Inventory Management PDF

INVENTORY SYSTEM ⌖Inventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-process ⌖An inventory system is the set of policies and controls that monitor levels of inventory and determine...

INVENTORY SYSTEM ⌖Inventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-process ⌖An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be Again: what is the Primary Goal in Financial Management? Maximization of Shareholders Wealth In order maximize the shareholders wealth management should: 1. Have a strategic plans and operations which MAXIMIZE REVENUES or SALES 2. Have a strategic plans and operations which MINIMIZE COST, EXPENSES AND LOSSES  INVENTORY COSTS to Consider ⌖Holding (or carrying) costs ⌖Costs for storage, handling, insurance, etc ⌖Setup (or production change) costs ⌖Costs for arranging specific equipment setups, etc ⌖Ordering costs ⌖Costs of someone placing an order, etc ⌖Shortage costs ⌖Costs of canceling an order, etc  Inventory Systems ⌖Single-Period Inventory Model ⌖One time purchasing decision (Example: vendor selling t-shirts at a football game) ⌖Seeks to balance the costs of inventory overstock and under stock ⌖Multi-Period Inventory Models ⌖Fixed-Order Quantity Models ⌖Event Triggered (Example: running out of stock) ⌖Fixed-Time Period Models ⌖Time triggered (Example: Monthly sales call by sales representative)  Fixed-order quantity model ⌖ also called economic order quantity (EOQ) ⌖ an inventory control model where the amount requisitioned is fixed and the actual ordering is triggered by inventory dropping to a specified level of inventory  Fixed-Order Quantity Model Assumptions ⌖Demand for the product is constant and uniform throughout the period ⌖Lead time (time [number of days] from ordering to receipt) is constant ⌖Price per unit of product is constant  Fixed-Order Quantity Model Assumptions ⌖Inventory holding [carrying] cost is based on average inventory ⌖Ordering or setup costs are constant ⌖All demands for the product will be satisfied (No back orders are allowed)  Basic Fixed-Order Quantity Model and Reorder Point Behavior 1. You receive an order quantity Q. 4. The cycle then repeats. Number of units on hand Q Q Q R L L 2. Your start using them up over time. 3. When you reach down to Time a level of inventory of R, R = Reorder point Q = Economic order quantity you place your next Q L = Lead time sized order.  Cost Minimization Goal By adding the item, holding, and ordering costs together, we determine the total cost curve, which in turn is used to find the Qopt inventory order point that minimizes total costs There is a Direct Relationship between the Order Size and Total Cost to Carry, when Order Size is decreases (few) C the Total Cost to Carry also decreases, while Order Size O Increases, total Cost to Carry also increases. S Holding /Carrying T Costs There is an inverse relationship between the Order Size and Total Cost per Order, if the Order Size decreases the Total Cost per Order Increase, while if the Order Size Annual Cost of Increases the total Cost per Order decrease. Items (DC) Ordering Costs Q OPT Order Quantity (Q)  Basic Fixed-Order Quantity TC=Total annual (EOQ) Model Formula cost Total Annual Annual Annual D =Demand Annual = Holding C =Cost per unit Purchase Ordering Q =Order quantity Cost + Cost Cost Cost S =Cost of placing + an order or setup cost R =Reorder point L =Lead time H=Annual holding D Q and storage cost TC = DC + S + per unit of inventory H Q2  Deriving the EOQ Using calculus, we take the first derivative of the total cost function with respect to Q, and set the derivative (slope) equal to zero, solving for the optimized (cost minimized) value of Qopt 2D S 2(A nnual D em and)(O rdering Cost per QO = = Unit) H olding C ost per Unit PT H _ We also need a R eorder point, R = d L reorder point to tell us when to _ d = average daily demand (constant) place an order L = Lead time (constant)  EOQ Example (1) Problem Data Given the information below, what are the EOQ and reorder point? Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = P10 Holding cost per unit per year =P2.50 Lead time = 7 days Cost per unit = P15  EOQ Example (1) Solution 2DS 2(1,000 )(10) Q OPT = = 89.443 units or 90 units = 2.50 H 1,000 units / year d = 2.74 units / 365 days / year = day _ Reorder point, R=d L = 2.74units / day (7days) = 19.18 or 20 units Analysis: In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units. 1. EOQ = 90 Units 2. Number of Orders per Year 3. Annual Ordering Cost 4. Annual Carrying Cost 5. Total Annual Cost 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 3.Annual Ordering Cost = Cost per Order x Orders Per Year 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 3.Annual Ordering Cost = Cost per Order x Orders Per Year 11 x 10 = P110 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 3.Annual Ordering Cost = Cost per Order x Orders Per Year 11 x 10 = P110 4.Annual Carrying Cost =Carrying cost*EOQ/ 2 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 3.Annual Ordering Cost = Cost per Order x Orders Per Year 11 x 10 = P110 4.Annual Carrying Cost =Carrying cost*EOQ/ 2 2.5 x (90 / 2) = P112.5 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 3.Annual Ordering Cost = Cost per Order x Orders Per Year 11 x 10 = P110 4.Annual Carrying Cost =Carrying cost*EOQ/ 2 2.5 x (90 / 2) = P112.5 5.Total Annual Cost = Annual Ordering Cost + Annual Carrying Cost 1. EOQ = 90 Units 2.Number of Orders per Year = Annual Demand / EOQ 1,000 / 90 = 11 Orders per Year 3.Annual Ordering Cost = Cost per Order x Orders Per Year 11 x 10 = P110 4.Annual Carrying Cost =Carrying cost*EOQ/ 2 2.5 x (90 / 2) = P112.5 5.Total Annual Cost = Annual Ordering Cost + Annual Carrying Cost P110 + P112.5 = P222.50 Order Size Number of Total Cost Average Total Cost To Total Cost to Order per Order Inventory Carry Order and (Order Size / Total Cost to 2) Carry 80 90 11 110 45 112.5 P222.5 100 Order Size Number of Total Cost Average Total Cost To Total Cost to Order per Order Inventory Carry Order and (Order Size / Total Cost to 2) Carry 80 12.5 125 40 100 P225 90 11 110 45 112.5 P222.5 100 Order Size Number of Total Cost Average Total Cost To Total Cost to Order per Order Inventory Carry Order and (Order Size / Total Cost to 2) Carry 80 12.5 125 40 100 P225 90 11 110 45 112.5 P222.5 100 10 100 50 125 P225  EOQ Example (2) Problem Data Determine the economic order quantity and the reorder point given the following… (Compute on your seat) Annual Demand = 10,000 units Days per year considered in average daily demand = 365 Cost to place an order = P10 Holding cost per unit per year = 10% of cost per unit Lead time = 10 days Holding Cost per unit = Cost per unit = P15 P15.00 x 10% = 1.5  EOQ Example (2) Solution 2DS Q O PT = 2 (10 ,000 )(10 ) H 1.50 = 365.148 units, or 366 u n its = 10,000 units / year d= 365 days / year = 27.397 units / day _ R = d L = 27.397 units / day (10 days) = 273.97 or 274 units Analysis: Place an order for 366 units. When in the course of using the inventory you are left with only 274 units, place the next order of 366 units. APPLICATION The computation of Economic Order Quantity and ReOrder Point will entail us to understand what should an Inventory Manager and staff should do in order to properly manage its inventories (raw materials, work in progress, finished goods and Goods In Transit) in order to minimize its total cost in handling inventories which will lead to a better profit margin and position on its profitability. In real life, example, if you are about to engage in business, you will be addressing the following situation/question. 1.How much stocks should I order and still cost a little and avoid excessive and stock-out of inventories? 2.It is really okay to purchase inventories or supplies in advance? In real life, example, if you are about to engage in business, you will be addressing the following situation/question. 1.How much stocks should I order and still cost a little and avoid excessive and stock-out of inventories? 2.It is really okay to purchase inventories or supplies in advance? The Economic Order Quantity will aide businessmen to properly manage its inventories in order to minimize its total cost and maximize its profit margin to have a better profitability position. Problem Solving Quiz The annual demand is 10,000 units, the ordering cost is P30 per order, and the carrying cost is 20% of the unit cost which is P15. The order quantity is 600 units. Compute for the following: 1.Economic Order Quantity 2.Number of Orders per Year 3.Annual Ordering Cost 4.Annual Carrying Cost 5.Total Annual Cost