COURSE : INDUSTRIAL ENGINEERING LESSON: INVENTORY COST
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INVENTORY COST Inventory Cost Purchase Cost Ordering or set-up cost Holding or Carrying cost Shortage or Stock Out Cost
INVENTORY COST 1.Purchase Cost: lt is the nominal cost or purchase price of the inventory and is normally considered during quantity discount. Purchase CostQuantity Purchased x Unit price of inventory 2. Ordering or set-up cost: It includes cost associated with processing and changing of purchase order, transportation, inspection for quality and so on. It is also known as procurement cost. When the units are produced with in the system it is called set-up cost and it refers to the cost associated with bringing production system into play. Ordering cost = no. of orders x cost/per order 3. Holding or Carrying cost It is the cost spend in storing or keeping an item in inventory. lt includes storage cost, damage and depreciation cost, handling cost, insurance cost, locked up capital interest, etc. It is directly proportional to the amount of inventory and the type of over which it is held. Holding CostAverage inventory x holding cost/ unit
INVENTORY COST 4. Stock out Cost or Shortage Cost: It is the cost associated with not serving the customer as stock out simply means shortage of inventory item Shortage Cost = No. of units short x shortage cost/ unit
CHARACTERISTICS OF INVENTORY Dependent and Independent demand item I. Dependent: In dependent demand the need for any item is a direct result of the need for some other iterm usually a higher level item of which it becomes a part. 2. Independent aThese are those items whose demand is not link to any other items.
INVENTORY REVIEW SYSTEM Inventory Review System Q-system P-system or or Fixed order system Periodic Review System or or Reorder point system Fixed Period System or Two-bin system
Q SYSTEM AND P SYSTEM I. Q System or Fixed Order System In this system a re-order point is fixed and as inventory level reaches this point a fresh order for a specified quantity is placed. In this system size of order (Q) is fixed while time of order (T) varies. 2. P system or Periodic Review System: In this system inventory level are reviewed after a fixed time and fresh orders are placed at that time. In this system inventory level are reviewed after a fixed time and fresh orders are placed at that time. In this system size of order (Q) varies and time of order (T) is fixed SS System- (combination of Q-system and P system)
DETERMINISTIC AND PROBAB ILISTIC MODEL Deterministic: Demand and lead time are known with certainity and are constant. Here stock is filled up as soon as the stock reaches point O and thus no need to carry safety or buffer stock. I. Probabilistic: Here demand and lead time are not known with certainity and they need not be constant. This model need to provide safety or buffer stock to meet the unfavourable conditions. 2.
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