Inventory Management

Inventory Management

1. Stockholding & Ordering costs

   • clerical & administrative costs of procurement
   • inward transport costs
   • cost of receiving and checking goods when delivered
   • costs related to setting up equipment, tooling, production scheduling

2. EOQ(Economic Order Quality) FORMULA

   • ASSUMPTIONS
     • no bulk discounts
       • constant price per unit (e.g. no promotions
         • the cost of holding each unit of inventory for a given period is known
           • the cost of placing and receiving an order is known
             • the rate of demand is steady and known
               • delivery times can be predicted accurately

3. MRP (Material Requirement Planning System)

   • is a production planning, scheduling, and inventory control system used to manage manufacturing processes.
     • An MRP system is intended to simultaneously meet three objectives:
       • Ensure materials are available for production and products are available for delivery to customers.
       • Maintain the lowest possible material and product levels in store
       • Plan manufacturing activities, delivery schedules and purchasing activities.

4. JIT methods of procurement

   • prime goal of JIT is the achievement of zero inventories
   • ADVANTAGES
     • reduced stockholding costs
     • simplified a/c requirements for raw materials
     • reduced production lead times
     • reduced labour costs per unit due to increased productivity
     • healthier current ratio and lower working capital requirements
   • DISADVANTAGES
     • Risk of running out of stock
       • need to have a good relationship with your supplier(s). You may need to form an exclusive agreement with suppliers that specifies supplying goods within a certain time frame, prioritising your company
       • More planning required
         • Most companies have seasonal sales periods, meaning a number of products will need a higher stock level at certain times of the year due to higher demand. Therefore, you need to factor that into planning for inventory levels, ensuring suppliers are able to meet different volume requirements at different times.