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Inventory Management

This document discusses inventory management concepts like reorder level, minimum level, maximum level, average stock level, and danger level. It also discusses the economic order quantity (EOQ) formula, which is used to determine the optimal order size to minimize total inventory costs. The EOQ formula balances ordering costs and carrying costs based on annual demand, ordering costs per order, and carrying costs per unit per year. Several examples are then provided to demonstrate calculating inventory levels and determining EOQ for different companies.

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177 views

Inventory Management

This document discusses inventory management concepts like reorder level, minimum level, maximum level, average stock level, and danger level. It also discusses the economic order quantity (EOQ) formula, which is used to determine the optimal order size to minimize total inventory costs. The EOQ formula balances ordering costs and carrying costs based on annual demand, ordering costs per order, and carrying costs per unit per year. Several examples are then provided to demonstrate calculating inventory levels and determining EOQ for different companies.

Uploaded by

pranay639
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Inventory Management

Re-order Level= Maximum Consumption x Maximum Re-ordering Period


Minimum Level = Re-order level - (Normal consumption x Normal Re-order Point)
Maximum Level = Re-order Level + Re-order quantity - (Minimum consumption x Minimum
Delivery Time)
Average Stock Level = Minimum Level + (1/2 Re-order Quantity)
OR
Average Stock Level = (Minimum Level + Maximum Level)/2
Danger Level = Normal consumption x Maximum re-order period for emergency purchase
EOQ

Q is the economic order quantity (units). D is demand (units, often annual), S is ordering cost

(per purchase order), and H is carrying cost per unit

1. A manufacturer buys casting equipment from outside suppliers @ Rs 30 per unit. Total
annual needs are 800 units. The following further data are available: Annual return on
investment, 10 per cent .Rent, insurance, taxes per unit per year, Re 1.Cost of placing an
order, Rs 100.
Determine the economic order quantity.
2. Precision Engineering Factory consumes 50,000 units of a component per year. The ordering,
receiving and handling costs are Rs 3 per order while the trucking costs are Rs 12 per order.
Further details are as follows: deterioration and obsolescence cost Rs 0.004 per unit per year;
interest cost Re 0.06 per unit per year; storage cost Rs 1,000 per year for 50,000 units.

Calculate the economic order quality.

3. Shriram Enterprises manufactures a special product “Zed.” The following particulars were
collected for the current year. Monthly demand of Zed, 1000 units Cost of placing an order,
Rs 100 Annual carrying cost per unit, Rs 15 Normal usage, 50 units per week Maximum
usage, 75 units per week Minimum usage, 25 units per week Reorder period, 4 to 6 weeks

Compute from the above: (a) Reorder quantity, (b) Reorder level, (c) Minimum level, (d)
Maximum level, and (e) Average stock level.
4. From the details given below, calculate: (a) Reordering level, (b) Minimum level, (c)
Maximum level, and, (d) Danger level: Reordering quantity is to be calculated on the basis
of the following information:

Cost of placing a purchase order is Rs 20 Number of units to be purchased during the year is
5,000 . Purchase price per unit inclusive of transportation cost is Rs 50. Annual cost of
storage per unit is Rs 5.
Details of lead time: Average, 10 days; Maximum, 15 days; Minimum, 6 days. For
emergency purchases, 4 days.
Rate of consumption: Average: 15 units per day; Maximum: 20 units per day.

5. The Complete Gardener is deciding on the economic order quantity for two brands of lawn
fertilizer: Super Grow and Nature’s Own. The following information is collected:

Particulars Fertilizer Super Grow Nature’s Own


Annual demand 2,000 Bags 1,280 Bags
Relevant ordering cost per purchase order Rs 1,200 Rs 1,400
Annual relevant carrying cost per bag 480 560

Required: (i) Compute EOQ for Super Grow and Nature’s Own.
(ii) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual
relevant carrying costs for Super Grow and Nature’s Own?
(iii) For the EOQ, compute the number of deliveries per year for Super Grow and Nature’s
Own.

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