Inventory management

Inventory

Management

Inventory

Inventory

•Necessary current asset that

permits the production-sale

process to operate.

Two Aspects of inventory:

1.Types of inventory

2.Different viewpoints as to the

appropriate level of inventory

3 basic types of inventory

Raw materials inventory- items purchased by the firm for

use in the manufacture of a finished product.

Work-in-process inventory- all items that are currently in

production.

Finished goods inventory- items that have been produced

but not yet sold.

Inventory level’s viewpoint

• Financial manager- keeping the inventory levels low

• Marketing manager- would like to have large inventories of each of the

firms finished product.

• Manufacturing manager- making sure that the production plan is

correctly implemented and that it results in the desired amount of

finished goods of acceptable quality at a low cost.

• Purchasing manager- concerned solely with the raw materials inventories.

Inventory as an investment

• Inventory is an investment in thesense that it requires that the firm tieup its money, thereby for going certainother earning opportunities.

The relationship between inventory and

accounts receivable

• The level and the management of inventory andaccounts receivable are closely related.

• Generally, in the case of manufacturing firms, whenan item sold it moves from inventory to accountsreceivable and ultimately to cash.

International Inventory management

• The production and manufacturing economies of

scale that would seem to come from selling products

globally may provide elusive if products must be

tailored for individual local markets, as very

frequently happens, or if actual production of goods

takes place in factories around the world.

Techniques for managing inventory

1. Abc System

2. The Basic Economic Order Quantity (EOQ Model)

3. The Reorder Point

4. The Materials Requirement Planning (MRP System)

5. Just-in-time (JIT System)

Abc System

• Inventory management technique that dividesinventory into 3 categories of descendingimportance based on the dollar investment ineach.

Economic Order Quantity Model

• Inventory management technique fordetermining an items optimal orderquantity, which is the one that minimizesthe total of its order and carrying cost.

Basic Cost

1.order cost

2.Carrying cost

3.Total cost

Order cost

•Include the fixed clerical cost of

placing and receiving an inventory

order.

Carrying cost

•The variable cost per unit ofholding an item in inventory fora specified time period.

Total cost

•The sum of the order cost and the

carrying cost of inventory.

Graphic Approach

•The economic order quantity can be

found graphically by plotting order

quantities on the X, or horizontal, axis

and cost on the y, or vertical, axis.

Mathematical Approach

• A formula can be developed for determining the firms EOQ for a given inventory item, by letting

• S= usage in units per period

• 0= order cost per order

• C=carrying cost per unit per order

• Q=order quantity in units

• The order cost can be expressed as the product of the cost perorder and the number of orders. Because the number of ordersequals the usage during the period divided by the order quantity(s/q), the order cost can be expressed as follows:

• Order cost= o (s/q)

• The carrying cost is defined as the cost of carrying aunit per period multiplied by the firms averageinventory.

• Carrying cost= c (q/2)

• Total cost equation is obtained by combining the order and carrying cost.

• Total cost= order cost + carrying cost

• Because the EOQ is defined as the order quantity that minimizes the total cost function, the total cost equation must be solved for the EOQ.

• EOQ= (𝟐 𝒙 𝑺 𝒙 𝑶)/𝒄

The Reorder Point

•The point at which to reorder inventory,

expressed equationally as:

Reorder point= lead time in days x daily usage.

Safety Stocks

•Extra inventories that can be drawndown when actual lead times and/ orusage rates are greater than expected.

Material Requirement Planning

• Inventory management system that usesEOQ concepts and a computer to compareproduction needs to available inventorybalances and determine when ordersshould be placed for various items on aproducts bill of materials.

Just-in-time (JIT) System

• Inventory management system that minimizes

inventory investment by having material inputs

arrived at exactly the time they are needed for

production.