Inventory planning and control

If there is no savings a error in the calculations may have occurred or the model does not fit your case. For instances were the total stocking costs are even you may use either order quantity.

The EOQ level is the point at which stocking costs are at their lowest point for a given item.

Lead time is the period of time from which a order for goods is placed until it is received by the store. Lead time is an important consideration for determining when orders should be placed.

Times for reordering goods vary dependent on the control system you use and its lead time. In fixed order quantities reorders should be placed when the safety stock is reached. In fixed period systems the reordering is done at set time periods. In just in time systems reordering is based on matching the demand with supply. For just in time a close watch on inventory levels is needed so that reorders are placed before goods are out of stock.

Inventory levels and their values can effect the income of the store, the amount of taxes paid and the total stocking cost.

In the market today there are many computer software packages that can compute forecasted demand for goods held in inventory.

The model only works for those cases that meet its assumptions.

Yes, a discount will cause the basic EOQ model to fail. To use a discount in determine a EOQ you must use the EOQ model with quantity discounts.

There are two types of forecasting qualitative and quantitative. Qualitative uses personal opinions to determine forecasts. Quantitative uses numerical data and statistical modeling to determine forecasts.

The EOQ formula is the square root of 2 times demand times order completion cost divided by carrying cost. The mathematical formula is square root of 2DS/C.

Forecasting is the process of estimating the future demand of a product.

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A inventory should be taken at least once a year. If items are perishable, seasonal or highly demanded a inventory should be taken more often.

To determine which numbers to use you must look for the following items. The number of items per order is the quantity(Q). The number of items that can be sold is D.

D may be the forecast demand for that particular good. The cost of placing the order is used for S. The final number to find is the carrying cost(C) which is the cost of the item to be held in inventory.

For inventory control to work at its best a store must consider the costs of acquisition, carrying, ordering and stock-out. the store must also look at its reordering system, its budgeting for inventory, insurance and forecast the demand.

Total stocking cost is the cost to the store of holding a good in its inventory. The stocking cost consists of the carrying cost times half the quantity in inventory and the order completion cost times demand divided by the quantity. In its mathematical form the cost is represented by TSC=(Q/2)C + (D/Q)S.

The EOQ works if its four assumptions match the case it is used on. The assumptions are:

☛ Annual demand, carrying costs and ordering costs can be estimated.

☛ Inventory level is divided by 2, no safety stock, goods used uniformly and are gone by next order.

☛ Stock-out, customer responsiveness and other costs not considered.

☛ No quantity discounts.

The letters in the formulas represent the quantity ordered(Q), the carrying cost of a unit(C), the demand for the units(D) and the cost of completing a order(S).