Appendix III: Inventory Management
Some examples of following costs : Ordering costs - It includes following:- • Transportation cost • Receiving costs • Cost of preparing purchase orders Example - Unloading and inspection Holding costs - It includes following:- • Insurance, security • Cost of storing • Foregone interest on working capital Example - Depreciation etcetera. Shortage costs - It includes the following costs:- • Loss of quantity discounts on purchase • Extra machinery setups • Idle workers etcetera
The following are the differences in the basic philosophies underlying the Just-In-Time (JIT) and Economic Order Quantity (EOQ) approaches to inventory Management. • EOQ approach takes the view the inventory is necessary to fulfill certain orders and in order to balance the cost of ordering against the cost of holding inventory. Whereas JIT is of the view that inventory should be minimized or if possible eliminated because of inefficiency and waste of storing inventory. • The philosophy of EOQ is to balance the cost of ordering against the cost of storing inventory where as JIT philosophy is to keep all the inventories as low as possible by frequent deliveries in small quantities.
Computation of Economic Order Quantity (EOQ): The EOQ a mathematical tool (model) is used to reduce the cost of holding inventory and cost of ordering inventory and to determine the order quantity.