Stock Control and Inventory Management - Essay Example

Running Head: stock control Stock control [The of the appears here] [The of the appears here] Stock control Introduction: Inventory management is vitally important to organizations, inventory sitting idly on the ware house cost money. The company would need to control the tock and reduce the stock while responsive to the customer demands. For this reason the Company should need to cut down the order, carrying and acquisition cost to a lower level. Now consider the company that has four branches in the north of England located at Preston, Chorley, Leyland and Blackburn. Each branch stores three products A, B, C. This report will tell about different methods of inventory management and appropriate purchasing policy of the company to reduce the total stock cost. Basic calculation EOQ: EOQ is designed to minimize the total ordering, holding cost for inventory items. We have the following requirements/demand. A B C Preston 600 350 420 Leyland 380 380 280 Blackburn 430 420 300 Chorley 380 320 480 Carrying cost.  Also called Holding cost, carrying cost is the cost associated with having inventory on hand.  It is primarily made up of the costs associated with the inventory investment and storage cost. For the purpose of the EOQ calculation, if the cost does not change based upon the quantity of inventory on hand it should not be included in carrying cost.  In the EOQ formula, carrying cost is represented as the annual cost per average on hand inventory unit. Below are the primary components of carrying cost. 1. Interest; if for purchasing the inventory we have to borrow money from any source, the interest amount that we have to pay on loan will be the part of carrying cost. 2. Insurance; as the insurance cost directly relate to the inventor so it would be the part of the carrying cost. 3. Taxes; if we are paying taxes on the inventory purchased we would take account of it as carrying cost. 4. Storage cost; the companies mistakenly include all the storage cost such as ware house rent, store keeper etc. to the carrying cost which is wrong .only variable storage cost based upon inventory levels will include in the carrying cost. Preston Product Carrying Cost A 6.6 B 9.9 C 10.45 Order Cost.   Also known as purchase cost or set up cost, this is the sum of the fixed costs that are incurred each time an item is ordered. These costs are not associated with the quantity ordered but primarily with physical activities required to process the order.   For purchased items, these would include the cost to enter the purchase order and/or requisition, any approval steps, the cost to process the receipt, incoming inspection, invoice processing and vendor payment, and in some cases a portion of the inbound freight may also be included in order cost.  It is important to understand that these are costs associated with the frequency of the orders and not the quantities ordered. In this case not only order cost includes but also the transportation cost for each branch store should be taken into account as well. Preston: Product Requirement Quantity Acq.Cost/Unit Carrying Cost Order Cost Cost A 600 300 60 6.6 40 1070 B 350 300 90 9.9 40 1531.66667 C 420 300 95 10.45 40 1623.5 4225.16667 Total stock cost is the cost to the store of holding a good in its inventory. The stock cost consists of the carrying cost times half the quantity of inventory and the order completion cost times demands divided by the quantity. In its mathematical form the cost is represented by TC= (Q/2)*C + (R/Q)*O. Table 3 shows all the relevant data in Preston such as annual demands (requirements) (R), quantity (Q), carrying cost (C), total order cost (O), total stock cost (TC) and so on. The total stock cost for each product respectively is listed below: TC = (300/2) 6.6 + (600/300) * 40 = 1070 TC = (300/2) *9.9 + (350/300) * 40 =1531 TC = (300/2) *10.45 + (420/300) * 40 = 1623.5 Hence, the total stock cost of Preston is TC+ TC+ TC= 4224.5 Similarly, the total stock cost of Leyland is 4181 The total stock cost of Blackburn is 4196 The total stock cost of Chorley is 4200 (Check them in the appendix) TRANSPORTATION COST Transportation cost is the cost to delivery cost from seller to buyer or buyer to seller. Thus transportation cost is the part of ordering cost Transportation Transportation Cost Cost/Unit Preston 35 0.116666667 Leyland 40 0.133333333 Chorley 30 0.1 Blackburn 35 0.116666667 The above table shows the transportation cost of the four branches. Methodologies: ABC definition: ABC is a system of accounting that focuses on activities as the fundamental cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects (Such as a product or a department), also called activity-bases costing or activity accounting. Charles T. Horngren p150） ABC process: Activity-based costing has the following five steps: a. Identify the different activities performed by the business. b. Calculate the total cost of each activity over the financial period(cost pool) c. Identify a cost driver (i.e. a causation factor) for each activity. d. Calculate the cost driver rate(i.e. the average cost of one occurrence of the cost driver) e. Assign part of the cost each activity to different products based to the extent to which each product has caused the activity to occur (i.e. apply the cost driver rate)(Proctor R. 2000, p67) A comparative analysis of traditional costing method with ABC costing method: 1. Measurement of cost by traditional costing method and ABC costing method are greatly different. ABC allocates the activity costs into products by cost drivers, while traditional costing method uses quantity drivers to allocate costs. Since the use of the traditional costing method was not avoided of products loss, we may as well say then that its continual use would be a wrong economic decision. 2. It is impossible to get correct activity information of each activity and the activity channeled towards production by using traditional costing method, while this can be achieved easily and accurately by ABC method. With the use of ABC, Vauxhall could now analyze which activity is tends towards loss of products, in order to discuss the possibility of reduction of such activities. 3. The product loss, measured by traditional costing method, was not encountered by ABC method since ABC could accurately allocate cost information. 4. Through the calculation of ABC, we are able to know the production of which good consumes activity most, which cost of activity is highest, helping us knows how to decrease cost and enhance efficiency. For example in Vauxhall plant, the unit activity cost is the highest in operating machine activity, its total cost is also the highest, and then the second highest cost is maintaining activity. It is necessary we look for alternative ways of carrying out these activities such as decreasing electricity consumption per hour, in order to decrease the activity cost per hour of operating machine activity. Economic Production Quantity: This model (also known as the EPQ model) is an extension of the Economic Order Quantity model. The difference being that the EPQ model assumes orders are received incrementally during the production process. The function of this model is to balance the inventory holding cost and the average fixed ordering cost. Just In Time (JIT): Just in time is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs.In just in time inventory the new stock will be purchased when the reorder level reaches.this method has a big drawback that the reorder level is determined historical demand ,but if the demand rises there will be inventory shortage Economic order quantity: Economic order quantity is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. Assumptions: 1. the monthly demand for the item is known, deterministic and constant 2. the lead time is zero, i.e., delivery is immediate 3. the receipt of the order occurs in a single instant and immediately after ordering it 4. quantity discounts are not calculated as part of the model 5. the setup cost is constant If we minimize the sum of the order and carrying costs, we are also minimizing the total costs EOQ Min.Cost No. Orders 84.54 567.80278 7.0975348 52.87 529.59104 6.619888 56.39 595.85233 7.4481541 total 1693.2462 EOQ (Q*), minimum cost and number of orders. The formula of EOQ is. The first column in the above table means that the optimum quantities. The second column is the minimum cost of each product; however, the mathematical form should be changed to TC= (Q*/2)*C + (R/Q*)*O. The third column explains the order times for each product. No. Orders = R/Q*. The total minimum stock cost of Preston is 1693.2. Similarly, the total minimum stock cost of Leyland is 1491.6055, Blackburn, 1564.4051, Chorley, 1593.764. (See appendix) Revised solution Appropriate Purchasing Policy (Preston)   Product Quantity Cost A 85.04375 567.8129 B 49.60885 530.6654 C 59.53062 596.7278 no. of orders 7.055192 total 1695.206 stock cycle 51.73495 Although Table 4 has provided the minimum stock cost, it is infeasible for the company in that the order times of each product are different. In real business, it is impossible for a store to carry out a purchasing policy that each product has different order times; furthermore, the time and transportation cost will be spent on the leftover products. We can resort to Solver function provided by Microsoft Excel to get an appropriate purchasing policy for Preston. Table 5 shows another total stock cost, 1695.2; the No. Orders, 7, which means the delivery of all the products, can be fulfilled within 7 times other than different product has different order times; the stock cycle, 51.6, which is 365 divided by No. orders, that is, the days between one order and the next. Obviously, the total stock cost in Table 5 is greater than the cost in Table4, 1693; however, that is a more practical number. Recommendations for the company (Appropriate Purchasing Policy for all the branch stores): The same method can be applied to the other branch stores. Leyland   Product Quantity Cost   A 61.14217 454.4462   B 61.14217 555.3308   C 45.05213 487.0018 no. of orders 6.215023 total 1496.779 stock cycle 58.72866     Blackburn   Product Quantity Cost   A 65.96757 482.2753   B 64.43344 583.4383   C 46.02388 503.8937 no. of orders 6.518355 total 1569.607 stock cycle 55.99573     Chorley   Product Quantity Cost   A 57.22303 457.3245   B 48.18781 506.5664   C 72.28172 646.9134 no. of orders 6.640683 total 1610.804 stock cycle 54.96422     Appendix: Preston           Preston                   Product Req. Qua. Acq.Cost/ Unit Carrying Cost Total Carrying Cost Order Cost Cost eoq Min.Cost No.Orders   Product Quantity Cost A 600 300 60 6.6 6.7166667 40 1088 84.54 567.80278 7.0975348   A 85 568 B 350 300 90 9.9 10.016667 40 1549 52.87 529.59104 6.619888   B 49.6 531 C 420 300 95 10.45 10.566667 40 1641 56.39 595.85233 7.4481541   C 59.5 597               4278 total 1693.2462   no. of orders 7.06 total 1695                       stock cycle 51.7     Leyland           Leyland                   Product Requirement Quantity Acq.Cost/Unit Carrying Cost Total Carrying Cost Order Cost Cost EOQ Min.Cost No.Orders   Product Quantity Cost A 380 300 60 6.6 6.7333333 40 1061 67.19 452.43047 5.6553809   A 61.1 454 B 380 300 90 9.9 10.033333 40 1556 55.04 552.28012 6.9035015   B 61.1 555 C 280 300 95 10.45 10.583333 40 1625 46.01 486.89492 6.0861865   C 45.1 487               4241 total 1491.6055   no. of orders 6.22 total 1497                       stock cycle 58.7     Blackburn           Blackburn                   Product Requirement Quantity Acq.Cost/Unit Carrying Cost Total Carrying Cost Order Cost Cost EOQ Min.Cost No.Orders   Product Quantity Cost A 430 300 60 6.6 6.7166667 40 1065 71.57 480.68007 6.0085009   A 66 482 B 420 300 90 9.9 10.016667 40 1559 57.92 580.13791 7.2517239   B 64.4 583 C 300 300 95 10.45 10.566667 40 1625 47.66 503.58713 6.2948392   C 46 504               4248 total 1564.4051   no. of orders 6.52 total 1570                       stock cycle 56     Chorley Product Requirement Quantity Acq.Cost/Unit Carrying Cost Total Carrying Cost Order Cost Cost EOQ Min.Cost No.Orders   Product Quantity Cost A 380 300 60 6.6 6.7 40 1056 67.36 451.30921 5.6413651   A 57.2 457 B 320 300 90 9.9 10 40 1543 50.6 505.96443 6.3245553   B 48.2 507 C 480 300 95 10.45 10.55 40 1647 60.33 636.49038 7.9561297   C 72.3 647               4245 total 1593.764   no. of orders 6.64 total 1611                       stock cycle 55     Read More