THE MOT AND VENTURE BUSINESS

Prof. Takao Ito, Doctor of Economics, PH.D. of Engineering, Graduate School of Engineering, Hiroshima University

Thursday, October 16, 2014

TOPIC 7 STOCK CONTROL AND PROBABILITY

STOCK CONTROL AND INVENTORY Deciding how much stock to keep depends on the size and nature of your business, and the type of stock involved. If you are short of space you may be able to buy stock in bulk and then pay a fee to your supplier to store it, calling it off as and when needed.

KEEPING LITTLE OR NO STOCK AND NEGOTIATING WITH SUPPLIERS TO DELIVER STOCK AS YOU NEED IT.

AdvantagesAdvantages   DisadvantagesDisadvantages   Efficient and flexible - Efficient and flexible - you only have what you only have what you need, when you you need, when you need itneed it

Meeting stock needs Meeting stock needs can become can become complicated and complicated and expensiveexpensive

Lower storage costsLower storage costs You might run out of You might run out of stock if there's a hitch stock if there's a hitch in the systemin the system

You can keep up to You can keep up to date and develop new date and develop new products without products without wasting stockwasting stock

You are dependent on You are dependent on the efficiency of your the efficiency of your supplierssuppliers

KEEPING LOTS OF STOCKAdvantages Disadvantages

Can meet sudden changes in demand

Costs of storage – rent and insurance

Less chance of loss of production time because of stock outs

Money tied up in stocks not being used elsewhere in the business

Can take advantage of bulk buying economies of scale

Large stocks subject to deterioration and theft

OPTIMIZING ECONOMIC ORDER QUANTITY (EOQ) The value of the average stockholding = (Q/2 x item cost/value) where Q is the order quantity. The holding cost/unit (Ch) is derived from the average inventory value) multiplied by the cost of carrying the item over the period (one year) expressed as a % of the item cost/value.

OPTIMIZING ECONOMIC ORDER QUANTITY (EOQ)

Ch is the holding cost per unit. It is also called carrying costs. Q is the order quantity

2cos QCtsHolding h

Order cost (Co) is derived from the number of orders placed (D/Q - demand p.a. divided by order quantity) multiplied by the cost of placing an order.

QDCtsOrdering ocos

Co……ordering cost D…… demand per yearQ …… order quantity

Total costTotal cost=Holding cost + Order cost =Holding cost + Order cost

QDCQCTC oh

2

h

o

CDCQ 2

EXAMPLEAs an example, in a company where order cost is estimated at $10 and with a holding cost of 25% of item value if annual demand is 1000 units at a supply price of $36. Calculate the EOQ.

ANSWER

the EOQ is 48 units

unitsCDCQh

o 1.4725.03610100022

THANK YOU FOR YOUR ATTENTION!