Topic 12: Inventory management Flashcards
What is the cost of low inventory levels?
High ordering costs, Low Holding costs, Loss of savings from bulk discount, increased chance of running out of stock.
What is the cost of high inventory levels?
Low ordering cost, high holding cost, less risk of running out of stock leading to loss of sales, high finance costs, higher chance of stock going bad or out of fashion.
What is the Economic order quantity? and explain the equations factors and what it does.
It is used to find the optimal order quantity and it does so by minimising the total annual holding cost and annual ordering costs.
Co = Cost of ordering
D= Annual demand for the inventory item.
Ch= Cost of holding one item for one year
How to calculate the re-order level?
Lead time is the length in time between ordering and receiving the goods
Re-order level = Lead time in weeks x weekly demand
How to calculate the holding cost?
Annual holding cost = (EOQ/2) X CH
EOQ = Economic order quantity
CH = Cost of holding 1 unit for 1 year.
How to calculate ordering costs?
Annual Cost of ordering = (D / EOQ) x Co
EOQ = Economic order quantity
D=Annual Demand
Co = Cost of placing one order.
What are the assumptions that need to be made for the following factors of EOQ?
1.) Demand
2.) Lead time
3.) Buffer inventory
4.) Price
Demand - Its assumed to be constant throughout the year/ Demand does normally fluctuate, normally seasonally.
Lead time - Its assumed to be constant throughout the year/ Its likely to fluctuate as there are many factors able to disturb the business norms.
Buffer Inventory - It assumes there is no buffer held/ most companies do hold buffer inventory for protection against uncertainty.
Price - Its assumed the price is constant throughout the year, no bulk discount savings.
How to deal with buffer inventory?
Annual holding cost = ((EOQ/2)+Buffer inventory) x Ch
EOQ - Economic order quantity.
Ch - Cost of holding one item for one year.
How to calculate if a bulk discount is worth doing?
Step 1.) Determine the EOQ ignoring the discount.
Step 2.) Calculate total annual purchase cost still ignoring discount and calculate annual holding costs, annual ordering costs at the EOQ.
Step 3.) Calculate annual purchasing cost with the discount + annual holding and annual ordering costs based on the minimum order level for the discount.
Step 4.) Determine whether step 2 or step 3 is cheaper.
What is just in time purchasing?
Its a system managing Purchases and/or production to seek and maintain the lowest level of inventory in order to reduce waste and inefficiencies.
What is just in time production?
Producing goods to order, means there is no finished goods inventory days.
What are the benefits and drawbacks of just in time?
Positives - Reduced cost e.g Lower financing costs, lower holding costs.
Eliminates waste and inefficiencies.
Negatives -
RIsky, Loss of sales.
