Page 210 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 12: Inventory Management

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.

12.6 Keywords

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.

12.7 Review Questions

1. Determine reorder level, minimum level, maximum level, and average stock level.
Normal usage – 100 units per week; Lead-time – 4 to 6 weeks
Minimum usage – 50 units per week; Maximum usage – 150 per week

Reorder quantity – 600 units
2. A company purchases a component of a product at the rate of ` 50 per piece. The annual
consumption of that component is 25,000 pieces. If the ordering cost is `230 per order and
carrying cost is 20 per cent per annum, what would be the EOQ?
3. AIM Company Ltd. uses quarterly 50,000 units of raw materials. Cost of raw materials is
`100 per unit, Cost of placing an order is `120 and carrying cost is 9 per cent per year.
Calculate EOQ.

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