INVENTORY CONTROL
Outcome 4: Use software-generated information to make decisions at operational, tactical and strategic levels in an organization. Assessment Criteria: 4.3 Prepare a spreadsheet to enable material requirements planning and calculate economic order quantities.
Part 4.2:
4.2.6
1.
4.2.6
a. b. c. d. e. f. g.
Inventory Model
Known and constant stockholding cost Known and constant ordering cost Known and constant demand Known and constant lead time Instantaneous replenishment of material Constant price per unit /no discounts No stockouts
EOQ Assumptions
4.2.3
Inventory Cost
2. Costs of obtaining stock -
1. Costs of holding stock associated with holding or carrying inventory over time
o t S
k c
t s o C
4.2.3
Inventory Cost
1.Costs of holding/ carrying stock a) Interest on capital invested in the stock b) Warehousing/ Storage charges (rent, lighting, heating, refrigeration, air conditioning, etc.)
Stock costs
c)
Stores staffing, equipment maintenance and running costs Insurance, security e) Pilferage, vermin damage f) Deterioration and obsolescence
d)
4.2.3
Inventory Cost
2.Costs of obtaining stock
Stock costs
a) Clerical & administration cost associated with purchasing, accounting, and Goods Received Dept. b) Transportation c) costs Cost associated with internal ordering
.2.6
.2.6
ustration 3: Graphical Illustration of EOQ Total cost per annum = Co p.a + Cc p.a i. No. of orders = Annual Demand/Order
Quantity = 50,000 / 5,000 = 10 times ii. Co p.a = 10 x RM50 = RM500 iii. Average stock = 5,000 / 2 = 2,500 units iv. Cc p.a = 2,500 x RM0.35 = RM875 ** From various assumption of quantity order, we may plot the various cost in a graph as follows
.2.6
Co l a t To
H
ve r u tC
ost C ing d l o
rve u C
h c u Order quantity m r? w de o H or to
.2.6
Order quantity
Order quantity
.2.6
1000 Orders (Postage RM330) PurchaseOrder Order Purchase PurchaseOrder Order Description Qty. Purchase Description Qty. Description Qty.1 Microwave Description Qty. Microwave 11 Microwave Microwave 1
Order quantity
.2.6
EOQ =
Notes: Always take care that demand and carrying costs are expressed for the same time period. A year is the usual period used. In some problems the carrying cost is expressed as a percentage of the value whereas in others it is expressed directly as a
.2.6
EOQ =
2 Co D Cc
2 50 50,000 0.35
.2.6
&
Total annual inventory cost is minimised when the order quantity, q takes the value of EOQ
.2.6
D q C = Co + Cc q 2
.2.6
.2.6
r u o y ? s n o t = 1250 + 350 i a s h lu W = RM 1600 c n o c Total annual cost for quantity order based on
calculated EOQ is the lowest compared to other two order quantities which are larger and smaller than the EOQ. These calculated cost proved that the EOQ minimise the balance of costs between inventory holding cost and re-
.2.6
Inventory Model
DO IT YOURSELF!!!
1. A company uses 100,000 units of EG per year which cost RM3 each. Carrying costs are 1% per month and ordering costs are RM250 per order. Currently, the company purchase this EG in batches of 7500 units each. Suggest the best quantity order for this company and explains the total cost saved by using EOQ.
Inventory Model
DO IT YOURSELF!!!
A building materials supplier obtains its bagged cement from a single supplier. Demand is reasonably constant throughout the year and last year the company sold 2000 tones of this product. It estimates the cost of placing an order at around RM25 each time an order is placed, and calculates that the annual cost of holding inventory is 20% of purchase cost. The company purchases the cement at RM60 per tone. How much should the company order at a time? After calculating the EOQ the operations manager feels that placing an order using EOQ
Inventory Model
SOLUTION
EOQ = 2 Co D Cc 2 250 100 ,000 = 12% 3 = 11785.11 11785 units
C EOQ
Inventory Model
SOLUTION (cont.)
C7500 D q = Co + C c q 2
100 ,000 7500 ( 250 ) + ( 0.36 ) = 7500 2 = 3333.33 + 1350
= RM 4683.33
4.2.6
Inventory Model
4.2.6
Inventory Model
Financial consequences of discount
v c d A ffe E
4.2.6
Inventory Model
.2.6
.2.6
No . 1. 2.
800 4%
2000
1600 5%
2000
3.
Minimum = quantity Average No. of Comparison = 8.7 =5 2.5 = 1.25 230 800 for each 1600 Quantity, EOQ 400 entitled Order per discount rate annum 8.7 2.5 8.7 1.25 8.7 5 = 6.2 times = 7.45 times = 3.7 times Average No. of Order Saver 3.7 RM 20 6.2 RM 20 7.45 RM 20 per annum
4.
= RM 74
= RM 124
= RM 149
5.
RM 474
RM 924 RM 1149
.2.6
1600
800 1600 400 230 9.60 9.50 9.80 10 2 2 2 2 15% 15% 15% 15% = RM 172.50 = RM 294 = RM 576 = RM 1140
294 172.50 576 172.50 1140 172.50 = RM 121.50 = RM 403.50 = RM 967.50
Net most Gain/ economical quantity to order? hat9. is the 1600 buckets Loss Company Why? will saved RM710 due to discount offered (5%) a frequency of orders to made
.2.6
EOQ
DO IT YOURSELF!!!
KABANA Bhd buy 100,000kg per annum of barites, a raw materials. The company purchases this commodity in batches of 2,000kg and pays RM10 per kg. The cost of ordering is estimated at Rm70 and the cost of holding each kg in stock is estimated at 10% of the purchase costs. Calculate the economic order quantity How much money would be saved by ordering the EOQ rather than the present