c6 managing inventory
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CHAPTER 6:
MANAGING INVENTORY
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Inventory ManagementObjective:1. Maximize inventory turnover2. Carry sufficient inventories
EXCESSIVE
Heavy burden on cash
INSUFFICIENT
Lost sales, delay for customers
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Terms: Lead Time- Time between start of activity, process and
completion (Start till the end process).
Stock Out- Production require the inventory, but stores
out of the inventory (Out of stocks).
Buffer- Maintaining the inventory and WIP for any
interruption of supply.
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Re-order Quantity- Number of units in one order.
Re-order Level- Level of inventory, when should place an
order.
Economic Order Quantity- Replenishment order size, minimize
ordering costs and holding costs.
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Types of Inventory1. Raw Materials- Mostly on credit or Accounts Payables
2. Work In Progress (WIP)- Consist partially finished goods.- Need add work before become finished
goods.
3. Finished Goods- Product completed but not sold yet.
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Costs of InventoryThere are three other inventory costs:
1. Holding costs- Admin, staff costs, insurance & etc.
2. Order set up costs- Incurred each time a batch of inventory is ordered.
3. Stock out costs- Costs of running out inventory.
4. Purchase costs- Actual cost of buying inventory
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Economic Order Quantity Model (EOQ)Definition:
1. Tools to determine the optimal order quantity that results in the lowest total in inventory cost.
2. Optimal order level will lead to minimal overall inventory cost.
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EOQ2 Questions
can be answered
How much to order?
What quantity
should be ordered?
When to order?
How frequently should be
inventory be ordered?
Conflict among dept:
- Financial dept: low lvl of inventory
- Marketing dept: high lvl of inventory
- Production Dept: High lvl of inventory
More frequent – increase ordering cost, decrease holding cost
Less frequent – decrease ordering
cost, increase holding cost
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EOQ Formula
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ExampleAnnual demand – 30,000 barrels. Purchase in lot 5,000 barrels. Price is $12/each.Ordering cost is $200/per order.Holding cost is 10% of purchase price.
Calculate the total cost by using EOQ and without EOQ technique?
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Without EOQTotal Cost = Holding Cost + Ordering Cost
= (Average Inventory x Ch/unit) +
(No. of orders x Co/order)= (Q/2 x Ch) + (D/2 x Co)= (5,000/2 x 1.20) + (30,000/5,000 x 200)= $ 3,000 + 1,200= $ 4,200
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