Inventory Management Pt 2

Holding Costs is known as

carrying costs

Ordering Costs

These costs are associated with the process of ordering, receiving, and inspecting new inventory items. Also known as procurement costs or setup costs

Holding Cost

Refers to the expenses associated with storing and maintaining inventory within a business

Examples of Holding costs

Storage space rental/Ownership, Utilities, Insurance Costs, Depreciation, Storage Costs, Security, Material Handling costs (Equipment lease)

Ordering Costs examples

Purchase Order Processing, Supplier Communication, Transportation Costs, Inspection, Quality Control

Basic Economic Order Quantity (EOQ) ensures that

The right amount of inventory is ordered per batch, so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand

EOQ model minimizes…

Total holding and ordering costs for the year

What model is used to determine when and how much to order?

Basic Economic Order Quantity Model (EOQ Model)

EOQ Important Assumptions (1-3)

1. Demand is known, constant, and independent of decision from other items

2. Lead Time is known and constant

3. Receipt of inventory is instantaneous and complete

EOQ Important Assumptions (4-6)

4. Quantity discounts are not possible

5. Only variable costs are setup/ordering and holding or carrying cost

6. Stockouts/shortages can be completely avoided because we want order at the right time

Lead Time

Time from ordering to receiving an order

The total orders per year is 1200 units, and if the quantity is divided by 100 units per order, how many times would the number of orders be?

12

The total orders per year is 600 units, and if the quantity is divided by 100 units per order, how many times would the number of orders be?

2

By increasing order quantity you decrease

The number of orders (brings down the order cost per year)

What is Q* or EOQ (EXAM)

The order quantity that minimizes total annual cost / inventory cost?

By minimizing the sum of setup and holding costs,

total costs are minimize

Optimal Order size Q* will

Minimize total cost

A reduction in either cost reduces

Total Costs

Optimal order quantity occurs when

Holding cost and setup cost are equal

Annual Total Inventory Cost =

Annual Holding Cost + Annual Ordering Cost = Q/2 * H + D/Q * S

Calculate Q*

Square root of 2 D (S) / H It also looks like Square Root 2DS / H

Annual Setup Cost =

Number of orders placed per year Setup/Order cost per order = ANnual Demand / Number of Units in each order Setup/order cost per unit = D/QStar * S

Annual Holding Cost =

Average Inventory Level Holding Cost per unit per year = (ORder Quantity/2)(Holding cost per unit per year = (QStar/2 Times) Times (H)

EOQ is found when

Annual setup costs equals annual holding costs

Q star =

Optimal number of pieces per order

ROP (Reorder Point) tells

When to order so you wont run out of stock

N is

D / Q Star (How that one example got 5)

What is the time frame btw 2 consecutive orders is

Expected time between orders formula

Total annual cost

Setup Cost + Holding Cost

Safety Stock

The number of products you sell per day * The number of days of stock you want to hold

Safety stock is an

extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation