Inventory

• Cost of having inventory

  Purchase price

  Holding costs

  Labour costs

  Rent costs

  Transport costs
• Ordering costs

  Processing purchase orders

  shipping fees

  administrative costs
• Stock out costs

  lost sales

  increased shipping- rushed orders

  Damage to customer satisfaction

  increase customer service costs
• Purpose of inventory

  meet demand

  increase operational efficiency

  take advantage of price drops
• Inventory control system

  Fixed quantity system

  periodic review system
• Fixed quantity system

  method for managing inventory that involves ordering the same amount of an item each time.
• Fixed quantity system

  1. set a reorder level
  2. 2. monitor inventory
  3. when inventory reaches or falls below re- order level place an order for the fixed quantity.
  4. wait for the order to be delivered
  5. repeat
• Periodic review systems

  managing inventory by checking interval levels regularly and ordering more to meet demand.
• Periodic review system

  1. choose a review interval
  2. count the inventory on hand
  3. forecast demand
  4. calculate how much to order to reach the target inventory level
  5. place an order for the difference between the target anf on hand inventory.
• Buffer inventory

  Minimum level of inventory to be held
• Lead time

  Time it will take to receive an order
• Buffer inventory= re-order level-(Average usage*Average leave time)
• How to work out the average

  Add up all the numbers in a set and divide by the total number of numbers
• Maximum Inventory level

  Determined by the size of the warehouse
• Maximum inventory level= Buffer inventory + maximum re-order quantity
• Re-order level

  The level of inventory which will trigger an order to be placed
• Re-order level= (Average usage*average lead time) + buffer inventory
• Maximum re-order quantity

  This puts inventory levels back to maximum levels
• Maximum re-order quantity= maximum inventory level- buffer inventory
• Minimum re-order quantity

  will restore inventory to the reorder level, at which point another order will need to be placed.
• Minimum re-order quantity= average usage* average lead time
• Economic order quantity (EOQ) is the minimum quantity of a product that should be held in stock to minimise the cost of holding stock
• Economic ordering quantity EOQ = 2XCOXD/CH = SQUARED
• CO= COST OF PLACING AN ORDER
• D= ANNUAL DEMAND
• CH= COST OF HOLDING ONE UNIT OF INVENTORY FOR ONE YEAR
• Advantages of FIFO

  INVENTORY IS VALUED AT A HIGHER COST
• DISADVANTAGE OF FIFO

  OUT OF DATE VALUATIONS TP PRODUCTION

  IDENTICLE JOBS MAY HAVE DIFFERENT COSTS
• DISADVANTAGES OF AVC0

  THE AVERAGE PRISE RARELY REFLECTS THE ACTUAL PURCHASE PRICE