The sum of ordering costs and carrying costs represents the total costs of inventory. Inventory Reports 10. In the VED analysis, V stands for vital items whose shortage may block the production process. Signifies the level below the minimum level, when this level of stock is reached the products halts and therefore immediate measures should be taken by the to acquire the stock. This also means that such items of inventory enjoy high demand. This involves proficient purchasing, very dependable suppliers, and a well-organized inventory-handling system. In some cases, you may also have to pay a flat fee per order as well. Class B items merit a formalized inventory system and periodic purchase and store management. (c) It assumes purchase price and ordering costs of inventory units to be constant throughout the year. For example, Lead time in a business is 15 days and average daily usage of inventory is 2,000 units. To provide for these types of events, managers carry a “buffer” or safety stock of items to protect the firm from stock- outs. The quantity ordered should be such that the cost of acquiring inventory or ordering cost and the cost of holding inventory or carrying cost are together minimised. iii. During the lead time, the remaining inventory in stock gets depleted at a constant demand rate, such that the new order quantity arrives at exactly the same moment as the inventory level reaches zero. 4. It can be achieved through maintaining the optimum level of inventory all the time. (i) Ordering Cost – It means the cost of placing an order. These losses are due to factors like decrease in sales, strained relations with the customers etc. Prohibited Content 3. The efficiency of inventory management affects the flexibility of the firm. Generally, EOQ is the point at which inventory carrying costs are equal to order costs. A reorder point is estimated by using the formula: Suppose a company uses 10 units of an item per day (usage rate), and the order lead time is 15 days, a new order must be placed when the inventory level reaches 150 units (reorder point 150 = usage rate 10 x lead time 15) so that the inventory is replenished before a stock out occurs. These items should be kept at the minimum possible level. Holding a high amount of inventory for a long duration is not idea for a business because of inventory consumes storage space and further it is subject to risk obsolescence and spoilage. On the other hand, small orders reduce the average inventory level thereby reducing the carrying costs of inventories but increasing the ordering costs because of increased number of purchase orders. Economic order quantity (EOQ) is a replenishment model designed to help you minimize your inventory costs. The optimal level of inventory is popularly referred as EOQ. The formula to calculate maximum stock level is as follows: Maximum stock level = (Reordering level + Reordering quantity) – (Minimum consumption x Minimum reordering period). It means that their consumption is quite slow and capital remains locked up in such items for a long period. Refers to the rate of inventory at which the organization places the reorder of raw material. 5) VED classification. At the EOQ level, the increase in carrying costs is completely offset by the decrease in average ordering costs bringing the total cost to minimum. Thus, these items, though few in number, contribute a high proportion of the value of inventories (80%). The organizations use relaxed inventory procedures for class C items. 3. Another technique of ascertaining the slow moving items is to prepare an Aging Schedule of Inventory. This auction technique considerably reduces the paperwork and other costs involved in searching the best price. 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