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Lecture Cost management: Measuring, monitoring, and motivating performance (3rd edition) – Chapter 16

Chapter 16 - Inventory management. In this chapter students will be able to: Explain and calculate ordering and carrying costs, calculate economic order quantity, calculate the re-order point including safety stock, analyze the impact of quantity discounts. | Lecture Cost management Measuring monitoring and motivating performance 3rd edition Chapter 16 COST MANAGEMENT Measuring Monitoring and Motivating Performance Third Canadian Edition ELDENBURG WOLCOTT CHEN COOK Chapter 16 Inventory Management Learning Objectives LO1 Explain and calculate ordering and carrying costs LO2 Calculate economic order quantity LO3 Calculate the re-order point including safety stock LO4 Analyze the impact of quantity discounts LO1 Explain and calculate ordering and carrying costs Minimizing inventory costs Total inventory cost consists of Ordering Costs Carrying Costs Ordering costs are those costs associated with placing an order for parts or goods. Carrying costs include costs for warehousing or storage space. Defining inventory costs Total inventory cost Ordering Costs Carrying Costs Ordering costs A QxK Where A the annual demand for parts or products Q the number of parts products each time an order is placed K the cost of placing an order Carrying costs Q 2xH Where Q the number of parts products each time an order is placed dividing by 2 provides an average number H the cost of carrying or holding one unit in inventory Relationship of inventory costs Economic Order Quantity Ordering costs and Total Costs carrying costs have an inverse relationship. Smaller ordering Holding Costs quantities Q result in C higher ordering costs. Larger ordering o st quantities Q result in Ordering Costs higher carrying holding costs. Q Order Quantity Example TimePiece Ltd. Manufacturer of Grandfather Clocks Total inventory cost Ordering Costs Carrying Costs 7 500 1 500 6 000 Ordering costs 20 000 1 000x 75 1 500 Where A 20 000 gears Q 1 000 gears K 75 per order Carrying costs 1 000 2x 12 6 000 Where Q 1 000 gears H 12 per gear LO2 Calculate the economic order quantity Economic Order Quantity Other Considerations Assumptions Managers now annual demand for inventory with certainty Demand for inventory or the usage rate of raw materials is steady or even .