Tuesday, 10 November 2015

Ways to control your inventories

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

This article will be useful if you buy and sell goods. You want to have an adequate amount of stocks available for your customers, you do not want to buy goods that customers won't buy until they go obsolete and then you have to discard them. You will also want to have the lowest storage cost possible, thus not storing excessive goods which will then lead to a high storage cost. A lot of factors are taken into consideration, other factors include minimizing your cost of re-ordering goods annually. You do not want to tie up your capital in stocks, thus you need funds to execute other business activities.

Today, I am going to let you know when to re-order stocks and how much stocks you have to order for when you need new stocks. The re-order level is calculated by multiplying the maximum lead time by the maximum usage. The lead time is the average period it takes to order and receive your stocks while the usage is the amount of stocks you sell during that period.  Thus if your maximum lead time is 10 days and the maximum usage per day is 400 units. Then your re-order level will be 10 × 400 units which is 4000 units of goods. Thus, when the units of your goods falls below 4000 units then you will have to make a re-order 

Now, you know when to re-order your stocks, the next challenge will be to calculate the quantity you have to order. You will want to order for a quantity that will minimize your holding cost and ordering cost. The Economic Order Quantity (EOQ)  will be calculated cause it minimizes the total holding and ordering cost. That will be the quantity you will order for. The holding costs include the cost of staff, the storage cost and the cost of deteriorated goods. The ordering cost include delivery cost, documentation cost and others. The annual holding cost is the average stock multiplied by the cost of holding a unit per year (Ch). The average stock is Q/2, where Q is the order quantity.  The annual ordering cost is the Annual Demand (D) divided by the order quantity (Q) multiplied by the cost of placing one order (Co). Thus, the

Annual Holding Cost = Q/2 × Ch

Annual Ordering Cost = D/Q × Co

The Annual Total Cost is the annual holding cost + annual ordering cost, thus, the

Total Cost = (Q/2 × Ch) + (D/Q × Co)

The  formula for the Economic order quantity is given below

             EOQ = /((2 × Co ×D) ÷ Ch)

Where / equals square root and the other symbols represent the same meaning as the ones above. Keep checking out my blog regularly. Cheers!

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