Thursday, October 16, 2014
THE MOT AND
VENTURE BUSINESS
Prof. Takao Ito,
Doctor of Economics, PH.D. of
Engineering, Graduate School of
Engineering, Hiroshima University
TOPIC 7 STOCK CONTROL AND
PROBABILITY
STOCK CONTROL AND INVENTORY
Deciding
how much stock to keep
depends on the size and nature of
your business, and the type of stock
involved. If you are short of space you
may be able to buy stock in bulk and
then pay a fee to your supplier to
store it, calling it off as and when
needed.
KEEPING LITTLE OR NO STOCK AND
NEGOTIATING WITH SUPPLIERS TO DELIVER
STOCK AS YOU NEED IT.
Advantages
Disadvantages
Efficient and flexible you only have what
you need, when you
need it
Lower storage costs
Meeting stock needs
can become
complicated and
expensive
You might run out of
stock if there's a hitch
in the system
You can keep up to
date and develop new
products without
wasting stock
You are dependent on
the efficiency of your
suppliers
KEEPING LOTS OF STOCK
Advantages
Can meet sudden
changes in demand
Disadvantages
Costs of storage –
rent and insurance
Money tied up in
Less chance of loss of
stocks not being used
production time
elsewhere in the
because of stock outs
business
Can take advantage Large stocks subject
to deterioration and
of bulk buying
theft
economies of scale
OPTIMIZING ECONOMIC ORDER
QUANTITY (EOQ)
The
value of the average
stockholding = (Q/2 x item cost/value)
where Q is the order quantity. The
holding cost/unit (Ch) is derived from
the average inventory value)
multiplied by the cost of carrying the
item over the period (one year)
expressed as a % of the item
cost/value.
OPTIMIZING ECONOMIC ORDER
QUANTITY (EOQ)
Q
Holding cos ts  Ch
2
 Ch
is the holding cost per unit. It is also
called carrying costs. Q is the order
quantity

Order cost (Co) is derived from the number of orders
placed (D/Q - demand p.a. divided by order quantity)
multiplied by the cost of placing an order.
D
Ordering cos ts  Co
Q
Co……ordering cost
D…… demand per year
Q …… order quantity
Total cost=Holding cost + Order cost
QC h DC o
TC 

2
Q
2 DCo
Q
Ch
EXAMPLE
As
an example, in a company
where order cost is estimated at
$10 and with a holding cost of
25% of item value if annual
demand is 1000 units at a
supply price of $36. Calculate
the EOQ.
ANSWER
2 DCo
2 1000 10
Q

 47.1 units
Ch
36  0.25
 the
EOQ is 48 units
THANK YOU FOR YOUR ATTENTION!