Reasons to hold inventory
-purchase in batch (economoies of scale…)
-protection against stock out
- strategic (price fluctuations…)
- seasonal stock
Cost to hold inventory
- opportunity cost of capital growth
- perishing cost
- storage cost
Monetary value of inventory formula
Monetary Value of Inventory = COS x Flow Time
Inventory flow time formula
Inventories/COS
Inventory turnover formula
Inventory turnover = 1/ Inventory flow time = COS/ Inventories
high turnover is desriable
- high inventory turnover leads to lower holding cost
- items are newer/fresher
- less storage space + man power
types fo supply chain costs
- purchasing costs
- fixed ordering costs
- holding costs
- stockout or shortage costs
Economic Order Quantity
- balance between inventory ordering costs and inventory holding costs
EOQ assumptions
- known annual demand, constant demand rate
- no uncertainty in lead time
- fixed order quantity Q
- inventory units of the same type
Inventory level formula
lenght of a cycle = T = Q/D
number of cycles in unit time = N = 1/ T = D/Q
Purchasing cost formula
P x D
total cost formula nnot at EOQ
TC = PD + HQ/2 + SD/ Q
EOQ applicable when…
- demand does not change significantly from one ordering period to another
- demand can be forecasted accurately
Things to remember
-when ROP and Q is optimized there is no safety stock
- when calculating holding cost ensure to add safety stock if there are some
