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Chapter 13
Planning importance
Begins with the design of a product
To plan manufacturing requirements, every stock item must be analyzed periodically to:
Forecast demand for the next period Determine acquisition lead time Plan usage during the lead time Establish quantity on hand Determine reserve or safety stock requirements Place units on order
Accurate future requirements for each stock item or product play a central role in materials control. Materials planning deals with two fundamental factors:
Determination of how much and when to buy involves two conflicting kinds of cost:
Investment cost Property rent/storage cost Insurance Handling cost Deterioration and shrinkage of stocks Obsolescence
Extra purchasing, handling and transportation cost Higher price due to small order quantity Frequent stockouts resulting in disruptions production schedule Additional clerical costs Inflation-oriented increases in prices Lost sales and loss of GOODWILL
EOQ Amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.
The quantity to be ordered at a given time must be determined by balancing two factors:
The cost of carrying (possessing) materials The cost of ordering (acquiring) materials
Formula
OR
EOQ= 2*RU*CO CU*CC
Formula
Example
Estimated requirement for the next year: 2400units Cost of the item per unit: $1.50 Ordering cost: $20 Inventory carrying cost: 10%
Solution
It is also possible to express EOQ in dollars rather than in units. EOQ= 2*AB I A= annual requirement in dollars B= ordering cost(per order) Inventory carrying costs.
Example
Estimated requirement for the next year: 2400units Cost of the item per unit: $1.50 Ordering cost: $20 Inventory carrying cost: 10%
Solution
Cost of carrying inventory can be calculated and expressed numerically Cost of not carrying inventory is difficult to be calculated; yet they must be considered upon ordering quantities.
Graph
Low point
Earns discounts and reduces per unit freight cost But it increases investment in inventories
Therefore larger quantities should be purchased only if the earned discount is more than the cost of additional investment
Inventory Turnover
Ratio between COGS and average inventory investment Number of times per period that inventory is physically replaced
The higher it is the better