The Importance of Inventory Management

Quantify the value of the current inventory and the cost of holding the stock per year for the consumables, assuming an annual holding rate of 27% and that the 10 weeks of stock policy is correctly implemented.

The value of the current inventory

To get the value of the current inventory, we look at the recent 10 weeks which is the 4 weeks in the month of august, 2015, four weeks in the month of July 2015 and two weeks in the month of June.

Total inventory value in the 4 weeks of August = 718033

Total inventory value in the 4 weeks of July = 667,607

Total inventory for the two weeks of June = 533,937/4 = 133,484.3 *2 = 266,968.5

Total value of the ten week inventory = £1652955.85

The cost of holding inventory is expressed as a percentage of the total value of inventory. In this case, the total value of inventory is £1652955.85. The firm sets its cost of holding stock at 27%. The carrying cost for this case will therefore be given by the equation shown below:

Total value of inventory X

The total cost of holding a stock is therefore calculated as;

£1652955.85 multiplied by 27/100

This will be £446,298.0795

Cost of holding stock therefore will be £ 446,204.3

Question two,

Segment the consumable inventory based on the value-usage criteria. Present and discuss the results including graphical presentation of Pareto principle. Explain what other segmentation criteria might be used

To segment the consumable inventory on value-usage criteria, ABC analysis which is also known as Pareto principle of inventory management will be applied.

Category A are the inventory that considered very important for the organization, B are the ones that are important and C is the category that is considered marginally important for the firm.

ABC calculation

Item no.

% of stock

Volume

Unit cost

Annual Dollar value

% of annual dollar volume

321898

0.516428

1,623

5.90

9575.7

0.579307669

321900

2.009075

6,314

6.90

43566.6

2.635678382

321902

0.577522

1,815

5.95

10799.25

0.653329609

508822

0.902715

2,837

2.05

5815.85

0.351845453

666378

0.245964

773

48.00

37104

2.244706052

666398

0.45629

1,434

11.35

16275.9

0.984654248

666401

0.387878

1,219

11.20

13652.8

0.825962775

666403

0.245964

773

52.00

40196

2.43176489

666405

0.457244

1,437

15.35

22057.95

1.33445488

666409

0.387242

1,217

15.20

18498.4

1.11911035

666423

0.243736

766

55.00

42130

2.54876741

666448

0.455335

1,431

18.35

26258.85

1.588599599

666476

0.387242

1,217

18.20

22149.4

1.339987393

334681

0.921807

2,897

2.50

7242.5

0.438154473

334689

0.582931

1,832

6.40

11724.8

0.709323241

36050

0.380878

1,197

5.95

7122.15

0.430873577

36072

0.209053

657

11.00

7227

0.437216759

52294

0.590886

1,857

14.35

26647.95

1.612139247

196360

0.553657

1,740

5.95

10353

0.626332518

236418

0.377696

1,187

5.50

6528.5

0.394959127

250370

1.073585

3,374

2.05

6916.7

0.418444328

273295

0.275238

865

13.20

11418

0.690762551

299463

0.47379

1,489

5.50

8189.5

0.49544578

360490

0.693662

2,180

7.40

16132

0.975948632

513481

1.731292

5,441

1.90

10337.9

0.625419003

513919

0.625251

1,965

5.95

11691.75

0.707323792

513923

0.415879

1,307

5.95

7776.65

0.470469311

514047

0.470608

1,479

5.50

8134.5

0.492118407

514670

0.042002

132

7.50

990

0.059892707

516975

0.395833

1,244

5.55

6904.2

0.417688107

516977

0.398378

1,252

5.55

6948.6

0.420374204

517277

0.525338

1,651

6.25

10318.75

0.624260473

179521

0.245646

772

50.00

38600

2.335210587

179522

0.45629

1,434

13.35

19143.9

1.158161605

238455

0.385969

1,213

13.20

16011.6

0.968664711

6496

0.527247

1,657

5.95

9859.15

0.596455737

6498

0.597568

1,878

5.95

11174.1

0.676007166

6503

0.483018

1,518

4.10

6223.8

0.376525483

26747

0.490973

1,543

5.50

8486.5

0.513413592

28517

0.390742

1,228

5.50

6754

0.408601355

34522

0.539338

1,695

5.50

9322.5

0.563989655

140718

1.637106

5,145

6.45

33185.25

2.007630754

217039

0.660252

2,075

4.20

8715

0.527237312

247937

0.263464

828

13.35

11053.8

0.668729295

278639

1.418507

4,458

1.90

8470.2

0.51242748

288498

0.941535

2,959

3.10

9172.9

0.554939202

298051

0.683162

2,147

5.50

11808.5

0.714386897

299732

0.367196

1,154

0.90

1038.6

0.062832894

319680

0.144778

455

33.00

15015

0.908372719

330189

0.481109

1,512

5.95

8996.4

0.544261361

341148

0.411106

1,292

4.90

6330.8

0.382998735

341939

0.162279

510

13.35

6808.5

0.411898479

341940

0.746164

2,345

14.35

33650.75

2.035792426

511733

0.388833

1,222

10.50

12831

0.776245778

514854

0.453744

1,426

5.95

8484.7

0.513304696

515500

0.533293

1,676

2.05

3435.8

0.207857941

516996

0.105322

331

5.95

1969.45

0.119147163

516998

0.400288

1,258

5.95

7485.1

0.452831211

517001

0.224963

707

5.95

4206.65

0.254492581

517541

0.556839

1,750

13.35

23362.5

1.413377133

357726

0.560339

1,761

55.00

96855

5.859503144

357758

0.332194

1,044

21.00

21924

1.326351215

358639

0.385969

1,213

15.50

18801.5

1.137447198

358640

0.384696

1,209

15.50

18739.5

1.133696342

511071

0.414606

1,303

25.75

33552.25

2.029833404

318330

0.445789

1,401

5.25

7355.25

0.444975587

318331

0.605204

1,902

5.25

9985.5

0.604099619

328054

0.155279

488

1.90

927.2

0.056093452

347911

0.278419

875

1.90

1662.5

0.100577399

211072

0.308011

968

5.95

5759.6

0.348442458

237131

0.54252

1,705

3.80

6479

0.391964492

165772

0.820303

2,578

5.95

15339.1

0.927980018

165774

0.233236

733

5.95

4361.35

0.263851572

514940

0.202371

636

21.60

13737.6

0.831092978

21265

0.53902

1,694

13.75

23292.5

1.409142295

21266

0.357013

1,122

5.95

6675.9

0.403876486

21267

0.241827

760

13.35

10146

0.613809498

21268

0.340149

1,069

3.10

3313.9

0.200483274

126231

0.391378

1,230

13.50

16605

1.004564036

329600

0.403788

1,269

5.95

7550.55

0.456790785

343414

0.132687

417

5.95

2481.15

0.150103828

514935

0.490018

1,540

13.35

20559

1.243771877

Class A = 20% 71.28%

35

288145

0.309921

974

0.85

827.9

0.050086

36

288146

0.509746

1,602

0.85

1361.7

0.08238

37

288147

0.379287

1,192

0.85

1013.2

0.061296

38

309856

0.420334

1,321

1.30

1717.3

0.103893

39

309857

0.202371

636

1.30

826.8

0.050019

40

309858

0.563839

1,772

1.30

2303.6

0.139362

41

334678

0.517701

1,627

2.50

4067.5

0.246074

42

334679

0.297511

935

2.50

2337.5

0.141413

43

334680

0.181689

571

2.50

1427.5

0.08636

52

509489

0.508155

1,597

2.05

3273.85

0.19806

53

509491

0.104686

329

2.05

674.45

0.040803

54

6528

0.507201

1,594

3.90

6216.6

0.37609

55

32233

0.373559

1,174

2.05

2406.7

0.1456

56

32403

0.247236

777

2.05

1592.85

0.096364

78

307651

0.512928

1,612

2.05

3304.6

0.199921

79

311344

0.506246

1,591

1.90

3022.9

0.182878

80

311345

0.419379

1,318

1.90

2504.2

0.151498

81

314490

0.587704

1,847

1.30

2401.1

0.145261

82

328653

0.403151

1,267

2.05

2597.35

0.157134

83

331292

0.383105

1,204

1.30

1565.2

0.094691

85

363699

0.20428

642

1.90

1219.8

0.073795

86

363700

0.107549

338

1.90

642.2

0.038852

87

364128

0.247236

777

1.90

1476.3

0.089313

88

371670

0.107231

337

1.90

640.3

0.038737

103

10572

0.333467

1,048

2.05

2148.4

0.129973

104

10936

0.129187

406

2.05

832.3

0.050352

105

10937

0.075094

236

2.05

483.8

0.029269

106

10938

0.578476

1,818

2.05

3726.9

0.225469

107

10983

0.263464

828

2.05

1697.4

0.102689

108

11147

0.140005

440

2.05

902

0.054569

112

65665

0.313421

985

6.15

6057.75

0.36648

113

103086

0.652297

2,050

1.90

3895

0.235638

114

103088

0.461699

1,451

1.90

2756.9

0.166786

115

103092

0.369423

1,161

1.25

1451.25

0.087797

116

103095

0.374832

1,178

1.25

1472.5

0.089083

117

103098

0.32583

1,024

1.25

1280

0.077437

120

138501

0.169279

532

1.30

691.6

0.04184

121

138506

0.323921

1,018

1.30

1323.4

0.080063

123

155317

0.210962

663

6.50

4309.5

0.260715

124

195452

0.168643

530

5.95

3153.5

0.190779

125

195453

0.290193

912

2.05

1869.6

0.113106

126

206250

0.411106

1,292

4.10

5297.2

0.320468

127

211199

0.40697

1,279

2.05

2621.95

0.158622

128

211200

0.531383

1,670

2.05

3423.5

0.207114

130

233421

0.241827

760

1.20

912

0.055174

131

238456

0.361786

1,137

1.95

2217.15

0.134132

132

243381

0.035319

111

1.55

172.05

0.010409

133

243387

0.508473

1,598

1.55

2476.9

0.149847

134

247936

0.302284

950

42.50

40375

2.442594

136

247938

0.234827

738

2.05

1512.9

0.091527

137

255826

0.503382

1,582

2.05

3243.1

0.1962

138

255831

0.020046

63

5.95

374.85

0.022678

139

257073

0.539338

1,695

2.05

3474.75

0.210214

140

257074

0.907488

2,852

2.05

5846.6

0.353706

141

257109

0.507519

1,595

2.05

3269.75

0.197812

142

263406

0.692071

2,175

2.05

4458.75

0.269744

143

263407

0.116459

366

2.05

750.3

0.045391

144

263408

0.465517

1,463

2.05

2999.15

0.181442

145

278635

0.209371

658

1.90

1250.2

0.075634

146

278636

0.318194

1,000

1.90

1900

0.114946

147

278637

0.408879

1,285

1.90

2441.5

0.147705

149

278640

0.112641

354

1.90

672.6

0.040691

150

278642

0.651661

2,048

1.90

3891.2

0.235409

151

278643

0.697162

2,191

1.90

4162.9

0.251846

152

278644

0.007955

25

12.25

306.25

0.018527

154

291118

0.2536

797

1.30

1036.1

0.062682

155

291674

0.680616

2,139

2.05

4384.95

0.265279

156

291684

0.040411

127

2.05

260.35

0.015751

172

335560

0.08623

271

4.90

1327.9

0.080335

173

337047

0.313421

985

5.50

5417.5

0.327746

174

341148

0.411106

1,292

4.90

6330.8

0.382999

175

341939

0.162279

510

13.35

6808.5

0.411898

176

341940

0.746164

2,345

14.35

33650.75

2.035792

177

345272

0.113913

358

1.00

358

0.021658

178

345791

0.314057

987

4.90

4836.3

0.292585

179

363993

0.492564

1,548

2.05

3173.4

0.191983

180

363995

0.185825

584

1.90

1109.6

0.067128

181

363996

0.376423

1,183

1.90

2247.7

0.135981

182

363997

0.502428

1,579

1.90

3000.1

0.181499

183

364054

0.640842

2,014

2.05

4128.7

0.249777

184

364055

0.282238

887

2.05

1818.35

0.110006

185

372800

0.10914

343

1.90

651.7

0.039426

187

514692

0.499246

1,569

0.60

941.4

0.056953

188

514700

0.301329

947

0.50

473.5

0.028646

189

514854

0.470608

1,479

2.05

3031.95

0.183426

190

514858

0.175643

552

2.05

1131.6

0.068459

191

514861

0.52311

1,644

1.55

2548.2

0.15416

192

514865

0.32233

1,013

1.90

1924.7

0.11644

193

514868

0.574976

1,807

1.90

3433.3

0.207707

194

514873

0.573067

1,801

1.85

3331.85

0.201569

195

514875

0.319148

1,003

5.50

5516.5

0.333735

197

514879

0.183916

578

5.95

3439.1

0.208058

198

514881

0.211281

664

5.95

3950.8

0.239014

199

514887

0.328376

1,032

4.20

4334.4

0.262221

200

515490

0.23069

725

2.05

1486.25

0.089915

201

515494

0.329967

1,037

2.05

2125.85

0.128609

218

328045

0.39106

1,229

1.90

2335.1

0.141268

219

328053

0.427652

1,344

1.90

2553.6

0.154487

221

347908

0.881715

2,771

1.90

5264.9

0.318514

223

359462

0.428289

1,346

11.00

14806

0.895729

224

508805

0.58484

1,838

1.90

3492.2

0.21127

225

180237

0.52311

1,644

1.90

3123.6

0.188971

226

180243

0.394878

1,241

2.05

2544.05

0.153909

229

364122

0.190916

600

3.80

2280

0.137935

230

364125

0.656115

2,062

1.90

3917.8

0.237018

231

272708

0.168643

530

1.10

583

0.03527

232

272709

0.454699

1,429

1.10

1571.9

0.095096

30.83077

20.94466

Class B 20.9% of value

94217

0.679025

2,134

2.05

4374.7

0.264659

94219

0.294329

925

2.05

1896.25

0.114719

94222

0.70289

2,209

2.05

4528.45

0.273961

151290

0.409515

1,287

2.05

2638.35

0.159614

151292

0.199507

627

2.05

1285.35

0.077761

197752

0.458199

1,440

2.05

2952

0.178589

224547

0.353513

1,111

2.05

2277.55

0.137786

236425

0.518019

1,628

2.05

3337.4

0.201905

236426

0.300057

943

2.05

1933.15

0.116951

314491

0.40347

1,268

2.05

2599.4

0.157258

314935

0.624932

1,964

2.05

4026.2

0.243576

321903

0.237372

746

5.95

4438.7

0.268531

366927

0.430198

1,352

2.05

2771.6

0.167675

366928

0.291465

916

2.05

1877.8

0.113603

367459

0.322967

1,015

2.05

2080.75

0.125881

367460

0.366241

1,151

2.05

2359.55

0.142747

371959

0.331876

1,043

2.05

2138.15

0.129353

371960

0.189643

596

2.05

1221.8

0.073916

508820

0.298147

937

2.05

1920.85

0.116207

508822

0.902715

2,837

2.05

5815.85

0.351845

508824

0.362104

1,138

2.05

2332.9

0.141135

508826

0.425743

1,338

2.05

2742.9

0.165939

334682

0.442289

1,390

1.85

2571.5

0.15557

334684

0.421607

1,325

1.85

2451.25

0.148295

334685

0.468063

1,471

1.85

2721.35

0.164635

334686

0.601704

1,891

1.85

3498.35

0.211642

334687

0.517065

1,625

1.85

3006.25

0.181871

334688

0.268555

844

6.40

5401.6

0.326784

52295

0.060457

190

41.00

7790

0.471277

105030

0.369423

1,161

1.30

1509.3

0.091309

157396

0.161961

509

2.05

1043.45

0.063126

197750

0.560021

1,760

1.30

2288

0.138419

208958

0.065548

206

2.05

422.3

0.025548

236709

0.210008

660

1.90

1254

0.075864

236713

0.365286

1,148

1.90

2181.2

0.131958

236714

0.704163

2,213

1.90

4204.7

0.254375

236893

0.451517

1,419

1.90

2696.1

0.163108

236899

0.41747

1,312

1.90

2492.8

0.150809

250367

0.407924

1,282

2.05

2628.1

0.158994

250368

0.20078

631

2.05

1293.55

0.078257

250371

0.480472

1,510

2.05

3095.5

0.187271

299733

0.511974

1,609

0.90

1448.1

0.087607

299734

0.365605

1,149

0.90

1034.1

0.062561

300470

0.443244

1,393

2.05

2855.65

0.17276

300471

0.146687

461

2.05

945.05

0.057173

300472

0.226236

711

2.05

1457.55

0.088178

300474

0.247236

777

2.05

1592.85

0.096364

300476

0.390742

1,228

2.05

2517.4

0.152297

300477

0.112959

355

2.05

727.75

0.044027

305088

0.343967

1,081

3.50

3783.5

0.228893

316757

0.423516

1,331

1.50

1996.5

0.120784

316762

0.173416

545

1.50

817.5

0.049457

318325

0.221463

696

1.90

1322.4

0.080002

318327

0.616341

1,937

1.90

3680.3

0.22265

318328

0.179143

563

1.90

1069.7

0.064714

318329

0.675525

2,123

1.90

4033.7

0.24403

318330

0.445789

1,401

5.25

7355.25

0.444976

Class C 49.60% 5.1%

Since the inventory are not named, they will be referred by the name of their vendors

The inventory will therefore segmented into three categories A, B and C as shown in the table above. Other method that can be used to segment inventory is the HML known as High, Medium and Low classification method. It follows the same principle with ABC, only that it applies unit value and not consumptions as in the case of ABC method.

Class A

Percentage annual dollar usage

80

70

60

50

40

Class B

30

20

Class C

10

Percentage of Inventory Item

0 10 20 30 40 50 60 70 80

Question three,

For a consumable inventory, calculate the total annual cost and re-order point (ROP) for each order. Define and show formulas for all the parameters you are using for calculation with the assumption that demand and lead time is constant

The year runs from September 1st 2014 to 1st of August 2015

The annual, total inventory cost for the period will be given by the total annual dollar volume of plus total cost of holding stock

Annual value of inventory = 8,258,861.85

Annual holding cost = 27/100 * 8,258,861.85 = 2,229,892.7

Total annual inventory = 10,488,754.55

To get the number orders the firm can make in a year, we first get EOQ is applied

EOQ= where S is the is ordering cost, D is annual demand, iC i the inventory carrying cost

Ordering cost is £10

Annual demand = 1,484,390 units

To get the carrying cost per unit, the total carrying cost will be divided by the number of units = 2,229,892.7/1,484,390 = £1.50 per unit

= EOQ = = 29,687,800/1.5 =

EOQ = = EOQ = 4,448.8

To get the number of orders, divide the annual demand with EOQ = 1,484,390/4,448.8 =

333.6 orders set up cost per order will be 333.6*£10 = £3,336.

ROP for each order

ROP = expected demand during lead time x safety stock

Get demand per day 1,484,390/364 = 4,077.9

There are 333.6 orders, each with, 4,448.8 units

Lead time is 4 weeks,

= 4,077.9 x 4 = 16,311.6

ROP = 16,311.6 + 4,077.9 = 20,389.5

ROP = 20,389.5

ROP for each order = 20,389.5/333.6 = 61.11

For example the ROP for item no. 94217 whose annual demand is 6,129 units will have to be reorder 61.11 which means when the inventory reaches this level, there will be need to reorder new units.