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MANAGEMENT
Nature of Inventory
Stocks of manufactured products
and the material that make up the
product.
Components:
raw materials
work-in-process
finished goods
stores and spares (supplies)
Objectives of Inventory
Management
To maintain a large size of inventories of
raw material and work-in-process for
efficient and smooth production and of
finished goods for uninterrupted sales
operations.
2AO
c
Quantity Discount
Many suppliers encourage their customers to place
large orders by offering them quantity discount.
With this the firm can save the per unit purchase
price.
Total cost= Purchase cost + ordering cost +
carrying cost
Savings in Quantity discount includes:
Discount savings in purchase price
Savings on ordering cost
additional carrying cost will be deducted
Cont
Reorder point under uncertainty
safety stock
Reorder point = (Lead time x average usage) +
safety stock
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Inventory Investment
Analysis
Estimation of incremental operating profit
(Change in contribution- change in carrying cost)
Estimation of incremental investment in inventory
( increase in finished goods inventories- increase
in other net working capital)
Return
on
investment
=
incremental
profit/incremental investment.
Estimation of the incremental rate of return (IRR)
Comparison of the incremental rate of return with
the required rate of return (RRR)
Optimum inventory:
IRR = RRR
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INVENTORY CONTROL
SYSTEMS
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Inventory Management
Process