
2. Quantities set aside that will not be used without making out a purchase
order.
• Items requiring special analysis
1. Expected changes in price, short delays in buying for expected decrease in
price or increased quantities for expected increase in price result in savings.
However, stock – outs or too heavy inventory costs should be guarded
against.
2. Expected changes in demand. Seasonal products fall into this category.
3. Orders for a demand for special goods, quantity ordered is equal to amount
demanded so that no material is left over.
4. Short supply of materials.
• Speculative buying should be avoided unless the manager is in that
business.
INVENTORY CONTROL
Placing responsibility of ordering
• One person should have the responsibility for ordering all
materials, but that person should obtain the help of those
knowledgeable people in the area where the goods are needed.
By having a single person responsible, duplicate orders for the
same material are avoided, the specialized kills needed for
purchasing can be used and the responsibility for improvements
in buying – process is established.
INVENTORY CONTROL
• Sources of Supply
• This is important because,
1. Price of purchased goods is a major cost in the production
2. Reliability in delivery and quality affects the operations
3. Vendor can be valuable source of information
4. Vendor can provide valuable service
INVENTORY CONTROL
• Prices of materials
• The prices of materials from different vendors are not the same.
Higher prices may be charged for
1. Higher quality
2. More reliable and faster service
3. Better terms for returning goods
4. More services such as packaging and information
5. Better or delayed payment plan
• The purchase manager can purchase an item at a lower price, but
the total cost of processing the item may be higher.
• Price and transport cost from a distanct place may be less than
from a local source but faster service from local source may allow
the purchasing firm to have less inventory.
• One source may supply a wide range of goods needed so that the
expenses of ordering from many sources can be reduced.
INVENTORY CONTROL
• The sources of supply may be brokers, wholesalers, manufacturer
or others.
• Each of these sources provides a valuable service.
• Wholesaler stocks many items, quick delivery of wide varieties of
items.
• Manufacturer does not involve intermediate handler, but it is
restricted to a product it can supply. Manufacturer may have sales
representatives or agents who can help small business.
• Regional and National Trade Fairs and Trade Association provide
valuable information on sources and their products and services.
 INVENTORY CONTROL
Using few or many sources
Arguments for a single source
1. A closer and more individual relationship can be established
2. Better services during shortages
3. Discounts for large purchase
• Multiple sources provide a greater variety of goods and often on
better terms.
• Care should be exercised on ethics of suppliers and should be
guarded against including gifts, entertainment, misrepresentation
and reciprocity.
• A small company should try to maintain a good image in its dealings
with vendors in order to obtain good services.
INVENTORY CONTROL
• Receiving Materials
The receipt and forwarding of materials to inventory constitute the
last step in acquiring inputs.
• Checking whether the material is in conformity with order, proper
condition and quality.
• Materials are checked for damage in transport, for specified
characters such as colour, size and items specified and for proper
quantity and price.
• Materials can be stored in the containers in which they are
received, in separate containers or by individual item. The
receiving agent prepares material for storing.