Tuesday, 21 January 2020

Unit 12: Inventory Management

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Unit 12: Inventory Management

Inventory management is concerned with keeping enough product on hand to avoid running out while at the same time maintaining a small enough inventory balance to allow for a reasonable return on investment.

A major problem with managing inventory is that the demand for a corporation’s product is to a degree uncertain.

The supply of the raw materials used in its production process is also somewhat uncertain.

Carrying costs constitute all the costs of holding items in inventory for a given period of time.

They are expressed either in rupees per unit per period or as a percentage of the value per period.

ABC inventory classification and related control techniques were developed originally for mutual systems prior to the widespread use of automated inventory record keeping.

ABC control placed emphasis on reducing record-keeping requirements, redirecting clerical and review effort, and implementing stratified or varying inventory control techniques.

These concepts also are generally applicable to automated systems.

Value-volume Analysis is an important concept, because those items with a high level of activity must be more closely controlled than the ones with relatively low activity levels.

The VED (Vital, Essential, Desirable) classification is applicable largely to spare parts.

Stocking of space parts is based on strategies different from those of raw materials because Notes their consumption pattern in different.

While consumption of raw material depends directly on the market demand for spare for spares follow the Poisson distribution and therefore, spares are classified as vital, essential and desirable.

This implies that vital classes of spares have to be stocked adequately and so on.

Also ABC and VED classifications can be combined to advantage.

A combination of XYZ and VED methods can give an idea of what are the items that can be disposed off to train the inventory.

The basic EOQ model assumes that orders to replenish the inventory of an item are filled instantaneously; that is, the lead time is zero.

In practice, however, some time usually elapses between when a purchase order is placed and when the item actually is received in inventory.

This lead time consists of the time it takes to manufacture the item, the time it takes to package and ship the item, or both.

Determining the optimal safety stock and order quantities under these more realistic conditions is a fairly complex process.

However, the factors that have to be considered in this type of analyzing can be identified briefly.

All other things being equal, the optimal safety stock increases as the uncertainty associated with the demand forecasts and lead times increases.

Likewise, all other things being equal, the optimal safety stock increases as the cost of stock outs increases.

Cash Flow Timeline: A line or chart showing a company’s cash inflows and cash outflows and the business activities that caused them over a given period of time.

Terminal Value: The value of an asset at some point of time in future.

Tombstone: An advertisement that announces a public offering.


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