Chapter 6 Material Management II
Material Management II
Reasons for keeping inventories
To take advantage of price discounts
To meet the demand during replenishment
To prevent loss of orders
To keep pace with changing market conditions
To stabilize production
Importance of inventory control
Improvement in customer’s relationships because of the timely delivery of goods & services
Smooth & uninterrupted production and hence no stock out
Efficient utilization of working capital. Helps in maintaining loss due to damage
Economy in purchasing
Eliminate the possibility of duplicate ordering
Economic Order Quantity(EOQ)
Total Inventory Cost
(TIC) = Holding Cost + Ordering Cost
Assumptions of Basic EOQ Model:
Demand is known with certainty
Demand is relatively constant over time
No shortages are allowed
Lead time for the receipt of orders is constant
The order quantity is received all at once
Holding or carrying cost: The cost to carry an item in inventory for a length of time. Costs including warehouse costs.(heat,light,rent,security)
Ordering costs: Are the costs of ordering and receiving inventory. Is a fixed type cost. Costs include invoice cost shipping cost , inspection cost,etc.
Shortage costs: Costs resulting when demand exceeds the supply of inventory.
Objectives of Inventory Control
To ensure adequate supply of products to customers & avoid shortage as far as possible
To make sure that financial investment in inventories is minimum
Efficient purchasing, storing, consumption, & accounting for materials is important objectives
To ensure timely action for replenishment
Inventory control is primarily about specifying the size & placement of stocked goods.
Inventory control is required at different locations within a facility or within multiple location of a supply network to protect the regular & planned course of production against the random disturbance of running out materials or goods.
It is a system & processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status.
"A items" with very tight control and accurate records
"B items" with less tightly controlled and good records
"C items" with the simplest controls possible and minimal records.
A range of items that have different levels of significance and should be handled or controlled differently.