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ABC analysis divides on-hand inventory into three classifications on the basis of dollar (TL) volume. It is based on Pareto Principle.(80-20 principle) The idea is to focus resources on the critical few and not on the trivial many.
ABC Analysis
ABC analysis divides the inventory into 3 categories.
Category A Low in number High Dollar Value Items
Category B Medium in number and Medium Dollar Value items Category C High in Number Low in Dollar Value
ABC Example
A washing machine company uses following inputs for making a machine: Nos. of inputs Costs 1 High Power Motor Rs. 10,000 2 2 Separate Plastic tubs Rs. 2,000 3 4 wheels (in trolley) Rs.500 for moving machine Which of these items in inputs is category A, B and C items?
Answer
High Power Motor Category A Plastic Tubs- Category B Four Wheels- Category C items
ABC Analysis
Numerical to be done in class
Purchasing/Ordering Costs
It is the cost of ordering inventory. It includes costs such as clerical costs of preparing verifying the purchase order, costs of transporting the inventory to factory etc.
Carrying Costs
The second cost of inventory is cost of storing the inventory. It includes storage, protection, risk of wastage of inventory etc.
Answer
EOQ = (2UP/C)1/2 =((2*12000*500)/300)1/2 = 200
Quick Check
A factory uses maximum 100 units input daily. The lead time is maximum 5 days for inventory to arrive. What is reorder level? a) 200 b) 300 c) 400 d) 500
Answer
500 units
It is the minimum level of stock that can be reached in inventory. The stock should never be allowed to go below this level.
Minimum Stock Level = Reorder level - (Average rate of consumption X Average time of inventory delivery)
Quick Check
A factory uses maximum 100 units per day. The maximum lead time is 5 days. The average usage of inputs is 80 units, average lead time is 3 days. What is the minimum inventory level? A)300 B)400 C)260 D)200
Answer
Reorder level =100* 5= 500 units Minimum= 500-(80*3) 260 units
Quick Check
The maximum usage is 100 units per day and maximum lead time is 10 days. The reorder quantity is 500 units. The minimum delivery usage is 50 units per day and minimum delivery time is 5 days. Calculate maximum level? a)2000 b)1500 c)1250 d)1000
Answer
Reorder Level = Maximum Usage X Maximum Lead Time 100X 10= 1000 Maximum Stock Level = Reorder Level+ Reorder Quantity-( Minimum Usage X Minimum Lead Time) = 1000+500-(50X5) 1250 units
Average Stock
It is the average stock level maintained by firm. It is given by: (Maximum Stock Level + Minimum Stock Level)/2
Quick Check
The ordering cost per order is Rs. 40. The firm orders 400 units at one time. The annual demand is 12000 units for the firm. What is the total ordering cost? a) 1000 b) 1200 c) 1300 d) 1400
Quick Check
Nos of orders per year = Total Demand/ Order Placed one time 12000/400 = 30 order per year Total Ordering cost = Ordering Cost per year X Nos. of orders per year 40 X 30 = Rs1200
Quick Check
The carrying cost per unit is 20% of purchase price per unit. The cost of input is 5 Rs/unit. The order size placed at one time is 400 units. What is total carrying cost of inventory (in rupees)? a) 300 b) 200 c) 400 d) 500
Answer
Carrying Cost = Carrying cost per unit x (Order size/2) (20%X Rs. 5) x(400/2) 1x 200= Rs. 200
Cost of Inventory
Total Inventory cost= Total annual demand X Cost per unit
Total Costs
Total Costs = Total Ordering cost+ Total Carrying Costs+ Total Inventory costs
Quick Check
If purchasing price per unit is Rs. 40 per units, annual demand is 12,000 units. Carrying cost is 1 Rs/unit, Total Ordering cost is 4000 Rs. What is total cost? a) 421,000 b) 525000 c) 496000 d) 35000
Answer
Total Costs = (12,000 x 40)+(12000X1)+ 4000 = 480000+12000+4000 =496000
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