Procurement Management Proofreading (Proofreading Sample)
Inventory refers to goods or items which an org. holds in its warehouses waiting to be sold or used. Or they are the usable resources currently kept idle. Broadly speaking inventory management is one way of maintaining for a given financial investment, an adequate supply of something in order to meet an unexpected demand
To the manufacturer management the word inventory connotes finished goods available for distribution or sale,
Partly finished goods moving through production stages, Raw materials & inventory parts to be in computed in the end product.
Other inventories include:
Libraries inventory is books
Banks inventory is money
Consulting organization inventory is specialist skills
In the broader sense inventories include machines, tools, personnel, cash auxiliary equipment of all kinds required in Business
All types of inventories have something in common when formulated mathematically
Cost of maintaining inventory
Cost of Replenishing inventory in order to serve particular policy or objectives. Hence there are costs of:
i. Acquiring inventory (Ordering)
ii. Holding inventory or carrying cost
1.What is the optimal quantity to order each time in order to minimize total inventory cost?
Number of orders will go down; hence, the ordering cost will also go down.
Holding/carrying costs go up
Order small quantities
Number of orders goes up. Therefore the ordering cost go up
Holding/carrying cost goes down
2. When should each order be made?
3. How much safety stock should be kept in anticipation of the variations in demand or time involved in acquiring the item?
There are four important types of costs associated with inventory
Purchase / production costs.
Purchase cost are the costs to be incurred if the items are to be bought from outside the organization while production costs are to be incurred if the items are to be constant per unit or may vary as the quantity produced or purchased increases or decreases.
Ordering/set-up costs. Ordering cost these are at times referred to procurement costs (ordering) and are incurred when goods are procured from outside the firm. This include the cost of processing requisition notes or purchases order, cost of following up the order, inspection costs, and quality control costs.
Set up cost is incurred when the goods are produced from within. It is associated with developing production schedules, setting up machines for production and acquiring raw materials for use.
Holding or carrying costs.
Sometimes referred to as the storage costs. They are incurred when our inventory is put in storage. Generally it is proportional to the amount of items stored and the period of storage. They include store man’s salary. Insurance, obsolescence costs, deterioration in value, scrapping and possible rework on our items.
These costs are generally expressed as a rate/unit or a percentage of the inventory value
SHORTAGE COSTS: Sometimes referred as the stock out cost or unsatisfied demand cost incurred when the amount of the commodity demanded is more than the amount available. If it is associated with the goods being bought from outside the firm, the storage costs can be interpreted as
Loss of customers good will due to delay
Customers subsequent reluctant to do business with the firm
Cost of delayed revenue.
If it is however associated with the temporary shortage of the materials required is produce items from within, then it can be interpreted as
Delay in the completion of production. Process which might require and invite a penalty
Lost production resulting into idle time for the many involving production and machines
TOTAL COST AS A FUNCTION OF QUANTITY ORDERED
SHAPE \* MERGEFORMAT
ECONOMIC ORDER QUANTITY (EOQ) MODEL
This is a classical model, the oldest and simplest to use. To use this we make the following assumptions:
The demand for the item is known continuous and constant over time
The lead time i.e. the time between the placement of an order and the receipt of an order is known and constant
The receipt of the inventory is instantaneous i.e. the inventory from an order arrives immediately the stock level reaches zero hence there are no stock shortages or excesses.
Within the range of quantities to be ordered the per unit holding cost and the ordering cost for order are fixed and independent of the quantity ordered.
The purchase price of the item is fixed and quantity discounts not allowed
The cost of managing inventory is made up solely of two costs i.e. the ordering and the carrying costs
SHAPE \* MERGEFORMAT
COMPUTATION OF E.O.Q
Q=The E.O.Q or Optimal number of units to order each time in order to minimize the total inventory cost
C=Cost per unit
I= Inventory carrying cost expressed as a percentage of the value of the average inventory
R=Total number of units required annually
S=Ordering costs per order or set up cost
a) TOTAL ANNUAL ORDERING COSTS
This is given by ordering cost per order which is equal to:
Number of orders per year x ordering cost per order = Total ordering cost
(R/Q ) x S =RS/Q
b) TOTAL INVENTORY CARRYING COSTS
This is obtained by multiplying the unit holding cost by the average No. of unit held in the inventory i.e
(Q/2) x IC = QIC/2
PURCHASE COST= cost per unit x total demand = RC
TOTAL INVENTORY COST = PURCHASE COST + ORDERING COSTS + CARRYING COSTS
TC = RC + RS/Q + QIC/2
EOQ (ECONOMIC ORDER QUANTITY)
At EOQ,ordering costs is equal to carrying costs hence we equate the two types of costs and solve for Q
EQUATE THE TWO AND SOLVE FOR Q
RS/Q = QIC/2 or RS/Q = QH/22RS=Q2CI or 2RS=Q2H Q2=2RS/CI or 2RS/H
EOQ = Q =в€љ2RS/CIor =в€љ2RS/H
C=Sh10.00 per unit
S=Shs40.00 per order
i) Determine EOQ = Q
Q=в€љ2*2000*40/10*10% =в€љ160000 =400units
The carrying cost=Q/2 CI=(400*10*0.1)/2=Sh200
The ordering cost
Total inventory cost = RC + RS/Q + QIC/2
2000x10 + Sh200 + Sh200=Sh20,400
If you are providing inventory we will have economic batch quantity (EBQ)=в€љ2RS/CI(1-d/p)
d- Quantity demanded
p- Quantity produced
S- Set up cost
QUANTITY DISCOUNT MODEL
The classical E.O.Q model assumes that the unit cost of the item remains uniform and constant throughout the period. Hence no account is taken of Quantity discount this however is unrealistic because structure price discounts are given and obtained when quantities ordered increase. Quantity discount is realized when a firm buys in larger quantities than E.O.Q. The advantages of buying in large quantities include:
Lower price per unit
Fewer orders to be placed hence lower ordering cost
Fewer stock out
Better service to customers
The disadvantages are:
Higher inventory carrying costs
More capital required to be invested in the inventory
Greater chance of deteriorations in value
Pilferage of goods
COST COMPARISON APPROACH
In this method the cost associated with a computed E.O.Q are compared with the cost associated with the Quantities proposed if the buyer was to qualify for the quantity discount.
The costs include:
The inventory purchase cost
Total ordering costs
Total inventory carrying cost
TC=RC+ QCI/2 + RS/Q