Chapter 17 - Working Capital Management - Inventory Control Flashcards
Why is keeping inventory levels high expensive?
The foregone interest that is lost from buying inventory
Holding costs:
Storage
Stores admin
risk of theft/damage/obsolescence
Why is keeping inventory too low bad?
High re-order/set up costs
Lost quantity discounts
Stock outs:
Lost contribution
Production Stoppages
Emergency orders
What should you determine for good inventory management?
Economic order quantity (EOQ)
Optimum re-order level (ROL)
What is the economic order quantity?
How many items should be ordered when an order is placed
What is the optimum re-order level?
How many items should be left in inventory when the next order is placed
How do you calculate the economic order quantity (EOQ)?
square root of (2 x cost per order x annual demand/cost of holding one unit for one year)
How do you workout if you should order than the EOQ to use discount?
- Calculate EOQ without discount
- If qualifying order quantity is below EOQ calculate total inventory costs arising from the EOQ
- Recalculate inventory costs using the discount order size
- Compare two amounts
How do you calculate reorder level with variable demand or variable lead time?
ROL = maximum demand x maximum lead time
What are the two ways to simplify inventory management systems?
Periodic review
Just in time (JIT)
What is the periodic review?
Inventory levels reviewed at fixed intervals. Inventory in hand is then made up to a predetermined level which takes account of:
Likely demand before the next review
Likely demand during the lead time
What is the just in time method?
Aims to minimise inventory levels and improve customer service by manufacturing at the exact time customers require.
The aims are:
A smooth flow of work through the manufacturing process
A flexible production process which is responsive to the customers requirements
Reduction in capital ties up in inventory
