Beruflich Dokumente
Kultur Dokumente
Inventory Management
Contents
The Concept of Inventory
Basics of Managing the Average Inventory Balance
Inventory Management and the Cash Flow Timeline
Monitoring the Inventory Balance
Reducing the Size of the Inventory Investment
Page 58
Chapter 4 - Page 59
Answers to Questions:
1.
Making sure that the company does not run out of inventory to satisfy production
or customer needs but doing so at a reasonable cost.
2.
3.
4.
Raw materials: shock absorber between the firm and the supplier. Work-inprocess: shock absorber for inefficiencies in the production system. Finished
goods: shock absorber between the firm and its customers.
5.
The financial manager is concerned with the amount of and cost of capital tied up
in the inventory investment.
6.
EOQ stands for the economic order quantity, that order quantity that minimizes
the inventory management total cost function.
7.
8.
Variability in demand, the production process, and delivery time will tend to
increase the optimal size of the safety stock. High inventory carrying costs tend
to reduce the optimal level of safety stock holding stock out costs constant.
9.
The present value timeline solution allows for the cost of capital directly whereas
the EOQ solution does not.
10.
11.
12.
Chapter 4 - Page 60
Ardmore Farm and Seed - EOQ, average inventory balance, and reorder
point.
ASSUMPTIONS
Order costs (F)
$25.00
Holding costs per gal. (H)
$0.25
Total annual quantity (T)
80,000
Order Quantity (Q)
10,000
Planning Period
365
Delivery Time (days)
7
a.)
b.)
c.)
d.)
2.
Chapter 4 - Page 61
a.)
b.)
c.)
d.)
3.
Ardmore farm and Seed - considering quantity discounts (see problem 1).
ASSUMPTIONS
Order costs(F)
$25.00
Discount options
Cost Per
Holding costs per gal. (H)
$0.25
Quantity ( Q )
Unit ( C' )
Total annual quantity (T)
80,000
0-4,999
$40.00
Planning Period
365
5,000-9,999
$39.00
Delivery Time (days)
7
10,000-19,999
$37.00
20,000+
$35.00
Total Cost = (F * (T / Q) + (H * (Q / 2) ) ) + (C' * T)
(The solution is arrived at by trial and error, partially shown below.)
It might be useful in class to plug in four quantities (Q), and show what happens,
as below:
Try EOQ = 4,000 gallons
Then total cost = order costs + holding costs + purchase costs
= (25)(80,000) / 4,000 + (0.25)(4,000) / 2 + (40)(80000)
= $500.00 + $500.00 + $3,200,000 = $3,201,000
Chapter 4 - Page 62
Holding
Costs
$2,500
Purchase
Costs
$2,800,000
Chapter 4 - Page 63
Quantity
4,000
Total
Cost
$1,004,500
Order
Costs
$2,500
Holding
Costs
$6,000
Purchase
Costs
$996,000
Chapter 4 - Page 64
4,000
$2,992,916.84
6,000
$2,923,096.43
8,000
$2,928,578.28
10,000
$2,783,501.27
= Lowest level of present value of
inventory
12,000
$2,787,725,.32
cost for optimum order quantity,
found by
14,000
$2,792,599.50 trial and error
16,000
$2,798,786.37
(Note: this is one-half of the 20,000 EOQ found in problem 3. )
Inventory purchase = 10,000 * $37.00 =
t
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Quantity
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
0
0
0
0
0
0
0
0
Cost Per
Unit
37.0
37.0
37.0
37.0
37.0
37.0
37.0
37.0
0
0
0
0
0
0
0
0
Purchase
Day
0.000
45.625
91.250
136.875
182.500
228.125
273.750
319.375
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
$370,000.00
PV of
PV Factor
Holding &
PV of
(simpleOrdering Inventory
interest)
Costs
Purchase
1.0000
0
370,000
0.9816
0
363,190
0.9639
0
356,627
0.9467
0
350,296
0.9302
0
344,186
0.9143
0
338,286
0.8989
0
332,584
0.8840
0
327,072
0.0000
0
0
0.0000
0
0
0.0000
0
0
0.0000
0
0
0.0000
0
0
0.0000
0
0
0.0000
0
0
0.0000
0
0
Chapter 4 - Page 65
16
17
18
19
20
21
22
23
24
25
26
27
28
29
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
0
0
0.0
80,000 = total annual quantity ( T )
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$1,261
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$2,782,240
Total Present Value Cost = PV of holding & order costs + PV of inventory purchase costs
= $1,261 + $2,780,979 = $2,782,240
TIMELINE ILLUSTRATION OF CASH FLOWS:
Day 0 Day 45.6
Day 91.3 Day 136.9 etc. Day 319.4 Day 365
---|------------|------------------|--------------|---------------------|---------------|----------->
$370K
$370K
$370K
$370K
etc. $370K
|
|
purchasing
$363,190 |
|
costs
$356,627
|
|
etc.
|
etc. (discounting at 15% / year simple interest)
|
$327,072
|
$2,780,979
$1,261
= PV of sum of purchases
= PV of holding and order costs
$2,782,240
$1650
holding
and
order
costs
|
|
|
|
|
Note: This is similar to pricing a bond, only the PMTS are in the form of an
annuity due, so the formula (using compound interest) would be:
PV = (PMT)(PVIFA k, n )(1 + k) + FV (PVIF k, n )
PV = ($370,000)(PVIFA 15% / 8 , 8 )[1 + (15% / 8)] + ($1,650)(PVIF 15% / 8, 8 )
PV = $2,776,184.74 + $1,422.14 = $2,777,606.88 which is slightly less
than the $2,782,240 found when using simple interest.
6.
Chapter 4 - Page 66
ASSUMPTIONS
Order costs(F)
Holding costs per unit (H)
Total period quantity (T)
Planning Period
Delivery Time (days)
Opportunity Cost
$50.00
$3.00
200,000
250
2
20%
Discount options
Quantity
Cost Per
(Q)
Unit (C')
0-1,999
$5.00
2K - 3,999
$4.99
4K - 5,999
$4.98
6K - 7,999
$4.97
8K - 9,999
$4.96
10M +
$4.95
$943,290.82
$942,793.62
t
0
1
2
3
4
5
6
7
8
9
10
11
$19,920
50
5
$6,000
$2,500
$8,500
Quantity
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
Cost
Per Unit
of Inventory
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
Inventory
Purchase
Day
0
5
10
15
20
25
30
35
40
45
50
55
every 10 days
Day 0 (annuity due)
orders / planning period
days between orders,
beginning Day 0
occurs at end of
planning period
occurs at end of
planning period
PV Holding
& Ordering
PV Factor Cost
1.0000
0
0.9973
0
0.9946
0
0.9918
0
0.9892
0
0.9865
0
0.9838
0
0.9812
0
0.9786
0
0.9759
0
0.9733
0
0.9707
0
PV of Inv.
Inventory
Purchase
19,920
19,866
19,811
19,758
19,704
19,651
19,598
19,545
19,493
19,441
19,389
19,337
Chapter 4 - Page 67
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
60
65
70
75
80
85
90
95
100
105
110
115
120
125
130
135
140
145
150
155
160
165
170
175
180
185
190
195
200
205
210
215
220
225
230
235
240
245
0.9682
0.9656
0.9631
0.9605
0.9580
0.9555
0.9530
0.9505
0.9481
0.9456
0.9432
0.9407
0.9383
0.9359
0.9335
0.9311
0.9288
0.9264
0.9241
0.9217
0.9194
0.9171
0.9148
0.9125
0.9102
0.9080
0.9057
0.9035
0.9012
0.8990
0.8968
0.8946
0.8924
0.8902
0.8881
0.8859
0.8838
0.8816
200,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
19,286
19,235
19,184
19,134
19,083
19,034
18,984
18,934
18,885
18,836
18,788
18,739
18,691
18,643
18,595
18,548
18,501
18,454
18,407
18,361
18,314
18,268
18,223
18,177
18,132
18,087
18,042
17,997
17,953
17,908
17,864
17,821
17,777
17,734
17,691
17,648
17,605
17,562
$7,475.90
$934,634.82
Day 245
Day 250
Chapter 4 - Page 68
---|-------------|-----------------|--------------|---------------------|---------------|----------->
$19,920 $19,920
$19,920 etc.
$19,920
|
|
purchasing
$19,865.57 |
|
costs
$19,811.44
|
|
etc.
|
etc.
(discounting at 20% / yr. simple interest)
|
$17,562.32
|
$934,634.82
$7,475.90
= PV of sum of purchases
= PV of holding and order costs
$942,110.72
$8,500
holding and
order costs
|
|
|
|
|
|
|
Note: This is similar to pricing a bond, only the PMTS are in the form of an
annuity due, so the formula (using compound interest = 20% / 73 5-day
periods in a year) would be:
PV = (PMT)(PVIFA k, n )(1 + k) + FV (PVIF k, n )
PV = ($19,920)(PVIFA
20% / 73 , 50
a.)
b.)
ERRATA NOTE: This problem as written in the text contains a flaw that
poses a problem for astute students. The problem puts no limit on discounts,
such that if one orders sufficient quantity eventually the price falls to zero.
Advise students prior to assigning the problem that the suppliers quantity
discount schedule maxs out at 2,500 per order = $9.75/oz.
Beverly Cosmetics - EOQ, optimal order quantity and the cost of capital.
ASSUMPTIONS
Discount options
Order costs ( F )
$75.00
Quantity
Cost Per
Holding costs per unit ( H )
$0.15
(Q)
Unit (C' )
Total annual quantity ( T )
50,000
1-499
$10.00
Planning Period (in days)
365
500-999
$9.95
Opportunity Cost (per year)
25%
1000-1499
$9.90
1500-1999
$9.85
2,000-2,499 $9.80
2500+
$9.75
EOQ = SQRT(2 * T * F / H)
EOQ =
7,071
Results of random trial solutions when k = 0%:
Chapter 4 - Page 69
Q
4000
5000
6000
7300
for
error,
8000
9000
10000
c.)
PV Cost
$488,875
$488,625
$488,725
$488,573
= Lowest level of present value of inventory cost
$488,725
optimum order quantity, found by trial and
$488,625
$488,625
when k = 0%
for
4000
5000
6000
$440,091
$440,941
$441,886
Q
3,000
C' * T
$487,500.00
F
$1,250.00
H
$225.00
TC
$488,975.00
t
0
1
2
3
4
5
6
7
8
9
Quantity
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
Cost Per
Unit of
Inventory
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
Inventory
Purchases
Per Day
0
22
44
66
88
110
131
153
175
197
PV Holding
& Ordering
PV Factor
Costs
1.0000
0
0.9852
0
0.9709
0
0.9569
0
0.9434
0
0.9302
0
0.9174
0
0.9050
0
0.8929
0
0.8811
0
PV of
Inventory
Purchase
29,250
28,818
28,398
27,990
27,594
27,209
26,835
26,471
26,116
25,771
Chapter 4 - Page 70
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
3,000
3,000
3,000
3,000
3,000
3,000
2,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
9.75
9.75
9.75
9.75
9.75
9.75
9.8
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
219
241
263
285
307
329
350
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.8696
0.8584
0.8475
0.8368
0.8264
0.8163
0.8065
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
25,435
25,107
24,788
24,477
24,174
23,878
15,806
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Chapter 4 - Page 71
d.)
7,071
7,300
3,000
Compare the three answers and discuss whether the answers make sense to
you.
It seems logical that considering a quantity discount would generally justify a
larger optimal order quantity. However, once the cost of capital iis considered,
this would work against having a larger investment in inventory, reducing the
optimal order quantity.
8.
a.)
February
COGS
100
150
Ending
40
50
Inventory
Average Daily COGS (Quarterly)
Average Days COGS in Inventory
Purchases = EI - BI + COGS
March
April
May
June
225
62
200
62
125
42
90
28
5.28
11.75
237
6.39
9.70
200
6.11
6.87
105
4.61
6.07
76
Interpretation:
It appears as though inventory is being held for a shorter time period with each
successive month from 11.75 days in March to only 6.87 days in May.
c.)
Chapter 4 - Page 72
February
March
April
May
June
160
237
200
105
76
31
15
47
#N/A 62
23
39
62
19
23
42
11
17
28
9.
a.)
1000
Feb
Mar
Apr
May
June
1500
2100
2700
3500
4800
Chapter 4 - Page 73
End. Inv.
300
450
630
810
1050
1440
70.00
11.57
2880
92.22
11.39
3740
122.22
11.78
5190
Inventory is being held for a shorter time period with each succeeding month with
average days COGS dropping from 12.33 days in March to 11.39 days in May.
c.)
Purchases
1650
2280
2880
3740
5190
Feb
20%
Mar
11%
20%
Apr
10%
20%
May
10%
20%
June
11%
20%
Chapter 4 - Page 74
August
$20,000
$10,000
$3,000
9.00
6.55
5.14