\u4e8c Inventory Costs Inventory tend to be one of the largest assets in terms of

二 inventory costs inventory tend to be one of the

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. Inventory Costs -Inventory tend to be one of the largest assets (in terms of dollar value) on the balance sheets. 1. Inventory carrying/holding costs : (1) The costs associated with holding inventory, are expressed in percentage terms. (2) Companies prefer to carry lower inventory as the carrying cost percentage increases. (3) Components of inventory carrying cost: Obsolescence : products lose value through time Inventory shrinkage : the fact that more items are recorded entering than leaving warehousing facilities Storage costs
Handling costs Insurance costs Taxes Interest costs: in US, the prime rate of interest has traditionally provided a convenient starting point when estimating the interest charges associated with maintaining inventory. 2. Ordering costs : (1) Refers to those costs associated with ordering inventory, such as order costs and setup costs. (2) The costs of receiving an order, conducting a credit check, verifying inventory availability, entering orders into the system, preparing invoices, and receiving payment. 3. Trade-off between carrying and ordering costs: an increase in the number of orders leads to higher order costs and lower carrying costs. 4. Stockout costs: (1) Estimating the costs or penalties for a stockout, involve an understanding of a customer’s reaction to a company being out of stock when a customer wants to buy an item. (2) The higher the average cost of a stockout, the better it is for the company to hold some amount of inventory (safety stock) to protect against stockouts; the higher probability of a delayed sale, the lower the average stockout costs- and the lower the inventory that needs to be held by a company. 5. Trade-off between carrying and stockout costs: higher inventory levels result in lower chances of a stockout. . When to Order 1. Fixed order quantity system: order a fixed amount of inventory (1) Reorder (trigger) point: DD-average daily demand; RC-the length of the replenishment cycle; SS-safety stock Under conditions of certainty: ROP=DD*RC Under conditions of uncertainty: ROP=(DD*RC) +SS (2) The system requires relatively frequent monitoring of inventory levels. 2. Fixed order interval system: orders can be placed at fixed time intervals Inventory levels are monitored much less frequently- often just before the scheduled order time Much more susceptible to stockouts situations, more likely to see higher levels of safety stock in a fixed interval system . How Much to Order 1. Economic order Quantity : deals with calculating the proper order size with respect two costs: the carrying costs and the ordering costs. (1) Assumptions: A continuous, constant, and known rate of demand A constant and known replenishment or lead time
A constant purchase price that is independent of the order quantity All demand is satisfied/no stockouts are allowed No inventory in transit Only one item in inventory or no interaction between inventory items An infinite planning horizon Unlimited capital availability

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