inv - CHAPTER 22 INVENTORY MANAGEMENT CONTENTS Introduction...

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CHAPTER 22 INVENTORY MANAGEMENT
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Chapter 22 Inventory Management 2 CONTENTS Introduction Meaning Purpose of Inventory Inventory Management Importance of Inventory Management Deciding Optimal Level of Inventory The EOQ Model of Optimal Inventory Deciding When to Order Analysis of Investment in Inventory Inventory Monitoring and Control
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Chapter 22 Inventory Management 3 INTRODUCTION Inventory management is about determining and maintaining an optimal level of inventory i.e. a level that is neither inadequate nor excessive. The management of inventory assumes significance in the light of the magnitude of funds blocked in them.
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Chapter 22 Inventory Management 4 MEANING OF INVENTORY Inventory represents value locked up at both ends of the production system. The definition of inventory is specific to the nature of business. For a typical manufacturing firm inventory comprises of raw material, work-in-process and – finished goods. For a trading business it refers to the finished goods stock held for sale.
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Chapter 22 Inventory Management 5 MOTIVES FOR HOLDING INVENTORY Transactionary motive Precautionary motive Speculative motive
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Chapter 22 Inventory Management 6 PURPOSE OF INVENTORY Inventory –decouples the different stages of the production–distribution function and –insulates succeeding stages of operation from the bottlenecks in the preceding stages. –Provides certain economies.
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Chapter 22 Inventory Management 7 INVENTORY MANAGEMENT Inventory management involves reconciling the interests of the different departments involved in the production distribution function. Basic issues in inventory management are: 9 Optimal level of inventory, 9 Reorder point, 9 Should the inventory level be changed, and 9 Monitoring and control of inventory. Inventory management is guided by the principles of efficient business operation and cost minimisation.
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Chapter 22 Inventory Management 8 IMPORTANCE OF INVENTORY MANAGEMENT Inventories form a link between production and sale. Inventory allows the firm to service customer needs adequately. Due to the sheer size of funds blocked in inventory its management assumes significance.
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Chapter 22 Inventory Management 9 DECIDING OPTIMAL LEVEL OF INVENTORY Optimal level of inventory involves a trade-off between – carrying costs and – ordering costs. At this trade-off point the total cost is minimum. This point is referred to as Economic Ordering Quantity (EOQ)
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Chapter 22 Inventory Management 10 DECIDING OPTIMAL LEVEL OF INVENTORY
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Chapter 22 Inventory Management 11 CARRYING COSTS Carrying Costs are the cost of maintaining inventory in a company's warehouse. It is alternatively referred to as holding cost. They include both, costs associated with physically carrying inventories, such as warehouse rent, – insurance of inventory and – financial cost of funds tied up in the inventory i.e.
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