Inventory Management

Question 0

Economic Order Quantity (EOQ)

Answer 0

square root of
2CoD/Ch

Co = cost of making an order/ cost caused by placing an extra order (unaffected by number of items on the order)
• administrative effort/ receiving & checking inventory/ processing invoice & payment

Ch = the holding cost per unit of inventory for one year
• include warehouse rent, warehouse staff wages, cost of obsolete, damaged and pilfered inventory, cost of financing

Question 1

List inventory costs

Answer 1

Holding costs- cost of capital, warehouse, handling cost, deterioration, obsolescence. Insurance, shrinkage
*Cost of holding inventory = ChQ/2

Procuring costs- ordering and delivery costs
*Cost of ordering inventory = DCo/Q

Shortage costs - contribution from lost sales, emergency inventory, stock outs

Question 2

Reasons for holding inventory

Answer 2

Uneven Demand - responding quickly enough to meet high demand

Bulk discounts

Delay in inventory - keep supplying customers even if delivery is late

Seasonal availability

Technical production reasons

Price opportunities/ hedge against price increases

Question 3

Re-order level system vs Periodic Review

Answer 3

1. Measure of inventory at which replenishment order should be placed
   Reorder level = maximum usage x maximum lead time
   Orders of fixed sized are placed whenever inventory falls to order level
2. Inventory levels reviewed at fixed intervals - orders of varying sizes placed at fixed intervals

Question 4

Inventory calculations.,,

Answer 4

Days= [average inventory/COS] * 365

Turnover= COS/average inventory

Question 5

Re-order level…

Answer 5

Minimum re-order level = minimum usage in the shortest delivery time

Maximum level of inventory= reorder level + reorder quantity - (min usage * min lead time)