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