Page 118 - DMGT525_MATERIALS_MANAGEMENT

Unit 8: Inventory Management

Self Assessment Notes

Fill in the blanks:
1. An analysis of inventory is useful to determine the level of…………… .
2. Inventory can have a significant impact on both a company’s ………….. and its delivery
time.
3. ………………… costs is the cost to hold inventory.
4. One major component of cost associated with inventory is the cost of ………………… it.

5. The costs that are incurred as result of running out of stock are known as ………………
costs.
6. There is a trade-off between carrying stock to satisfy ……………… and the costs resulting
from stock out.

8.2 Inventory Models

The primary function of inventory management is to determine:
1. When to order?

2. How much to order?
When to Order?

This problem of inventory control deals with the point of time when the order for fresh inventory
is to be given. The problem of ‘when to order’ is solved by fixing the appropriate re-order level
of each type of inventory. It is determined by compromising the cost of maintaining these stocks
and the disservice to the customer if this order is not delivered in time.

Re-order Level

‘When to order’ is an important query which requires a suitable answer.
Buying and issuing the inventories are the foremost tasks of all types of organizations. When
the inventories fall below a particular level as decided in advance, they are refilled with fresh
procurement. But what should be the quantity of fresh stock is always an important question
which requires a suitable answer. In short, the re-order level is the level of inventory at which
the order for additional stock should be placed.

Re-order level = Average usage × Lead time
i.e. R = Au*L
Re-order Point example
Demand = 10000 units/year

Store open = 320 days/year
Average usage (Au) = 10000/320 = 33.33 units/day
Lead time (L) = 10 days
R = Au L = (33.33) × 10 = 333.33 units

LOVELY PROFESSIONAL UNIVERSITY 113