This document discusses inventory models and the costs involved in inventory management. It describes the four main inventory costs: item costs, ordering costs, holding costs, and shortage costs. Item costs refer to the direct costs of the items themselves. Ordering costs include the administrative costs of processing purchase orders. Holding costs are the ongoing costs of storing inventory, such as taxes, insurance, and obsolescence. Shortage costs occur when demand cannot be met due to inventory shortages. The document also introduces deterministic and probabilistic inventory models and provides the assumptions and formulas for the basic economic order quantity model.
This document discusses inventory models and the costs involved in inventory management. It describes the four main inventory costs: item costs, ordering costs, holding costs, and shortage costs. Item costs refer to the direct costs of the items themselves. Ordering costs include the administrative costs of processing purchase orders. Holding costs are the ongoing costs of storing inventory, such as taxes, insurance, and obsolescence. Shortage costs occur when demand cannot be met due to inventory shortages. The document also introduces deterministic and probabilistic inventory models and provides the assumptions and formulas for the basic economic order quantity model.
This document discusses inventory models and the costs involved in inventory management. It describes the four main inventory costs: item costs, ordering costs, holding costs, and shortage costs. Item costs refer to the direct costs of the items themselves. Ordering costs include the administrative costs of processing purchase orders. Holding costs are the ongoing costs of storing inventory, such as taxes, insurance, and obsolescence. Shortage costs occur when demand cannot be met due to inventory shortages. The document also introduces deterministic and probabilistic inventory models and provides the assumptions and formulas for the basic economic order quantity model.
I nventory is the physical stock of items held in any business
for the purpose of future production or sales. In a production shop the inventory may be in the form of raw materials. I nventory planning is the determination of the type and quantity of inventory items that would be required at future points for maintaining production schedules. Inventory planning is generally based on information from the past and also on factors that would arise in future. I nventory control The aim is focused to bring down the total inventory cost per annum as much as possible. Two important questions are 1)how much to stock or how much to buy 2)how often to buy or when to buy. An answer to the above questions is usually given by certain mathematical models. I nventory cost are have four major elements that should be taken for analysis, such as 1) Item cost 2) Ordering cost 3) Holding cost 4) Shortage cost I tem Cost is the cost of the item whether it is manufactured or purchased. If it is manufactured, it includes such items as direct material and labour, indirect materials and labour and overhead expenses. When the item is purchased, the item cost is the purchase price of 1 unit. Ordering Cost is the administrative and clerical costs are involved in processing a purchase order, expediting, follow up, transportation etc., It is also called as Purchasing or Setup or Acquisition cost. When a unit is manufactured, the unit set up cost includes the cost of labour and materials used in the set up and set up testing and training costs. Component of Ordering Cost Tender and Bidding Cost Purchase negotiations Selection of vendor Preparation and sending of order etc. Component of setup cost are Cost of cleaning and adjusting production equipment Inspection Bringing required raw materials. Changing dies etc. Holding cost. If the item is held in stock, the cost involved is the item carrying or holding cost. Some of the costs included in the unit holding cost are Taxes on inventories, Insurance costs for inflammable and explosive items, Obsolescence, Deterioration of quality, theft, spillage and damage to times, Cost of maintaining inventory records. Shortage Cost is due to the delay in satisfying demand (due to wrong planning); but the demand is eventually satisfied after a period of time. Shortage cost is not considered as the opportunity cost or cost of lost sales. The unit shortage cost includes such items as, Overtime requirements due to shortage, Clerical and administrative expenses. Cost of expediting. Loss of goodwill of customers due to delay. Special handling or packaging costs. Lost production time. I nventory models are the different technical methods used to determine order quantity which minimizes the total costs (i.e. ordering cost + inventory carrying cost) E.O.Q model with shortages I nventory models Deterministic probabilistic Production model In the deterministic type of inventory control, the parameters like demand, ordering quantity cost, etc are already known or have been ascertained and there is no uncertainty. In the probabilistic inventory control, the uncertain aspects are taken into account. Model 1: Purchasing model with no shortages The following assumptions are made in deriving the formula for economic order quantity. 1. Demand (D) is at a constant rate. 2. Replacement of items is instantaneous (lead time is zero). 3. The cost coefficients C1, C2, and C3 are constant. 4. There is no shortage cost or C4 = 0. Total cost/period = (Item cost + set up cost + holding cost/period)
Item cost per period = (Cost of item) X (number of items ordered/period) = C 1 Q..(1)
Purchase cost per period = C 2 (only one set up per period)
Holding cost per period = (Holding cost) x (average inventory per period) x (time per period) = C 3 (Q/2) x t(2)
Total cost per period (C') = C 1 Q + C 2 + C 3 (Q/2) x t....(3)
The time for one period t = Q/D..(4) Therefore the total cost per unit time, C = C'/t