Inventory management order cost

Inventory management is concerned with maintaining economic order quantities so that you order neither too much stock nor too little to meet your commitments. The stock level is dependent upon what it costs both in capital and in space needed to maintain such levels. Even if you employ a ship-to-line principle, you still need to determine the economic order quantities. Some items have a higher value than others, thereby requiring a higher degree of control. Use of the Pareto principle will probably reveal that 20%... 

It is common accepted knowledge that inventory hedges from price, availability, and demand variations, and their impact on the profitability of the operations. It is also known that maintaining such inventory has a cost, both capital and operative. That risk is automatically reduced is not necessarily true unless risk is managed specifically as is briefly shown next. Contrary to the assumption that operating at zero inventory (produce to order) always increases profit, it will be also shown that inventories do not represent a reduction in expected profit. 

Consider the problem of managing the inventory of Xerox paper in a wmehouse. Although demands from retailers may fluctuate a bit in their demand, your aggregate demand for the item is fairly constant at 100,000 cases for the year. Due to your volume, your supplier has agreed to provide you an everyday low price of 55.00 a case. You calculate that it will cost about 4.00 per ctise per year to hold each case. Costs associated with each order and delivery charges by your supplier yield a fixed ordering cost of 75.00. 

Consider a retailer in location B who purchases product from a supplier in location A. Customer demand at location B is satisfied from stock at a warehouse at B. The retailer takes possession of goods at A and arranges transport, manages inventories and order placement, and so on. The retailer can choose any mode of transport to get product from A to B. How should the retailer take account of total supply chain costs in making this decision ... 

This chapter focused on managing the warehouse and associated flows in a supply chain as well as on the number of different ways flows from suppliers to users can be organized. It established that effective use of the warehouse to decrease supply chain costs often requires careful design and use of crossdocking as an operational tool. Finally, managing order picking can have a big impact on warehouse turn-around time. This chapter thus discussed how the chain structure, the capacity of transportation, and the coordination of material movement and inventory as well as workers in a warehouse improve the competitiveness of the supply chain. 

However, a large number of chemicals on the shop floor become an inventory management problem, as well as larger quantities expire, simply because they were ordered more than needed, becoming a disposal problem. They become a cost issue, as well as an environmental impact factor. 

With these pieces in place, we can build a model of the annual cost of managing inventory. First, we consider the annual cost of ordering goods. In this constant-demand setting, our sole decision variable is, as it was in the newsvendor model, the order quantity Q. Since each order costs A /order, and an average of D/Q orders would be placed annually, the expected annual cost of ordering is OC = A D/Q. 

The storage cost is expressed as a percentage. A storage cost rate of 25% means that 25% of the capital tie-up per year occurs in inventory in order to finance, manage, store, etc. said inventory. 

This case describes the author s experience running a purchasing department for one of the country s leading distributors. The challenge was to motivate a relatively inexperienced group in order to improve customer service and achieve cost-effective inventory management. 

Keeping months of chemical inventory is often not possible, because of space limits, or desirable, because many chemicals degrade with time. However, running out of treatment chemicals is not a choice, and even running low is risky. Maintaining accurate chemical feed and records of historical chemical use is necessary for managing chemical inventory. To minimize costs, order full-load shipments. 

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