Total Inventory Costs

To minimize inventory costs, the inventory managers should order 1,826 boxes of bandages each time. The next section introduces the connection between order size and its effect on total inventory costs. 

If the hospital system orders 1,826 boxes of bandages at a time throughout the year, how much will the yearly cost to hold and order bandages be Using the total cost formula below, where TC is the total cost, Q is the order quantity in units, H is the holding cost, D is the annual demand in units, and S is the order cost, this question can be answered. The EOQ formula is used to find Q, while H, D, and S are the same values used in the EOQ formula. 

The rate at which the inventory holding cost is predicated on is difficult to determine. To complicate the situation, the costs that make up an organization s total holding cost are spread throughout the organization. Total holding cost is made up of individual costs related to  

Allocating these costs to holding inventory is neither simple nor precise. However, by striving for precision, inventory decisions become more accurate. One thing experienced managers know is that money will be spent if inventory sits on a shelf. This is the basis for the preoccupation with measuring inventory turns and days of inventory. The faster the inventory turns over, then the lower the number of days of inventory, and the lower the cost to hold inventory. 

Each time a company orders inventory it incurs additional costs. These are called order costs, sometimes referred to as setup costs. Order costs include  

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The equation for total inventory cost is then the holding cost plus the carrying costs, or ... 

Modem information technology has enabled this strategy in which distributors are integrated so that expertise and inventory located at one distributor is available to the others. DI can be used to address both inventory-related and service-related issues. In terms of inventory, DI can be used to create a large pool of inventory across the entire distributor network thus lowering total inventory costs while raising customer service levels. Similarly, DI can be used to meet the customer s specific needs by directing those requests to the distributor best suited to address them. 

Inventory carrying cost. The cost of holding stock, calculated from the total inventory cost and the annual rate charged for holding inventory. 

There is an increase in total inventory costs of 3,250 - 2,738.61 = 511.39, an increase of 18.67%, just from ordering fewer units more... 

Perhaps the biggest contribution that technological advancement in petroleum production will make is bringing large volumes of unconventional petroleum resources, eg, heavy oil and tar sands, into a viable economic realm by lowering the unit cost of production. Compared to the inventory of conventional petroleum reserves and undiscovered resources, the physical inventories of such unconventional petroleum resources are extremely large for example, the Athabasca tar sands in Alberta, Canada, are estimated to contain 360 x 10 m (2250 x 10 bbl) of in-place petroleum (19). This volume is equivalent to the total inventory, ie, the combined cumulative production, reserves, and undiscovered resources, of world conventional cmde petroleum. In... 

If the sales volume exceeds the annual production rate by 10 percent and the inventory is valued at the sales price, then Eq. (9-153) shows that the profit margin is (A vf/As)100 = 0 percent. If the inventory is valued at the total variable cost, then the profit margin (A vf/As)100 = (0.1)(1 — 0.7) (100) = 3 percent. Hence, the value of the inventoiy is of vital importance. 

The problem of splitting the total production into lots or campaigns can be solved by a multiproduct extension of the old and well known Andler or Harris formula [7], which is for one product only. This extension copes with several products on the same production train and various side conditions, and minimizes the lot sizes. It can be shown that lot sizes should be proportional to the square-root of demand, as far as side conditions allow. The demand as well as the lot size can be measured in weight or value. It is important to realize that unnecessarily high lot sizes not only generate inventory cost but also negatively affect the production of more urgently needed products. 

Inventory indicators are of key interest for planners. Higher inventory on the one hand ensures delivery capability and hedges the risk of volatile procurement prices on the other hand, high inventories increase the capital employed and the capital costs. While transportation quantities are a result of distribution balances, inventory quantities can vary between minimum and maximum bandwidth boundaries. The relative inventory level IL1 measures the percentage of the total inventory ending quantity compared to the total absolute maximum bandwidth inventory. 

In order to minimize the total distribution costs represented by logistics and inventory expenses, many companies are adapting their networks to the shifts of the geographical distribution of sales volumes or to changing tariffs, and optimizing the use of full or less than truck (or container) loads. 

The raw-materials inventory included in working capital usually amounts to a 1-month supply of the raw materials valued at delivered prices. Finished products in stock and semifinished products have a value approximately equal to the total manufacturing cost for 1 month s production. Because credit terms extended to customers are usually based on an allowable 30-day payment period, the working capital required for accounts receivable ordinarily amounts to the production cost for 1 month of operation. 

Project net present value Return on investment Reactor productivity per unit volume Plant availability (time on stream) Process yield of main product Project expense Cost of production Total annualized cost Plant inventory (for safety reasons) Formation of waste products... 

Figure 7 Pareto Distribution. Many populations have a Pareto distribution, in which a small portion of population has a large proportion of the criterion. Inventories, for example, can be classified by the ABC system. A items may comprise 10% of the part numbers but 70% of the inventory cost. B items may comprise 25% of the part numbers and 25% of the cost the total of A + B items then comprise 35% of the part numbers and 95% of the cost. C items thus comprise the remtiining 65% of the part numbers but only 5% of the cost. Concentrate your efforts on the A items. Don t use gold cannons to kill fleas (From Work Design Industrial Ergonomics, 5th Ed., by S. Konz and S. Johnson. Copyright 2000 by Holcomb Hathaway, Pub., Scottsdale, AZ. Reprinted with permission)...

As mentioned before, management wanted to decrease total logistics costs by reducing warehouses. A consolidated network would reduce inventory levels and other associated costs. Transportation costs could increase since it was estimated that there would be a trade-off in this case between less critical next-day tiir shipments and stock transfer shipments but more direct and smaller customer shipments. 

Products with a high per-unit cost require a large inventory investment. Consequently, high-value products typically will require shorter supply chains (fewer members) in order to minimize total inventory investment. But supply chains tend to be longer when the unit value is low, unless sales volume is high. In general, intensive distribution is used for low-value products. 

If transition efforts can be expressed in terms of costs, the total costs for pipeline transport can be used as the planning objective. In this context, total costs comprise transition costs, transport costs, and inventory costs. Transport costs account for operational pipeline costs, such as the energy costs for pumping. These costs are affected by the pipeline s pump rate which needs to be explicitly controlled and planned when the transported materials differ in viscosity or other physical properties. Inventory costs are... 

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