Jun 072017
 
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Inventory Management

Inventory Carrying Costs associated with carrying inventory include:

  • Interest on Capital Costs – this is the largest component of carrying cost and is associated with money tied up.
  • Taxes & Insurance – insurance and taxes has to be paid on the current inventory.
  • Obsolescence & Depreciation – inventory obsolescence is a major issue with products with a short shelf life or lose value over time (computer products).  Companies involved with products that become obsolete quickly should be focusing on decreasing cycle times.
  • Storage – the cost associated with having a facility to hold the inventory.
  • Opportunity Cost – what could the capital be used for that is tied up in inventory.

Costs of running out of inventory:

  • Loss of customer/sale
  • Bad reputation
  • Disruption in supply chain

INVENTORY CARRYING/HOLDING COST

Carrying Cost = (Price per unit * Carrying cost percentage * Order Quantity in Units)/2

AVERAGE INVENTORY

Average Inventory = EOQ/2 + safety stock

ECONOMIC ORDER QUANTITY

  • Demand is known and is constant

  • No quantity discounts

REORDER POINT

Reorder point = Estimated Demand * Lead Time

Inventory Management Training.

Inventory Management

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