WCPM - Inventory Control Flashcards
EOQ
SQRT: 2 CoD/Ch
Co
Ordering cost (cost per order)
D
Annual demand
Ch
Cost of holding a unit for 1 year
How to compare EOQ to other quantities
Use the EOQ as a base quantity and then find:
Purchasing cost = annual demand*unit cost
Annual holding cost = Ch * Q/2 (avg inventory) - (orders per year/2)
Annual ordering cost = Co *D/Q (orders per month) = Orders per year
The sum will tell you total cost of different quantities
EOQ with discounts
Do the same as above, but for the purchasing cost, add the discount.
DOES NOT go into Co or CH
Reorder level in units:
Weekly demand*lead time
Reorder level occurence
Annual demand/order level= orders per year
52/orders per year
SIMPLER:
Q/D*365
Reorder level in units with buffer:
Add the buffer level to the units
Issues of holding inventory
Holding inventory compared to JIT can be seen as holding inventory to cover up problems such as:
Unreliable suppliers
Poor industrial relations
Lack of planning systems
Poor quality work e.g. faulty product
Inventory buffer formula
Additional inventory after an order is placed e.g.
Order made when inventory falls below 20k
It takes 1 week for new inventory to arrive
Inventory used per week is 12k
Therefore the buffer is 8k as that what would be left after a week
Over-capitalisation
High current assets and low liabilities - profitability suffers
Over-trading
Not enough capital to fund increase in working capital - insufficient capital
Indicators:
High revenue
Rapid increase in current assets
Financed by credit
Drop in liquidity ratios
Aggressive financing strategy
Large amounts of short-term finance
Conservative investment strategy
High levels of current assets e.g. avoiding stockouts
