WCPM - Inventory Control

Question 1

EOQ

Answer 1

SQRT: 2 CoD/Ch

Question 2

Co

Answer 2

Ordering cost (cost per order)

Question 3

D

Answer 3

Annual demand

Question 4

Ch

Answer 4

Cost of holding a unit for 1 year

Question 5

How to compare EOQ to other quantities

Answer 5

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

Question 6

EOQ with discounts

Answer 6

Do the same as above, but for the purchasing cost, add the discount.

DOES NOT go into Co or CH

Question 7

Reorder level in units:

Answer 7

Weekly demand*lead time

Question 8

Reorder level occurence

Answer 8

Annual demand/order level= orders per year
52/orders per year
SIMPLER:
Q/D*365

Question 9

Reorder level in units with buffer:

Answer 9

Add the buffer level to the units

Question 10

Issues of holding inventory

Answer 10

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

Question 11

Inventory buffer formula

Answer 11

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

Question 12

Over-capitalisation

Answer 12

High current assets and low liabilities - profitability suffers

Question 13

Over-trading

Answer 13

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

Question 14

Aggressive financing strategy

Answer 14

Large amounts of short-term finance

Question 15

Conservative investment strategy

Answer 15

High levels of current assets e.g. avoiding stockouts

Question 16

Average inventory

Answer 16

Buffer safety inventory +(re-order level/2)
Or EOQ/2

Question 17

Buffer safety inventory

Answer 17

reorder level - (avg usage*avg lead time)

Question no.?

Question 18

Inventory Turnover

Answer 18

CoS/Avg inventory held

Question 19

If Ch not given in question

Answer 19

Take purchasing price per unit*cost of capital and add annual storage cost per unit

Question 20

JIT

Answer 20

Reduced inventory levels - lower holding costs
Less waste across the whole working capital cycle e.g. finished goods, holding period
Reduced production times
Improved quality