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二. 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 timeInventory shrinkage: the fact that more items are recorded entering than leaving warehousing facilitiesStorage costs
Handling costsInsurance costsTaxesInterest 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 setupcosts.(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 anitem.(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.三. When to Order1.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 stockUnder conditions of certainty: ROP=DD*RCUnder 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 intervalsInventory levels are monitored much less frequently- often just before the scheduled order timeMuch more susceptible to stockouts situations, more likely to see higher levels of safety stock in a fixed interval system四. How Much to Order1.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 demandA constant and known replenishment or lead time
A constant purchase price that is independent of the order quantityAll demand is satisfied/no stockouts are allowedNo inventory in transitOnly one item in inventory or no interaction between inventory itemsAn infinite planning horizonUnlimited capital availability