1.- INVENTORY ADMINISTRATION
The most common inventories are those of: raw materials, products in process and finished products.
The inventory management depends on the type or nature of the company, it is not the same in a service company as in a manufacturing company.
It also depends on the type of process used: continuous production, specific orders, and assemblies or assemblies.
In continuous production processes, raw materials are purchased in advance and the finished product remains in inventory for a short time.
In specific order processes the raw material is purchased after the order or order is received and the finished product is delivered practically immediately after completion.
The assembly process production method requires, in general, more in-process inventories than continuous systems but less than order-based processes.
However, inventory management, in general, focuses on 4 basic aspects: 1) how many units should be ordered (or produced) at any given time ?, 2) when should the inventory be ordered (or produced) ?, 3) What inventory items deserve special attention? 4) Can one protect against changes in the costs of inventory items?
II.- INVENTORY COSTS
The goal of inventory management is to provide the inventories required to maintain operations at the lowest possible cost.
Total inventory costs:
A.- Maintenance costs
It includes the costs of storage, capital and depreciation (waste and misuse).
To determine this, the percentage cost per year for maintenance must first be calculated
For its calculation we must take into account the following:
Average inventory = A = units per order / 2 = (Y / N) / 2
S = units to be purchased throughout the year
N = the number of purchases made
P = purchase price
C = percentage cost per year for maintaining inventory.
To calculate C all costs are taken such as: financing costs (capital cost * average investment in inventory), storage, insurance, wastage,. These are added and divided by the average inventory investment (A * P)
Already calculating C, to determine the total maintenance cost would be:
CTM = total maintenance cost = C * P * A
B.- Ordering costs
These are the costs of placing an order and receiving it (these are usually fixed costs regardless of the size of the order).
Total cost to order = CTO = F * N
F = fixed cost per order
N = number of orders placed in the year.
N can be calculated. N = S / 2A
So the total cost of ordering can also be expressed as follows:
Total cost to order = CTO = F * (S / 2A)
C.- Total inventory costs
CTI = CTM + CTO
= (C * P * A) + F (S / 2A)
and if A = Q / 2
so
CTI = C * P * (Q / 2) + F * (S / Q)
III.- THE MODEL OF THE ECONOMIC AMOUNT OF THE ORDER
a.- The economic quantity of the order is the optimal inventory quantity, or minimum cost, that should be ordered
EOQ = 2FS / CP
EOQ = economic quantity of the order, or optimal quantity to be
order
F = fixed cost of placing and receiving an order
S = annual sales in units
C = annual maintenance costs expressed as a percentage of the
average inventory value
P = purchase price of the products, is the price at which the
Business
b.- Reorder point
The reorder point is the inventory level that determines when an order should be placed
reorder point = time frame in weeks X weekly consumption
c.- Goods in transit
They are the products that have been ordered but have not yet arrived and enter the inventory
reorder point = time frame X weekly consumption - merchandise in
transit
d.- Safety inventories
It is the additional inventory that is kept to protect against changes in expected sales or delays in production or in the supply of products.
Maintaining this inventory increases the average inventory that is had during the year and as a consequence of this, the annual cost of maintaining the inventory also increases.
e.- Quantity discounts
When a discount is offered for increasing the number of purchased pieces, two aspects should be taken into account: 1.- the cost of maintaining the inventory will increase because the investment in the inventory is increased, 2.- there is a saving in the purchased products by reducing its price: then the results of these two aspects should be compared to determine if it is convenient to accept the discount and buy more quantity.
Download the original file
