This document provides guidance on effective inventory management. It suggests determining inventory holding costs, which can range from 20-35% of average inventory value. Managers should compare their costs to industry standards and identify areas for improvement. The most profitable inventory level balances holding enough stock to meet needs while minimizing costs. Managers can calculate how reductions in average inventory affect both holding costs and potential lost sales to identify the optimal inventory level.
Inventory management involves balancing the costs of holding inventory with the benefits. It refers to controlling and tracking materials, work in process, and finished goods. The goals are to maintain optimal inventory levels to meet demand while minimizing costs. Effective inventory management requires specifying order quantities, reorder points, and controlling inventory across all stages and locations.
The document discusses stock control and purchasing in manufacturing organizations. It describes factors that purchasing managers should consider when choosing suppliers, such as quality, quantity, time, dependability and price. It also discusses the benefits and costs of different stock control methods, such as setting maximum, minimum and reorder stock levels to efficiently control stock. Computerized stock control allows automatic reordering and identification of best sellers. Just-in-time (JIT) production aims to minimize stock levels by receiving goods just before production.
Role of Inventory is very important in any business operations without thinking of its size, structure and market value.
Inventory helps in smooth functioning of the business..
Methods and techniques of inventory control | business managementvibhasharma78
The document provides information on various inventory control methods and techniques, including ABC analysis, economic order quantity (EOQ) model, safety stocks, and reorder point. ABC analysis involves classifying inventory items into categories A, B, and C based on criteria like usage and value, with category A items involving the largest investments and requiring the most control. The EOQ model helps determine the optimal order quantity to minimize total ordering and carrying costs. Safety stocks are maintained to avoid stock-outs, and the reorder point is the level at which a fresh order should be placed based on factors like daily usage and lead time.
This document discusses the history and evolution of inventory management. It begins with early merchants keeping handwritten records of products before the Industrial Revolution. Herman Hollerith then invented punch cards in 1889, allowing data to be recorded and read by machines. In the 1930s, Harvard University created a punch card system for businesses to track inventory and orders. However, this was too expensive and slow. In the 1960s, retailers developed barcodes to more efficiently track inventory, which were later standardized in 1974. As computers advanced, inventory management software in warehouses became popular in the 1990s and 2000s. The document then discusses definitions of inventory, types of inventory, purposes for holding inventory, costs associated with inventory, and inventory control and management.
The Consequences of Implementing the Indigenisation and Economic Empowerment ...iosrjce
The paper discusses the consequences of implementing the indigenisation laws in their current form
on the banking sector in Zimbabwe. The law requires that firms operating in the country which are owned by
non-indigenous Zimbabweans and with asset values exceeding US$500 000 cede 51% shareholding to
indigenous black Zimbabweans. The paper concludes that the benefits of indigenising foreign banks are far
outweighed by possible negative consequences. These consequences include loss of confidence in the banking
system, loss of lines of credit, loss of access to latest technologies, and as well as limited exposure to
international best practices. The programme may lead to foreign banks disinvesting from the country with
serious repercussions to the economy. The indigenisation of foreign banks should therefore be approached with
caution so that the indigenised banks would at least retain their international appeal with the foreign partners
retaining influence on important decisions affecting the operations of the banks.
Armouring india indigenisation of india’s defence needsRaj Narayan
India is the largest importer of defence equipment in the world. It is therefore evident that the domestic industry is not being optimally utilized to meet the country’s defence requirement.
How to develop maintenance program in aviation industry with considering cost, operational aspect. Comparing MSG System, FMEA principal and commercial aspect. Airline maintenance program is ultimately important for sustainability of airline business
Inventory management involves balancing the costs of holding inventory with the benefits. It refers to controlling and tracking materials, work in process, and finished goods. The goals are to maintain optimal inventory levels to meet demand while minimizing costs. Effective inventory management requires specifying order quantities, reorder points, and controlling inventory across all stages and locations.
The document discusses stock control and purchasing in manufacturing organizations. It describes factors that purchasing managers should consider when choosing suppliers, such as quality, quantity, time, dependability and price. It also discusses the benefits and costs of different stock control methods, such as setting maximum, minimum and reorder stock levels to efficiently control stock. Computerized stock control allows automatic reordering and identification of best sellers. Just-in-time (JIT) production aims to minimize stock levels by receiving goods just before production.
Role of Inventory is very important in any business operations without thinking of its size, structure and market value.
Inventory helps in smooth functioning of the business..
Methods and techniques of inventory control | business managementvibhasharma78
The document provides information on various inventory control methods and techniques, including ABC analysis, economic order quantity (EOQ) model, safety stocks, and reorder point. ABC analysis involves classifying inventory items into categories A, B, and C based on criteria like usage and value, with category A items involving the largest investments and requiring the most control. The EOQ model helps determine the optimal order quantity to minimize total ordering and carrying costs. Safety stocks are maintained to avoid stock-outs, and the reorder point is the level at which a fresh order should be placed based on factors like daily usage and lead time.
This document discusses the history and evolution of inventory management. It begins with early merchants keeping handwritten records of products before the Industrial Revolution. Herman Hollerith then invented punch cards in 1889, allowing data to be recorded and read by machines. In the 1930s, Harvard University created a punch card system for businesses to track inventory and orders. However, this was too expensive and slow. In the 1960s, retailers developed barcodes to more efficiently track inventory, which were later standardized in 1974. As computers advanced, inventory management software in warehouses became popular in the 1990s and 2000s. The document then discusses definitions of inventory, types of inventory, purposes for holding inventory, costs associated with inventory, and inventory control and management.
The Consequences of Implementing the Indigenisation and Economic Empowerment ...iosrjce
The paper discusses the consequences of implementing the indigenisation laws in their current form
on the banking sector in Zimbabwe. The law requires that firms operating in the country which are owned by
non-indigenous Zimbabweans and with asset values exceeding US$500 000 cede 51% shareholding to
indigenous black Zimbabweans. The paper concludes that the benefits of indigenising foreign banks are far
outweighed by possible negative consequences. These consequences include loss of confidence in the banking
system, loss of lines of credit, loss of access to latest technologies, and as well as limited exposure to
international best practices. The programme may lead to foreign banks disinvesting from the country with
serious repercussions to the economy. The indigenisation of foreign banks should therefore be approached with
caution so that the indigenised banks would at least retain their international appeal with the foreign partners
retaining influence on important decisions affecting the operations of the banks.
Armouring india indigenisation of india’s defence needsRaj Narayan
India is the largest importer of defence equipment in the world. It is therefore evident that the domestic industry is not being optimally utilized to meet the country’s defence requirement.
How to develop maintenance program in aviation industry with considering cost, operational aspect. Comparing MSG System, FMEA principal and commercial aspect. Airline maintenance program is ultimately important for sustainability of airline business
The Impact of Inventory Management on Manufacuring Industryinventionjournals
Inventory is generally considered to comprise in three main areas which are raw materials, work in progress and finished goods. Where these are held and in what quantities, and how they are managed will vary significantly from one organization to another. The activities of inventory management involves are identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status. In order to have clear inventory management, a company should not only focus on logistic management but also on sales and purchase management. Inventory management and control is not only the responsibility of the accounting department and the warehouse, but also the responsibility of the entire organization. Actually, there are many departments involved in the inventory management and control process, such as sales, purchasing, production, logistics and accounting. All these departments must work together in order to achieve effective inventory controls. Inventory includes raw material in progress, finished products, general Suppliers and equipment etc. inventory control may defined as systematic location, storage and Recording of goods in such a way that desired degree of service can be made to the operating shops at minimum ultimate cost. The need for inventory control is to maintain stock of goods and ensure Manufacturing according to the production schedule based on sale requirement and the lowest possible ultimate cost to the customer. Every enterprise needs inventory for smooth running of activities, it serves as link between production and distribution process and there is general time lag between the recognition of a need and its fulfillment. The greater time lag, the higher the requirement for inventory. The unforeseen fluctuation in demand and supply of goods also necessitate the need for inventory as it provides cushion for future price fluctuation. This paper includes the concept of inventory management, nature of inventory management, materials management techniques and inventory accounting
The document discusses retail inventory management and the key challenges involved. It describes the process of replenishing inventory from the factory to the wholesaler to the distributor and finally to the retailer. Problems can occur due to production delays, shipping delays, or customers withdrawing items. The goal of inventory management is to facilitate the flow of goods while minimizing costs. It aims to stock the right products and maintain optimal inventory levels.
This document provides an overview of inventory planning and control metrics that can be used to monitor and improve inventory performance. It discusses defining key metrics to uncover sub-optimal activities, evaluate performance against plans, and measure factors like forecast accuracy, inventory levels, and replenishment. The service can help organizations answer questions about how to measure, evaluate, focus improvements, understand costs, and identify opportunities to reduce inventory costs. The overall goal is to analyze variability and interpret results to enhance inventory planning and operations.
The document discusses inventory management. It defines inventory as goods held for production or sale. Maintaining optimal inventory levels is important for meeting production needs and customer demand while minimizing costs associated with excess inventory. Effective inventory management requires tracking inventory levels, maintaining accurate records, and controlling the supply/demand balance. The goals of inventory management are to have the right level of inventory at the lowest possible cost.
The document discusses various inventory management techniques, including inventory turnover ratio, aging schedule of inventory, just-in-time (JIT), and VED analysis. Specifically, it provides definitions and formulas for calculating inventory turnover ratio. It describes how an aging schedule can help identify slow-moving inventory. It explains the goals and features of JIT, including maintaining minimum inventory levels and ensuring timely deliveries. Finally, it outlines the VED classification system which categorizes inventory based on vitality, with vital items being most critical to operations.
Project report on inventory managementAyesha Hamid
This document discusses inventory management. It defines inventory as items or goods that a company uses or will sell. Effective inventory management is important to minimize costs and ensure adequate supply. The document outlines different types of inventory like raw materials and finished goods. It also discusses inventory costs and metrics like turnover ratios that measure how quickly inventory is sold. The goal of inventory management is to provide good customer service while minimizing inventory levels and related costs.
This document discusses inventory management and its importance. It defines inventory as unsold goods that businesses hold for sale or raw materials used for manufacturing. Maintaining optimal inventory levels is important for meeting customer demand while minimizing costs associated with excess inventory. Successful inventory management requires balancing inventory levels with costs and benefits. Key aspects of inventory management include counting current stock levels, controlling supply and demand, keeping accurate records, and managing employees involved in the inventory process. The overall goal is to have sufficient inventory available while avoiding issues like overstocking, stockouts, and obsolete goods.
Inventory management tools and techniques retailMohd Affan Ali
The document discusses various concepts related to inventory management. It defines inventory as stock of goods and explains that inventory includes raw materials, work in progress, and finished goods in a manufacturing context. It also discusses determining economic order quantities by balancing ordering and carrying costs. Other concepts covered include ABC analysis for classifying inventory, just-in-time manufacturing, inventory turnover ratios, and stock keeping units. The overall purpose of inventory management is to avoid overstocking or understocking.
hey friends, we know from earlier research that material control is the major component of cost. so, let us have a look at few tenchniques relating to material control
This document discusses various concepts related to inventory management. It defines inventory as stock of goods and explains that inventory includes raw materials, work in progress, and finished goods for a manufacturing company. It also discusses determining economic order quantity by balancing ordering and carrying costs. Other concepts covered include ABC analysis for inventory classification, just-in-time manufacturing, inventory turnover ratio, and stock keeping units. The overall purpose of inventory management is to avoid understocking or overstocking.
The document discusses various inventory control techniques used in pharmacy practices such as ABC analysis, VED analysis, economic order quantity, and FSN analysis to classify inventory items and maintain optimal inventory levels. The goals of inventory control are to reduce costs, ensure adequate supply of drugs, and avoid stockouts while making efficient use of capital. Proper inventory control techniques are important tools for smooth operations and effective management of business enterprises.
case study Farmasi Store :Inventory ManagementEjay Rizal
Farmasi Tiara must effectively manage their inventory to ensure they have enough products to meet customer demand while avoiding overstock. This involves activities like cycle counting, ABC analysis to classify products based on demand, and using a safety stock inventory model. Maintaining the right inventory levels is important for business sustainability and profitability. Farmasi Tiara aims to balance inventory in accordance with Islamic principles by avoiding hoarding and keeping only what is needed.
This document discusses inventory management in the textile industry. It begins by defining inventory and explaining that proper inventory management is important for business success. The document then reviews several key aspects of inventory management, including demand forecasting, economic order quantity, lead times, safety stocks, and the various costs associated with holding inventory. It also discusses several common inventory management techniques used in the textile industry like ABC analysis to classify inventory items based on their value and usage. The overall aim is to study how textiles companies globally manage their inventories.
Inventory management plays a significant role in working capital management. It involves activities related to acquiring, storing, and using raw materials, work-in-progress, and finished goods. The objectives of inventory management are to maintain optimal levels of inventory to ensure smooth production and meet sales demands while minimizing investment costs. Effective inventory management requires balancing inventory levels to avoid under- or over-investment and using techniques like EOQ, reorder points, and ABC analysis to classify inventory items and determine optimal order quantities.
Logistics management involves planning and controlling the efficient flow of goods and services. Inventory management balances supply and demand through various types of inventory like safety stock. Warehousing provides storage and preservation of goods between production and consumption. It allows for inspection, packaging and processing of goods. Logistics information systems deliver the right information to the right people at the right time through input, databases, and outputs. Order processing fulfills customer orders accurately from order acceptance through delivery. The bullwhip effect causes demand swings to amplify up the supply chain.
The document discusses inventory management. It defines inventory as any items a business holds for resale or repair. Effective inventory management requires tracking inventory levels and sales to avoid stock-outs or overstocking. Stock-outs occur when inventory is unavailable, potentially losing sales, while overstocking ties up capital in unsold goods that incur storage costs. The document provides tips for inventory management, including categorizing items by sales volume, tracking product information, auditing inventory counts, and using formulas to determine optimal order quantities.
This document discusses inventory management. It defines inventory as raw materials, work-in-process goods, and finished goods ready for sale. It notes that inventory is an important asset for businesses as it represents a primary source of revenue. The document outlines the functions of inventory, including meeting anticipated demand and guarding against stock-outs. It also discusses inventory costs like ordering costs, holding costs, and stockout costs. Finally, it introduces the concept of economic order quantity, which is the order size that minimizes total inventory costs.
The APCO Geopolitical Radar - Q3 2024 The Global Operating Environment for Bu...APCO
The Radar reflects input from APCO’s teams located around the world. It distils a host of interconnected events and trends into insights to inform operational and strategic decisions. Issues covered in this edition include:
Part 2 Deep Dive: Navigating the 2024 Slowdownjeffkluth1
Introduction
The global retail industry has weathered numerous storms, with the financial crisis of 2008 serving as a poignant reminder of the sector's resilience and adaptability. However, as we navigate the complex landscape of 2024, retailers face a unique set of challenges that demand innovative strategies and a fundamental shift in mindset. This white paper contrasts the impact of the 2008 recession on the retail sector with the current headwinds retailers are grappling with, while offering a comprehensive roadmap for success in this new paradigm.
The Impact of Inventory Management on Manufacuring Industryinventionjournals
Inventory is generally considered to comprise in three main areas which are raw materials, work in progress and finished goods. Where these are held and in what quantities, and how they are managed will vary significantly from one organization to another. The activities of inventory management involves are identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status. In order to have clear inventory management, a company should not only focus on logistic management but also on sales and purchase management. Inventory management and control is not only the responsibility of the accounting department and the warehouse, but also the responsibility of the entire organization. Actually, there are many departments involved in the inventory management and control process, such as sales, purchasing, production, logistics and accounting. All these departments must work together in order to achieve effective inventory controls. Inventory includes raw material in progress, finished products, general Suppliers and equipment etc. inventory control may defined as systematic location, storage and Recording of goods in such a way that desired degree of service can be made to the operating shops at minimum ultimate cost. The need for inventory control is to maintain stock of goods and ensure Manufacturing according to the production schedule based on sale requirement and the lowest possible ultimate cost to the customer. Every enterprise needs inventory for smooth running of activities, it serves as link between production and distribution process and there is general time lag between the recognition of a need and its fulfillment. The greater time lag, the higher the requirement for inventory. The unforeseen fluctuation in demand and supply of goods also necessitate the need for inventory as it provides cushion for future price fluctuation. This paper includes the concept of inventory management, nature of inventory management, materials management techniques and inventory accounting
The document discusses retail inventory management and the key challenges involved. It describes the process of replenishing inventory from the factory to the wholesaler to the distributor and finally to the retailer. Problems can occur due to production delays, shipping delays, or customers withdrawing items. The goal of inventory management is to facilitate the flow of goods while minimizing costs. It aims to stock the right products and maintain optimal inventory levels.
This document provides an overview of inventory planning and control metrics that can be used to monitor and improve inventory performance. It discusses defining key metrics to uncover sub-optimal activities, evaluate performance against plans, and measure factors like forecast accuracy, inventory levels, and replenishment. The service can help organizations answer questions about how to measure, evaluate, focus improvements, understand costs, and identify opportunities to reduce inventory costs. The overall goal is to analyze variability and interpret results to enhance inventory planning and operations.
The document discusses inventory management. It defines inventory as goods held for production or sale. Maintaining optimal inventory levels is important for meeting production needs and customer demand while minimizing costs associated with excess inventory. Effective inventory management requires tracking inventory levels, maintaining accurate records, and controlling the supply/demand balance. The goals of inventory management are to have the right level of inventory at the lowest possible cost.
The document discusses various inventory management techniques, including inventory turnover ratio, aging schedule of inventory, just-in-time (JIT), and VED analysis. Specifically, it provides definitions and formulas for calculating inventory turnover ratio. It describes how an aging schedule can help identify slow-moving inventory. It explains the goals and features of JIT, including maintaining minimum inventory levels and ensuring timely deliveries. Finally, it outlines the VED classification system which categorizes inventory based on vitality, with vital items being most critical to operations.
Project report on inventory managementAyesha Hamid
This document discusses inventory management. It defines inventory as items or goods that a company uses or will sell. Effective inventory management is important to minimize costs and ensure adequate supply. The document outlines different types of inventory like raw materials and finished goods. It also discusses inventory costs and metrics like turnover ratios that measure how quickly inventory is sold. The goal of inventory management is to provide good customer service while minimizing inventory levels and related costs.
This document discusses inventory management and its importance. It defines inventory as unsold goods that businesses hold for sale or raw materials used for manufacturing. Maintaining optimal inventory levels is important for meeting customer demand while minimizing costs associated with excess inventory. Successful inventory management requires balancing inventory levels with costs and benefits. Key aspects of inventory management include counting current stock levels, controlling supply and demand, keeping accurate records, and managing employees involved in the inventory process. The overall goal is to have sufficient inventory available while avoiding issues like overstocking, stockouts, and obsolete goods.
Inventory management tools and techniques retailMohd Affan Ali
The document discusses various concepts related to inventory management. It defines inventory as stock of goods and explains that inventory includes raw materials, work in progress, and finished goods in a manufacturing context. It also discusses determining economic order quantities by balancing ordering and carrying costs. Other concepts covered include ABC analysis for classifying inventory, just-in-time manufacturing, inventory turnover ratios, and stock keeping units. The overall purpose of inventory management is to avoid overstocking or understocking.
hey friends, we know from earlier research that material control is the major component of cost. so, let us have a look at few tenchniques relating to material control
This document discusses various concepts related to inventory management. It defines inventory as stock of goods and explains that inventory includes raw materials, work in progress, and finished goods for a manufacturing company. It also discusses determining economic order quantity by balancing ordering and carrying costs. Other concepts covered include ABC analysis for inventory classification, just-in-time manufacturing, inventory turnover ratio, and stock keeping units. The overall purpose of inventory management is to avoid understocking or overstocking.
The document discusses various inventory control techniques used in pharmacy practices such as ABC analysis, VED analysis, economic order quantity, and FSN analysis to classify inventory items and maintain optimal inventory levels. The goals of inventory control are to reduce costs, ensure adequate supply of drugs, and avoid stockouts while making efficient use of capital. Proper inventory control techniques are important tools for smooth operations and effective management of business enterprises.
case study Farmasi Store :Inventory ManagementEjay Rizal
Farmasi Tiara must effectively manage their inventory to ensure they have enough products to meet customer demand while avoiding overstock. This involves activities like cycle counting, ABC analysis to classify products based on demand, and using a safety stock inventory model. Maintaining the right inventory levels is important for business sustainability and profitability. Farmasi Tiara aims to balance inventory in accordance with Islamic principles by avoiding hoarding and keeping only what is needed.
This document discusses inventory management in the textile industry. It begins by defining inventory and explaining that proper inventory management is important for business success. The document then reviews several key aspects of inventory management, including demand forecasting, economic order quantity, lead times, safety stocks, and the various costs associated with holding inventory. It also discusses several common inventory management techniques used in the textile industry like ABC analysis to classify inventory items based on their value and usage. The overall aim is to study how textiles companies globally manage their inventories.
Inventory management plays a significant role in working capital management. It involves activities related to acquiring, storing, and using raw materials, work-in-progress, and finished goods. The objectives of inventory management are to maintain optimal levels of inventory to ensure smooth production and meet sales demands while minimizing investment costs. Effective inventory management requires balancing inventory levels to avoid under- or over-investment and using techniques like EOQ, reorder points, and ABC analysis to classify inventory items and determine optimal order quantities.
Logistics management involves planning and controlling the efficient flow of goods and services. Inventory management balances supply and demand through various types of inventory like safety stock. Warehousing provides storage and preservation of goods between production and consumption. It allows for inspection, packaging and processing of goods. Logistics information systems deliver the right information to the right people at the right time through input, databases, and outputs. Order processing fulfills customer orders accurately from order acceptance through delivery. The bullwhip effect causes demand swings to amplify up the supply chain.
The document discusses inventory management. It defines inventory as any items a business holds for resale or repair. Effective inventory management requires tracking inventory levels and sales to avoid stock-outs or overstocking. Stock-outs occur when inventory is unavailable, potentially losing sales, while overstocking ties up capital in unsold goods that incur storage costs. The document provides tips for inventory management, including categorizing items by sales volume, tracking product information, auditing inventory counts, and using formulas to determine optimal order quantities.
This document discusses inventory management. It defines inventory as raw materials, work-in-process goods, and finished goods ready for sale. It notes that inventory is an important asset for businesses as it represents a primary source of revenue. The document outlines the functions of inventory, including meeting anticipated demand and guarding against stock-outs. It also discusses inventory costs like ordering costs, holding costs, and stockout costs. Finally, it introduces the concept of economic order quantity, which is the order size that minimizes total inventory costs.
The APCO Geopolitical Radar - Q3 2024 The Global Operating Environment for Bu...APCO
The Radar reflects input from APCO’s teams located around the world. It distils a host of interconnected events and trends into insights to inform operational and strategic decisions. Issues covered in this edition include:
Part 2 Deep Dive: Navigating the 2024 Slowdownjeffkluth1
Introduction
The global retail industry has weathered numerous storms, with the financial crisis of 2008 serving as a poignant reminder of the sector's resilience and adaptability. However, as we navigate the complex landscape of 2024, retailers face a unique set of challenges that demand innovative strategies and a fundamental shift in mindset. This white paper contrasts the impact of the 2008 recession on the retail sector with the current headwinds retailers are grappling with, while offering a comprehensive roadmap for success in this new paradigm.
Building Your Employer Brand with Social MediaLuanWise
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Introduction
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HOW TO START UP A COMPANY A STEP-BY-STEP GUIDE.pdf
Iventory mgmt control
1. INVENTORY MANAGEMENT AND Y How to determine how much to order
CONTROL* and how often to order.
INVENTORY MANAGEMENT AND Controlling Inventories
CONTROL concerns most managers of
agricultural marketing and supply businesses, Purchase systematically. Place orders for
whether they are retail, wholesale, or service materials long enough beforehand so there
oriented. will not be a shortage between ordering and
delivery.
The value of a manager to an agricultural
marketing and supply business depends on Let the inventory become relatively low
his ability to manage inventories effectively. before reordering but keep enough on hand
The total cost of maintaining the desired to meet current needs. There are costs
inventory level must be held down to a associated with keeping large inventories.
reasonable figure, but the inventory must also Likewise, there are costs if you deplete your
be large enough to permit the company to stock.
effectively merchandise the products and
services it sells. If the manager doesn't Don't hold “dead” lines or items.
control his inventories to accomplish both of
these objectives, the business may not be Keep track of inventories. When stock is
able to prosper or even to survive against received, be sure that what was ordered was
competition. delivered. Make sure that the amount
received is added to the inventory.
The information in this circular suggests to
the manager ways on how best to do four Physical inventories should be taken
things: frequently to find out which items are not
selling so you can discontinue them as
Y How to control inventories. quickly as possible, to spot shortages in
Y How to visualize the inventory costs to merchandise that may be due to theft, to note
be included in determining how much deterioration that may occur, and to decide
inventories are costing the company. when to reorder.
Y How to determine the level of Make someone responsible for checking
inventory that is most profitable. the inventory. Delegate the responsibility for
specific parts of the total inventory effort to
*
By B.L. Brooks, Extension Economist, University of the persons in the organization who are best
Illinois; reprint of Extension Circular 1063, October qualified to do the job.
1972, with the kind permission of the author and the
Cooperative Extension Service, University of Illinois,
Urbana, Illinois.
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
1
2. Be sure those to whom you delegate The most profitable inventory turnover ratio
responsibility know exactly what they are varies with each commodity. Generally, high
supposed to do. inventory is needed for rapidly moving
commodities if the merchandising effort is
Use storage facilities efficiently. Assign going to be efficient and effective. Good
space to each item in stock. Arrange the examples of this are feed and grain. Other
storage area to permit the handling of stock commodities move more slowly but require
with the least amount of effort and in such a that a small stock be on hand at all times.
way that stock can be easily found, the Farm machinery is a good example of this.
quantity determined and recorded, and the The demand for some items, such as seed, is
stock removed if necessary. seasonal and requires large inventories at
certain times of the year.
Arrange the warehouse and sales area so the
items that sell rapidly can be most easily Increase selling efforts or reduce the average
picked up by the customer or restocked in the stock of slow-moving items. If an item can’t
display area readily by the employees. be sold, discontinue stocking it immediately.
Dead items are real losers.
Use mechanical means to handle and move
supplies whenever the volume warrants it. Know the costs of inventories. Because
This will reduce the amount of labor used in costs of inventories are very closely related to
handling stock. size of inventories, the manager should keep
his inventory as small as possible consistent
Plan to use space interchangeably with with a good merchandising program.
seasonal items and thus reduce the cost of
storage space. The costs of carrying inventories can be a
large percentage of the sale value of the
Be aware of inventory turnovers. Know inventory. The costs are often 20 to 25
what the turnover of each commodity is and if percent or more of the total value of the
possible compare this with the turnover of the inventory. The manager should know the
same items by other similar firms. costs of holding an inventory and then try to
reduce the price of an item to the inventory
Inventory turnover ratio is determined by holding cost to dispose of the items instead of
dividing the volume of sales of merchandise holding them in inventory.
by the level of inventory at a point in time,
such as the first of each month. For example, Avoid holding lines of merchandise that
the sales of fertilizer in May amounted to compete with one another. Stocking too
$143,000 and the fertilizer inventory at the many lines is asking for inventory problems.
end of May was $16,300. The inventory Choose the lines of merchandise carefully
turnover ratio for May thus was and then vigorously sell a limited number of
$143,000/$16,300, or 8.8 to 1. That is, there lines. Duplication of items that occurs when
was an $8.80 turnover of fertilizer for every the company carries multiple lines can more
dollar’s worth in stock at the end of the period easily result in larger inventories and
in question. increased inventory holding costs.
A zero inventory, which would give you a ratio Determining Inventory Costs
of infinity, would not be desirable because the
objective of management is to maintain the Inventory costs are real but they are also
level of inventory at a level that will permit the difficult to determine because they cannot be
most effective merchandising. taken directly from accounting records.
Inventory costs for individual items make it
necessary to prorate costs of equipment,
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
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3. space, labor for handling, utilities, insurance, Inventory service costs. These include
taxes on land and buildings, depreciation on taxes on inventory; labor costs of
buildings and handling equipment, clerical handling and maintaining stock clerical
help, unemployment insurance for certain costs for inventory records; contribution to
personnel, social security for all “space,” Social Security by employer based on
“handling,” and “inventory service” personnel, prorated time devoted to inventories by
and a proportionate share of administrative employees; unemployment compensation
overhead. The cost of holding inventories insurance based on prorated time of
may make the payoff so great that the “inventory involved” personnel; employer
manager can’t afford not to do it. Also, when contribution to pension plans, and group
inventory costs have been determined once, life, health, and accident insurance
it is a much simpler task to make the programs based on prorated time of
necessary adjustments in each of the costs. “inventory involved” personnel; and an
appropriate proportionate share for
One way to view the total annual cost of administrative overhead, including all
carrying inventory is as a percentage of total taxes, Social Security, pension, and
inventory value. For example, if a company’s employer contributions to insurance
average inventory is $25,000 and the programs for administrative personnel
average inventory carrying cost is 20 percent, who are involved.
it will cost the company $5,000 per year to
carry an average inventory of $25,000. Capital costs. These include interest on
money invested in inventory; interest on
An inventory holding cost that is 20 percent of money invested in inventory handling and
the average value of inventory is probably too control equipment; and interest on money
low. Estimates of inventory holding costs for invested in land and buildings to store
agricultural supply businesses usually range inventory (if land and buildings are
from 20 to 35 percent. owned).
The costs that need to be included in the total Cost summary. The information about
inventory carrying cost are: the hypothetical company that follows
shows how a manager can develop a
Storage space costs. These include better understanding of how he can use
taxes on land and buildings; insurance on the knowledge he has about inventory
buildings; depreciation on buildings and holding costs to make better management
warehouses owned; rent (if paid); decisions.
materials for repairs and maintenance on
buildings; utilities; and janitor, watchman, The company management thinks they have
and maintenance costs. a high cost of inventory holding but they don't
know exactly what that cost is. Consequently
Handling costs. These include they ask the manager to compute this cost.
depreciation on equipment; fuel for The average inventory value in 1971 was
equipment; maintenance and repair of $25,000. This figure is arrived at by adding
equipment and insurance and taxes on the quarterly inventory values, which were
equipment. $21,000 on March 31, $33,000 on June 30,
$29,000 on September 30, and $18,000 on
Risk costs on inventory. These include December 31, to get a total of $101,000. This
insurance on inventory; obsolescence of results in a quarterly average of $25,250,
inventory; physical deterioration of which is rounded to $25,000. The manager
inventory; pilferage; and losses resulting computed the holding costs on the average
from inventory price declines. inventory and found that they were as follows:
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
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4. Obsolescence cost based on the Comparing these percentages with the
value of the average inventory ......... $1,500.00 industry-wide wide averages, the manager
Cost of capital on the average discovered that most of his costs were on the
inventory ........................................... $2,500.00 high side, compared to those of the industry.
Deterioration of average inventory or For example, his cost for handling and
its prevention .................................... $1,250.00 distribution was 8 percent of the average
Handling and distribution costs of
value of his inventory while the industry
average inventory ............................. $2,000.00 standard for handling and distribution of
Transportation................................... $250.00
average inventory was 2 to 3 percent of the
average inventory value.
Taxes on average inventory ............. $187.50
Insurance of average inventory… $125.00
The manager then decided to summarize
Storage facilities cost on average each of his costs and compare them with the
inventory ........................................... $500.00 industry standards to get a clear picture
TOTAL .............................................. $8,312.50 regarding which of his individual inventory
costs were higher than the industry
The manager also had available the average standards. He would then know which of his
industry-wide inventory holding costs listed costs should receive his attention. He
below: prepared a summary of the percentage his
costs were of the total average value of his
Obsolescence ................................ 4 to 7% inventory and compared each of the costs
Cost of capital ................................ 8 to 12% with the inventory standards as shown below:
Deterioration or its prevention ....... 4 to 5%
Handling and distribution ............... 2 to 3% Percent
Transportation................................ .5 to 1% above or
Computed below
Taxes ............................................. .5 to .75%
Range for cost for maximum
Insurance ....................................... 0.25% industry company industry
Storage facilities ............................ .25 to .75% (percent) (percent) cost
TOTAL ...........................................19.5 to 29.75% Obsolescence 4 to 7 6 -1
Cost of capital 8 to 12 10 -2
The manager now compared his company’s Deterioration 4 to 5 5 ...
costs with these percentages by computing Handling and
the percentages that each of the company’s distribution 2 to 3 8 +5
average inventory holding costs were of his Transportation .5 to 1 1 …
total inventory costs. These computations Taxes .5 to .75 0.75 …
yielded the following information: Insurance 0.25 0.5 +0.25
Storage facilities .25 to .75 2 +1.25
Obsolescence ....... $1,500 is 6% of $25,000
TOTAL Difference ................................ +3.5
Cost of capital ....... 2,500 is 10% of 25,000
Deterioration or its These figures indicated to the manager that
prevention ............. 1,250 is 5% of 25,000 he should reduce inventory handling and
Handling and distribution costs and the costs of the storage
distribution ............ 2,000 is 8% of 25,000 space being used for the inventory being
Transportation....... 250 is 1% of 25,000 carried by the company. The manager now
Taxes .................... 187.50 is .75% of 25,000 wondered whether he should also reduce his
Insurance .............. 125 is .5% of 25,000 average inventory which would consequently
Storage facilities ... 500 is 2% of 25,000 reduce the cost of holding the inventory. He
knew that he would loose some sales and
TOTAL .......... $8,312.50 is 33.25% of $25,000
possibly some customers if he did because
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
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5. he would not have a 100-percent stock Inventory holding Decrease in
position at all times. So he decided that he decrease units sold 1
would try to determine what would be his 4,400 units 600
most profitable level of inventory. 4,400 units 1,800
4,400 units 3,600
Determining the Most Profitable Level 4,400 units 6,800
of Inventory 4,400 units 7,200
There is another cost associated with By reducing the inventory by 20,000 units, the
inventory management in addition to those company will lose $23,000 (20,000 X $1.15)
discussed previously. This cost results when in sales. This is far more than the $8,312.50
an item is not available or your inventory for in inventory holding costs.
the item is zero. This kind of situation results
in the loss of sale immediately and might At what point should the manager stop cutting
permanently lose a customer. Although a his inventory, given the above decrease in
business doesn’t want to lose sales nor sales with each successive cut in inventory
customers permanently, should it maintain a he makes? Table 1 gives the results of the
100-percent in-stock condition, with manager’s computations.
associated high inventory costs, to forestall
these situations? Or would it he more It is obvious from Table 1 that the average
profitable to have a 95-percent in-stock inventory holding costs are reduced as a
position? Any inventory management system result of each cut. But sales are also reduced,
must weigh these alternatives and the so what is gained is partially, or totally lost by
manager must decide whether to maintain a decreased sales. The manager decides to cut
100-percent in-stock position and pay his average inventory by about 10,000 units,
additional inventory costs or to carry a less thus reducing his average inventory holding
than 100-percent in-stock position and lower costs by about $3,775. His sales will be
his inventory costs while risking possible loss reduced by a similar amount. Any further
of sales and customers. How can the reduction in inventory would not reduce the
manager make this decision? average inventory holding costs as much as
the reduction in sales and would result in a
Let’s go hack to the hypothetical company. reduction of gross income.
The manager knows that for the $25,000
avenge value inventory he carries, it costs A manager cannot reduce inventory to zero
him $8,312.50. He also knows that he carries without losing sales volume. He can,
about 22,000 items in his average inventory however, reduce inventory as well as the
with an average value of $1.15 per item. The costs of holding inventory to a certain point,
average inventory holding cost per item is which can be determined, that will be an
thus about 37 3/4 cents ($8,312.50 ¸ optimum point for holding inventory from a
cost versus loss-of-sales standpoint. A
22,000). Now, suppose he decides to manager can do this only if he knows his
decrease his average inventory in five inventory holding costs and can then estimate
successive steps, which will reduce his within a reasonable degree of accuracy what
inventory holding cost to zero. But he also will happen to his sales when he cuts his
knows he will lose sales because he will be inventory.
out of stock in some items when his
customers ask for them. He estimates that
the decrease in sales with each successive
1
20-percent decrease in inventory holding cost Decrease in sales is cumulative. That is, the first cut
will be as follows: in inventory results in a decrease of 600 in the number
of items sold, the next one in 1,800 plus the previous
600, or 2,400, and so forth.
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
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6. Determining How Much and How Often represent the lowest cost because the total
to Order2 cost for four units or for six units is not known.
A mathematical formula can be used to
The order cycle is the period of time that determine the EOQ.
elapses between the order of the goods and
the receipt of the order. For example, if the The components of the EOQ formula are:
company has sales of $700,000, the average a = ordering cost per order,
daily inventory must he at least $2,000 s = annual sales rate,
($700,000 ¸ 365 days). The longer the order
i = ineterest cost per unit per year.
cycle, the larger the inventory requirements.
Thus, if the order cycle is 15 days, the The formula is:
average inventory must be at least $30,000. If
the order cycle is shortened to 10 days, then
the average inventory requirement is at least 2as
EOQ =
$20,000. i
There is a technique that can be used to Given the data in the previous example:
determine how much should be ordered. This a = $15
technique is called the Economic Order
Quantity (EOQ). To determine the EOQ, a s = 5,200 units
businessman must trade off two costs -- i = $0.15 per unit
ordering costs and inventory carrying costs.
Ordering costs are the expenses involved in then:
placing a single order times the frequency
orders are made. The smaller the quantity 2(15)(5,200)
EOQ =
ordered per order, the greater the ordering .15
costs because more orders are placed with
156,000
suppliers. The fewer the orders placed, the EOQ =
lower the ordering costs but the higher the .15
average inventory and higher inventory EOQ = 1,040,000
holding costs.
EOQ = 1,019 units
Table 2 below shows how a least-cost
solution for EOQ determination can be made. Thus, for lowest total cost, 1,019 units should
In this example, assume that the business be ordered about five times a year.
has determined (1) carrying costs equal to 15
percent of average inventory value (if the unit
cost is $1, carrying costs are 15 cents), (2)
order costs are $15 per order, (3) average
inventory holding costs are one-half of the
order quantity, and (4) total sales are 5,200
units per year.
The lowest total cost in Table 2 is found at
five orders per year. This is $153. However,
there is no assurance that five orders
2
Adapted from unpublished material prepared by
Richard Fenwick, Extension Economist, Agricultural
Business Management, University Extension Division,
University of Missouri-Columbia.
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
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7. Table 1.--Results of Successive Inventory Cuts
Inventory Decrease in Decrease in Net gain or
Inventory holding units sold with inventory Decrease loss from
cut number decrease in each cut in holding in sales inventory
units a inventoryb costc volume d decrease e
1 .................................. 4,400 600 $1,661 $ 690 $ 971 gain
2 .................................. 4,400 2,400 3,322 2,760 562 gain
3 .................................. 4,400 6,000 4,983 6,900 1,917 loss
4 .................................. 4,400 12,800 6,644 14,720 8,076 loss
5 .................................. 4,400 20,000 8,305 23,000 14,695 loss
a
Total inventory is 22,000 units and the manager plant to cut 20 percent in five successive cuts, or .20 x 22,000 =
4,400 units.
b
Decrease in units sold is 600 for first cut, 600 plus 1,800 for second cut, 600 plus 3,600 for the third cut, etc., until
the fifth cut when sales are reduced a total of 20,000 units by reducing the inventory to zero.
c
Inventory holding costs are decreased about $1,661 each time (37 ¾ cents x 4,400 unity).
d
Decrease in dollar sales volume is the decrease in units sold with each cut time $1.15 per unit.
e
Net gain or loss is the amount saved by reducing inventory cost minus the decrease in dollar volume as a result of
reduced sales.
Table 2--Economic Order Quantity (EOQ) Formulation
Number of Orders
1 2 5 10 15 20 25
Size of order (units) 5,200 2,600 1,040 520 347 250 208
Average inventory (units) 2,600 1,300 520 260 173 125 104
Carrying cost $390 $195 $78 $39 $26 $19 $16
Order cost 15 30 75 150 225 300 375
TOTAL COST $405 $225 $153 $189 $251 $319 $391
Sincerely,
Ken D. Duft
Extension Economist
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
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