Big Picture in Focus: ULOd. Determine the optimal inventory level and reorder point. Metalanguage For you to demonstrate ULOd, you will need to have an operational understanding of the following terms below. 1. Inventory Management. A set of guidelines in monitoring inventory. 2. Re-order Point. Refers to the level of inventory that signals replenishment. 3. Safety Stock. Refers to the number of stocks maintained which waiting for the purchase to arrive. Essential Knowledge To perform the aforesaid big picture (unit learning outcomes) for the weeks 4-5 of the course, you need to fully understand the following essential knowledge laid down in the succeeding pages. Please note that you are not limited to exclusively refer to these resources. Thus, you are expected to utilize other books, research articles and other resources that are available in the university’s library e.g. ebrary, search.proquest.com etc., and even online tutorial websites. 1. Inventory Management Classification of inventories Manufacturing: Raw Materials Goods in process Finished Goods Factory Supplies Merchandising: Merchandise inventory 2. Objective of Inventory Management Its objective is to ensure the smooth operation of the firm’s production and marketing functions and at the same time avoid tying up funds in excessive and slow-moving inventory. 3. Inventory Management Techniques 1. Economic Order Quantity (EOQ) AD = Annual Demand CPO = Cost Per Order CCPU = Carrying Cost per Order Total Inventory Cost = Ordering Costs + Carrying Costs Ordering Cost Carrying Cost Average Inventory = (AD (units) / EOQ ) x CPO = Average Inventory x CPO = EOQ or Order size / 2 2. Reorder Point RP = Lead Time Usage + Safety Stocks Illustration: Assume that a local gift shop is attempting to determine how many sets of wine glass to order. The store feel it will sell approximately 800 sets in the next year at a price of P18 per set. The wholesale price that the store pays per set is P12. Cost of carrying one set of wine glass are estimated at P1.50 per year while ordering costs are estimated at P25. a. Determine the EOQ for the sets of wine glasses. Solution: = 163 units per order b. Determine the annual inventory costs for the firm if it orders in this quantity. Total Inventory Costs = [(800/163) + (25) + (163/2) + (1.5) =P 244.95 Illustration: (Safety Stock) HHI Operates a chain of hardware stores in Metro Manila. The Controller wants to determine the optimum safety stock levels for an air purifier unit. The inventory manager has complied the following date. The annual carrying cost of inventory approximates 20% of the investment in inventory. The inventory investment per unit average P50. The stockout cost is estimated to be P5 per unit. The company orders inventory on the average of ten times per year. Total costs = carrying costs + expected stockout costs The probabilities of a stockout per order cycle with varying levels of safety stock are as follows: Units Safety Stock Stockout Probability (%) 200 0 0 100 100 15 0 100 15 0 200 12 What is the total safety stock on an annual basis with safety stock level of 100 units? Solution: Annual Carrying Costs (100 x P10) Annual Stockout costs (100 x 15% x 5 x 10) Total P1,000 750 P1,750 Self-Help: You can also refer to the sources below to help you further *Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1). Manila: GIC Enterprises & Co., Inc. *Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th ed.). Singapore: Cengage Learning Asia Pte Ltd. *Agamata, F. T. (2012). Reviewer in management advisory services (2013 Ed.). Manila: GIC Enterprises & Co., Inc. Let’s Check Questions: 1 1. What are the different types of inventories? How do types differ? ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________. 2. What is the importance of having a good inventory management? _________________________________________________________________ __ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________. Let’s Analyze Questions: 1. Which condition justifies accepting a low inventory turnover ratio? A. High carrying costs. C. Low inventory order costs. B. High stock-out costs. D. Short inventory order times. lead 2. If one optimizes the inventory turnover ratio, which costs will not increase? A. Carrying costs C. Total reorder costs B. Stock-out cost D. Unit reorder costs 3 The underlying philosophy of “just-in-time” inventory system is that A. The quantities of most stock items are subject to definable limits. B. It is a quest toward continuous improvement in the environmental conditions that necessitates inventories. C. It is impractical to give equal attention to all stock items, hence the need to classify and rank them according to their cost significance. D. The status of quantities on hand must be periodically reviewed where high-value items or critical items are examined more frequently than low cost or non-critical items. 4. Which one of the following items is not directly reflected in the basic economic order quantity (EOQ) model? A. Inventory obsolescence. B. Interest on invested capital. C. Public warehouse rental charges. D. Quantity discounts lost on inventory purchases. 5. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual relevant A. ordering costs and carrying costs. C. ordering costs and stockout costs. B. ordering costs and purchasing costs. D. stockout costs and carrying costs. 6. The following data refer to various annual costs relating to the inventory of a singleproduct company: Unit transportation-in on purchases $0.20 Storage per unit 0.12 Insurance per unit 0.10 Annual interest foregone from alternate investment of funds Annual number of units required 10,000 What is the annual carrying cost per unit? A. $0.30 C. $0.42 B. $0.32 D. $0.50 $800 7. The following information are given: Optimal production run in units 2,000 Average inventory in units 1,000 Number of production runs 5 Cost per unit producedP75Desired annual return on inventory investment 18% Set-up costs per production run P5,000 If the units will be required evenly throughout the year, the total annual relevant costs using the economic-order-quantity approach is A. P5,000 C. P75,000 B. P38,500 D. P150,000 8. Cost of placing an order P10 Annual demand 20,000 units Purchasing price per unit P0.50 The cost of holding the stock items amounts to 20% of the stock value per annum. What annual cost saving would result if RODENSTOCK used the economic order quantity for order sizes instead of their current policy? A. P 80 C. P150 B. P 90 D. P240 9. M&L Co. has the following information on inventory: Sales 20,000 units per year Order quantity 4,000 units Safety stock 2,600 units Lead time 4 weeks What is the re-order point? (For calculation purposes, use 50-week year) A. 1,600 units. C. 4,200 units. B. 2,600 units. D. 5,600 units. Order quantity 1,500 units Normal use per day 500 units Maximum use per day 600 units Minimum use per day 100 units 10. If the lead time is five days, the order point is A. 500 units C. 2,500 units B. 1,500 units D. 3,000 units In a Nutshell Based on the concepts on financial forecasting presented, write the three remarkable lessons you learned. 1. _________________________________________________________ __________________________________________________________ __________________________________________________________ 2. _________________________________________________________ __________________________________________________________ __________________________________________________________ 3. __________________________________________________________ __________________________________________________________ __________________________________________________________