DETERMINANTS OF INVENTORY COST

• Inventories are used to satisfy demand requirement of the production department

• Too much inventory is cost investment

• Shortage in materials stock will result to more losses

• Purchasing and inventory management must go hand in hand

• Managers of the supply management must know the extent of demand and lead time delivery.

the three basic costs associated with Inventory are ;

1. Holding or Carrying Cost - Refer to all the fees and expenses for keeping items stored before they are
sold

2. Ordering Cost - The expenses incurred to create and process an order to a supplier

3. Shortage Cost - The result when demand for the products exceeds the supply inventory at hand

THE DETERMINATION OF ECONOMIC ORDER QUANTITY

- Companies can use EQR as an efficient ordering guideline to prevent shortages

- It helps companies manage their inventory efficiently.

There are three order models of EOQ .

1. The Economic Order Quantity Model - This is used to identify the order size that will minimize the
annual cost of holding inventory and ordering cost.

2. Instantaneous Economic Order Model - This model assumes that the usage of materials is
proportionately equal to the delivery of materials in the production line.

3. Quantity Discounts

- Price production offered by suppliers for volume orders

- When quality discount is offered the buying organiszation must be able to compute between the
carrying cost , storage cost and amount of capital investments.
ORDERING SCHEDULE AND SAFETY STOCKS

- The ordering of materials needed in the production line needs constant analysis and study

- Affect the costs associated with materials inventory

- The time of material delivery must be made so that the stock level is still enough to supply production
operation

the ff are the signal points in the materials ordering process.

1. The rate of demand based on production schedule

2. the lead time of delivery

3. The extent of demand and time variability

4. The degree of stock risk and the operation costs involved.

SAFETY LEVEL OF STOCK

- Carry additional inventories in-stock to reduce the risk of running out of materials during the ordering
lead time

- This is needed when variability is present in demand or lead time

- Sustain the supply of materials while waiting for the arrival of replenishment

The amount of safety stocks that is appropriate for a give situation depends on the following :

1. The average demand rate and average lead time

• Average Demand Rate - is the production requirements for any given time either on weekly or
monthly basis

• Average Lead Time - is the period by which replenishment will arrive at the warehouse .

2. Demand and lead-time variability - when demand is constant , the lead-time variability in the supply
of materials could be determined and therefore stock-outs are avoided

3. The demand service level

- is the average time by which the supplier can deliver the goods to the production line

- longer the service period , the more safety stocks should be stored to avoid stock outs