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Unformatted text preview: 1 Management of Inventory ¡ Nature of inventory ¡ Inventory costs and their calculations ¡ Economic order quantity ¡ Reorder point ¡ Inventory control systems Inventory ¡ Items procured for eventual production and/or sales. 1. Raw materials: 27-Oct-10 Management of Inventory 2 ¢ Procured but not fed into production process. 2. Work in process: ¢ Fed into production process but production not complete. 3. Finished goods: ¢ Production complete but goods not sold. Issues in Inventory Management ¡ Focuses on four basic issues. i. How many units of a certain inventory item should be ordered (or produced) at a time? 27-Oct-10 Management of Inventory 3 ii. At what point should a new order be placed (or new production started)? iii. What inventory items warrant special attention? iv. Can changes in the costs of inventory be hedged? Inventory Costs ¡ Prime objective of inventory management £ to provide inventories to sustain operations at the lowest possible cost. 27-Oct-10 Management of Inventory 4 ¡ Major costs of inventory £ Carrying costs £ Ordering costs £ Stock-out costs 1. Carrying Costs ¡ Includes The cost of capital tied up in inventory. £ Storage and handling costs. Inventory Costs 27-Oct-10 Management of Inventory 5 £ Insurance. £ Depreciation and obsolescence costs. ¡ Shown as a percentage of the average inventory value £ TCC = % carrying cost x Average inv. value 1. Carrying Costs Inventory Costs £ CC% is the percentage carrying cost £ Q is the unit per order. £ Q/2 is the average inventory size. PP X 2 Q x CC% TCC = 27-Oct-10 Management of Inventory 6 £ PP is price per unit of the inventory. (N) year per oforders Number demand(S) Annual Q = N S Q = i.e., PP X 2 S/N x CC% TCC = 2 2. Ordering Costs Inventory Costs ¡ Include ¢ Ordering and production set up cost ¢ Shipping and handling costs. 27-Oct-10 Management of Inventory 7 ¡ Within a given range of inventory level, ordering cost is fixed per order. 2. Ordering Costs Inventory Costs ¡ Total Ordering Cost (TOC) = Fixed ordering cost X # of orders per year ¡ TOC = F X N 27-Oct-10 Management of Inventory 8 Q = S/N, N = S/Q ¡ TOC = F X S/Q 3. Stock-out Costs (TSC) Inventory Costs ¡ Arises from the possibility of running short of supply that may result in ¢ Loss of sales. ¢ Loss of custome good wil 27-Oct-10 Management of Inventory 9 ¢ Loss of customer good will. ¢ Disruption in production schedule. ¡ Indirect in nature and hard to measure ¢ Firms typically maintain safety stock (buffer stock) to deal with possible shortage of supply....
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This note was uploaded on 04/23/2011 for the course FIN 427 taught by Professor Mahmudulhaque during the Spring '11 term at BRAC University.
- Spring '11
- Corporate Finance