Home News COMMERCE STUDY NOTES, FORM TWO TOPIC 5-6.

COMMERCE STUDY NOTES, FORM TWO TOPIC 5-6.

TOPIC 5: Ware-Housing Management

Ware-Housing Management
Meaning of the Terms Ware-housing and Ware-house
Define the terms ware-housing and ware-house
Warehousing is
the institutional arrangement for the storage of goods i.e. receiving,
storing and dispatching the goods to the uses. It is a very important
aids to trade and through it trade can be operated efficiently.
A warehouse
is a commercial building for storage of goods. Warehouses are used by
manufacturers, importers, exporters, wholesalers, transport businesses,
customs, etc. They are usually large plain buildings in industrial areas
of cities, towns and villages. A warehouse is an establishment for the
storage or accumulation of goods. The people who require goods may be
secondary producers, distributors or ultimate consumers.
They
usually have loading docks to load and unload goods from trucks.
Sometimes warehouses are designed for the loading and unloading of goods
directly from railways, airports, or seaports. They often have cranes
and forklifts for moving goods, which are usually placed on ISO standard
pallets loaded into pallet racks. Stored goods can include any raw
materials, packing materials, spare parts, components, or finished goods
associated with agriculture, manufacturing and production. In Indian
English a warehouse may be referred to as a go down.
The
global warehousing concept has gained popularity over the last decade
as stock pre-positioning becomes one of the strategies for ensuring a
timely response to emergencies. They are usually purpose built or
purpose designed facilities operated by permanent staff that has been
trained in all the skills necessary to run an efficient facility or
utilising third party logistics (3PL) staff and facilities. For such
operations, organisations use, information systems that are computer
based, with sophisticated software to help in the planning and
management of the warehouse. The operating situation is relatively
stable and management attention is focused on the efficient and cost
effective running of the warehouse operation. Numerous organizations
have centralized pre-positioning units strategically located globally.
Some of these offer extended services to other humanitarian
organizations on a cost plus operating charges basis.
The Need for Warehousing
Show the need for warehousing
Advantages of warehouse are;
Is
storage an issue for your business? Many companies reach a point where
the housing of their products creates an impediment in their forward
progress. Are you worried about competing with others in your industry?
Would you like to produce more products but are in need of a warehouse?
Many
smaller to mid-sized companies do not have the immediate funds to
invest in warehousing facilities. What options do they have? They can
wait and hope their business eventually makes enough money in order to
buy or rent a warehouse. This could take a while and cause anxiety in
regards to keeping abreast in the industry.
Another
option is to outsource for public warehousing. Outsourcing for business
services solves the problem of attempting to remedy situations
in-house. Smaller businesses do not have to worry about accumulating the
immediate funds; contract warehousing is available to them. Consider
the following advantages of outsourcing for storage services.
  • Storage services provide opportunity to expand;A
    business’ products may be selling well, but the buying cycle could
    possibly be stymied by lack of room for mass production. Expansion is
    inhibited and revenue cannot reach full potential due to lack of
    warehousing. Outsourcing solves this problem.A popular product could be
    produced in full force and stored in public warehousing. Your supply can
    now meet the demand of your customers.
  • Warehousing distribution gives you a chance to focus on your business;Businesses
    need other services. This fact leads the company to make a decision to
    either build an extension in-house or to outsource for their desired
    service. Larger companies have the advantage of building in-house more
    easily; they often have the human resources and the money readily
    available. It is not so easy for smaller businesses.If smaller companies
    start to turn their focus to peripheral subjects, they begin to lose
    focus on their core business matters. Distractions can impede the growth
    of a smaller business and give their competitors time to surpass
    them.Outsourcing for warehouse services (as with other services) affords
    the smaller business time to remain focused on their main objectives.
  • Storage services can save you money on shipping;Public
    warehousing vendors are located all over the country. It may be easiest
    to choose a warehouse located around your largest customer base. Many
    businesses select a contract warehouse in the middle of the country.
    This saves money on shipping coast to coast and from southern and
    northern poles of the country.
  • Public warehousing does a lot more than store your goods;Warehouses
    conduct a variety of tasks. They address ancillary tasks such as
    picking, packing, shipping etc. You can devote less concern about the
    particularities of your business. Imagine a warehouse receiving your
    goods, taking your orders, packing it for shipment, and then shipping it
    out to the customer! The sundry details of your business will be
    handled by professionals with experience.
The advantages of warehousing your print products will change the way you look at your future marketing processes.
  1. Cost;
    The cost benefits of warehousing can be determined by looking at a
    couple of different factors. The first is what does it cost to warehouse
    boxes of your printed materials? In some cases you’ll find that a print
    company will take on your warehousing costs as a value add for printing
    in bulk or at very low rates per square metre. The second factor, If
    you have multiple locations globally or across the nation then having
    central warehousing locations for distribution can save you a lot of
    money on shipping. You’ll need to consider how many printed pieces you
    intend to use for different campaigns and which ones can be printed in
    bulk and warehoused
  2. Environmental Considerations
    When you run any print job there is large quantity of stock (generally
    500+ sheets per run) that is required as make ready. This make ready run
    is required to set the presses to ensure you print job comes up looking
    just right and that those colours pop off the page. When you consider
    printing in bulk there are less make runs required, which saves paper
    and reduces energy consumption. When you consider a warehousing option
    by printing in bulk you’re helping the environment.
  3. Inventory Control
    Having your products warehoused and ready for distribution provides you
    with the advantages of always having products in stock and ready to
    distribute out to the market. When you warehouse your print products you
    can control your inventory and distribute your products when and where
    you need them. If an unexpected campaign pops up and you have inventory,
    then you can meet that demand immediately, almost on the day if need
    be. Alternatively going back to the printing press can really delay your
    campaign and ultimately the loss of sales opportunities. Having
    inventory will allow you to control your needs in more streamlined
    process.
4. Space saving
Depending
on the size of your business you simply might not have the space to
store your print products. The initial advantage is that when you print
in bulk you take advantage of the cost savings achievable. You may also
require conditioned space for some printed products, so that over time
your products aren’t affected by air and worse humidity. By warehousing
your products you take advantage of having your products store with a
professional warehousing provide and ready to ship on demand, which
saves you the space at your office.
5. Joint Print and Product Opportunities
If
you distribute products around the country or even globally then having
centrally located warehousing solutions can really help you with your
inventory controls, reverse logistics and the time it takes to deliver a
product to market. When you warehouse your print products along with
the products you sell you take advantage of economies of scale to
distribute your products efficiently to the markets you serve.
6. Reverse logistics
If
any of your printed products are likely to be returned with the order,
then having a warehousing solution can really help you to manage your
return orders. When a product needs to be returned you’ll be in a
position to have the returned products sent back to your warehouse. This
saves you both time and money by centralising your warehousing
solutions.
7. Anticipate orders (print materials are always in stock)
When
you warehouse your print materials you’ll always have items in stock
ready to ship. Either printed materials that are sent directly with your
products or print products that are used to continue to market your
promotions to your customers. You can then match your projected orders
with your stock to best manage your inventory control.
8. Businesses are able to gain the benefits of ordering large print orders
A
warehousing solution is a key component in reducing the overall costs
for your print materials. Its commonly known that when you print in bulk
you reduce the cost per item to print. When you print in bulk you
generally need the benefit or a warehousing solution to store your print
products. A good print management company can offer you a warehousing
and distribution program that will allow you to pocket the savings on
printing your orders in bulk.
9. Some warehouse solutions providers can help you with packaging, labeling and shipping
A
growing trend in the warehousing solutions market is to provide
distribution services which includes packaging, labelling and the
shipping of your products. When you consider warehousing your products
ask if your warehousing partner offers distribution services as well.
You may be able to centralise your warehousing solutions so that you can
send products out on demand cost effectively to meet your customers
needs.
10. Extended storing for long lead items
  • Some
    products have longer lead times than others and may need to sit on the
    shelf for an extended period of time before they go out to market. Have a
    warehousing partner can allow you to cost effectively manage and store
    your products over extended periods of time, so when your marketing
    campaigns kick in your products will be waiting and ready to deliver.
  • Have
    you considered warehousing your print and packaging requirements? Let
    us know how we can help you evaluate a warehousing and distribution
    service.
FUCTIONS OF MODERN WAREHOUSING
  1. Storage:
    This is the basic function of warehousing. Surplus commodities which
    are not needed immediately can be stored in warehouses. They can be
    supplied as and when needed by the customers.
  2. Price Stabilization:
    Warehouses play an important role in the process of price
    stabilization. It is achieved by the creation of time utility by
    warehousing. Fall in the prices of goods when their supply is in
    abundance and rise in their prices during the slack season are avoided.
  3. Risk bearing:
    When the goods are stored in warehouses they are exposed to many risks
    in the form of theft, deterioration, exploration, fire etc. Warehouses
    are constructed in such a way as to minimise these risks. Contract of
    bailment operates when the goods are stored in wave-houses. The person
    keeping the goods in warehouses acts as boiler and warehouse keeper acts
    as boiler. A warehouse keeper has to take the reasonable care of the
    goods and safeguard them against various risks. For any loss or damage
    sustained by goods, warehouse keeper shall be liable to the owner of the
    goods.
  4. Financing: Loans can be raised from the
    warehouse keeper against the goods stored by the owner. Goods act as
    security for the warehouse keeper. Similarly, banks and other financial
    institutions also advance loans against warehouse receipts. In this
    manner, warehousing acts as a source of finance for the businessmen for
    meeting business operations.
  5. Grading and Packing:
    Warehouses nowadays provide the facilities of packing, processing and
    grading of goods. Goods can be packed in convenient sizes as per the
    instructions of the owner.
Difference between the Various Types of Warehouses
Distinguish the various types of warehouses
Types of Warehouses
Private Warehouse
This
type of warehouse is owned and operated by channel suppliers and
resellers and used in their own distribution activity. For instance, a
major retail chain may have several regional warehouses supplying their
stores or a wholesaler will operate a warehouse at which it receives and
distributes products.
The benefits of private warehousing are:
  1. Private
    warehousing offers better monitoring systems over the handling and
    storageof products as required by the management from time to time which
    would enhancethe performance of the warehouse.
  2. There is less
    likelihood or error in the case of private warehousing since
    thecompany’s products are handled by its own employees who are able to
    identify theproducts of their own company.
  3. If there is
    sufficient volume of goods to be warehoused, the cost of private
    warehousing comparatively less than that of public warehousing. The cost
    of private warehousing per unit may be actually higher if the private
    warehouse is packed to the brim.
  4. Private warehousing is the best
    choice for some of the locations and the products handled because of
    the non-availability of the public warehousing.
  5. Private
    warehousing has the opportunity to specially design its facilities for
    automatic material handling equipment where as public warehousing may
    have the same.
  6. Enabling the end user to increase their efficiency by means of better design and structured lay-out.
  7. Efficient use of human resources in warehouse operation improves end users’ overall performance.
  8. Intangible benefits in the form of cost reduction in all the warehouse operations.
The disadvantages of private warehousing include:
  1. Lack of flexibility: The
    major drawback is it is too costly, because of its fixed size and
    costs. This means that in the short run, the private facility cannot
    expand or contract to meet increases or decreases in demand. Thus, when
    demand is low, the firm still assumed the fixed costs as well as the
    lower productivity linked to unused warehouse space. However, the
    disadvantages can be minimized if the firm is able to rent out part of
    its space. Moreover, it loses flexibility in its strategic location
    options. They can’t change quickly to rapid changes in market size,
    location and preferences, and this may mean that they will lose an
    excellent business opportunity.
  2. High opportunity cost (high risk)ROI
    on other investments may be greater if funds are channeled into other
    profit-generating opportunities. Besides, there is also a potential
    probability of not being able to sell the w/h in the later period due to
    its customized design.
  3. Low Rate of return: Since
    the rate of return is about the same as the firm’s other investments,
    most companies find it advantageous to use a combination of public and
    private warehousing. It is best to use private warehousing to handle the
    basic inventory levels required for the least cost logistics in markets
    where the volume justifies ownership. On the other hand, any extra
    volume can be stored in the public warehouse during peak periods where
    private warehouse is full.
  4. High start-up cost:Firms
    have to generate enough capital to build or buy a warehouse. A
    warehouse is often a long, risky investment. Moreover, there is cost of
    hiring and training of employees, and the purchase of material handling
    equipment. The high cost involved may force the company to seriously
    consider public warehousing as a better option.
Public Warehouse: These
are warehouse which are owned by private individuals or companies or
government but they are open to any member of public in return for a
storage fee or charge.
The benefits of public warehousing are:
  1. It is in general less expensive and more efficient and effective to achieve more customer service level.
  2. Public warehouses are usually strategically positioned and easily available.
  3. Public
    warehousing is adequately flexible to meet most space requirements, for
    several plans are available to suit the requirements of different users
  4. Fixed
    costs of a warehouse are distributed among many users. Therefore, the
    overall cost of warehousing per unit works out to a lower figure.
  5. Public warehousing facilities can be given up as soon as necessary without any additional liability on the part of the user.
  6. The costs of public warehousing can be easily and exactly ascertained, and the userpays only for the space and services he uses.
  7. Conservation of capital is more in public warehousing
  8. It has got enough space to handle peak requirements
  9. Public warehousing has reduced risk in their operations.
  10. Public warehousing has got good economies of scale
  11. It would give Tax advantages for end users
  12. Knowledge of exact storage and handling costs are available to end users.
  13. It is insulated from labour disputes
Disadvantages of Public warehouses
  1. Communication
    problem: There is a potential problem of incompatible computer
    terminals and systems. They may not have another terminal just to suit
    the needs of just one customer. Thus, the lack of standardization in
    contractual agreements makes communication regarding contractual
    obligations difficult.
  2. Lack of specialized services: Spaces or
    specialized services needed may not always be available in a specific
    location. Most public warehouse facilities provide local services which
    may not be useful for the big MNC who requires more specialized
    services.
  3. Space may not be available: Public warehousing space
    may not be available when ans where a firm wants it. Shortage of space
    can happen in some places especially during peak season, and this may
    affect the firm adversely
The
public warehouse is essentially space that can be leased to solve
short-term distribution needs. Retailers that operate their own private
warehouses may occasionally seek additional storage space if their
facilities have reached capacity or if they are making a special, large
purchase of products. For example, retailers may order extra merchandise
to prepare for in-store sales or order a large volume of a product that
is offered at a low promotional price by a supplier.
Bonded Warehouses:
Bonded
warehouses are used for imported goods which are not granted clearance
on account of non-payment of custom duty by the importer of these goods.
Such warehouses are situated near the ports. Goods can’t be removed
from these warehouses until the custom duties are paid.
Bonded
warehouses may be run by the government or private agencies (when
granted licenses to operate such warehouses). In both the cases there is
a strict control and supervision imposed by custom authorities on their
operation and functioning.
Importer
of the goods has some control over his goods and he can inspect and
check the goods as and when he wants. After making part payment of the
custom duty, goods can be proportionately withdrawn from these
warehouses.
Goods
kept in these warehouses can be branded, packed, graded, labeled and
canned in the warehouse itself. Bank loans can be raised with the help
of receipt issued by these warehouses by giving that receipt as
collateral security.
There
is a least possibility of goods being exposed to any risk of theft,
damage and deterioration. The entrepot trade i.e., re-export of imported
goods is greatly facilitated as the importer can have the delivery of
goods without paying any custom duty.
Advantages of Bonded warehouses
  • No Duty Payment Required
    As mentioned, importers and proprietors do not have to pay any type of
    import duty on products traded or purchased internationally. This can
    save the importer money and give him or her more control over his
    finances.
  • Storage is often Long-Term In some
    countries, storage time is unlimited. In the United States, imported
    goods may be stored for up to five years. This means that the importer
    can sit on a product until there is an increase in demand. Because duty
    is required when the goods are exported or removed from the warehouse
    for consumption, this also helps the importer manage his or her money,
    because an increase in demand usually equals an increase in revenue.
  • Save Haven for Restricted Goods
    If you import goods that are subject to restriction, finding something
    to do with them before you get the restrictions straightened out can be a
    hassle. With a bonded warehouse, you can store restricted items until
    you are able to move them elsewhere or get permission to bring them into
    the country. Bonded Service has been serving the state or Georgia since
    1931. With locations in both Savannah and Atlanta and easy access to
    one of the biggest airports in the world and one of the busiest ports
    along the Atlantic Ocean, we can store your imports in our warehouses or
    transport goods to anywhere in the world.
Disadvantages of bonded warehouses are:
A
Customs and Excise Warehouse, commonly known as a Bonded Warehouse, has
been located at our premises where customers utilizing the clearing
services of the company, are able to store dutiable products without the
payment of the customs duty. The maximum storage time allowed is two
years. The duty is payable when the goods are required to be withdrawn
from storage.
The
main disadvantage would be the risk of duty on a certain products being
increased while the goods are in the warehouse. <!– [if
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The following conditions apply:
  • The
    duty rate applicable at the time of withdrawal (UNLESS BEING EXPORTED
    FROM THE WAREHOUSE) is the rate in force at that time and not the rate
    that was applicable at the time of warehousing. In other words if the
    duty is increased by Government during the time the goods are warehoused
    then the increase will apply. By the same token, if the duty is
    reduced, the lower rate will apply.
  • Only dutiable goods may be
    warehoused however both duty and VAT is then deferred while in the
    warehouse. Goods on which VAT only is payable may not be placed in a
    Bonded Warehouse.
  • If, while in the warehouse, duty is totally
    removed by Government from a certain product, then the goods must be
    removed immediately from the warehouse and the VAT applicable must be
    paid.
  • All goods must be removed and duty paid after the two year period is expired.
  • No goods may be removed from the bonded warehouse WITHOUT PROPER CLEARANCE AND PAYMENT OF DUTIES AND VAT HAVING TAKEN PLACE.
In
some instances, especially with large importers, it may be viable for
the importer to establish his own bonded warehouse on his own premises.
We provide a service to do this for the importer, if this interests you
please visit our consultancy page.
Other type of Warehouses:
These include:
  1. Special Commodity Warehouses.
  2. Cold Storages or Refrigerated Warehouses.
  3. Institutional Warehouses.
  1. Special Commodity Warehouses:
    These warehouses are constituted for storing a particular type of
    commodity, e.g., tobacco, cotton, wheat etc. Mature of commodity is
    important in selecting the type of warehouse. For storing petrol,
    storage tanks are needed and for storing agricultural products, god
    downs are needed.
  2. Cold Storage or Refrigerated Warehouses:
    These are the warehouses which are used for storing perishable
    commodities like eggs, butter, fruits, vegetables, fish, fresh meat etc.
    Goods stored in cold storages can be held for longer time. In fact,
    cold storages have made possible the regular supply of certain
    commodities throughout the year. For example, fruits and vegetables of
    all types can be made available to the people throughout the year.
    Refrigerated warehouses have greatly improved the modern way of life.
  3. Institutional Warehouses:
    Different institutions and bodies have their own warehouses on account
    of the nature of their operations. For example, Banks, Railways, Food
    Corporation of India etc. has their own warehouses for conducting their
    activities. Banks keep the stock of the parties in these warehouses as
    security against the loans advanced. Railways maintain warehouses to
    store large quantity of goods. Goods to be dispatched to different parts
    of the country are kept in warehouses before they are sent. Similarly,
    goods received for the purpose of delivery are kept till they are
    disbursed to the claimant. Various transport agencies also maintain
    warehouses for storing the goods which are to be dispatched and
    received. Food Corporation of India has built many big warehouses
    throughout the country for storing agricultural products.
FACTORS TO CONSIDER IN SELECTION OF SITE FOR WAREHOUSE.
  1. Nature
    of trade operation: nature of trade and operation can affect for site
    for warehouse.example, importers and exporters may locate their
    warehouse near terminals such as airport and so on, and manufacturer may
    locate their warehouse near their factories and so on.
  2. Location
    of customers and pattern of demand for the goods: the warehouse must be
    located near customer for easy distribution of goods. Also if the
    customers buy in small quantities in order to reduce carriage cost the
    warehouse must be located near them.
  3. Cost of land: the cost of land on which a warehouse a warehouse is built must be reasonable.
  4. Availability
    of labour-there is some labourers to work in warehouse. This includes
    the availability of skilled or trained and non skilled labour.
  5. Enough
    space for loading and offloading: there must be enough to allow loading
    and offloading to take place easily which saves times. For example
    enough space for trucks to deliver goods.Availability of transport
    facilities: there must be easy access to transport facilities for easy
    transportation of goods from the warehouse to the customer.
  6. Government
    policy: decision about the site for a goods warehouse is also affected
    by the government on utilization of space for business purpose.
Exercise 1
QUIZ
  • Discuss the importance of warehousing in commerce.
  • Discuss various types of warehouses.

TOPIC 6: Stock Administration

Meaning of the Term Administration
Define the term stock administration
Are
the overseeing and controlling of the ordering, storage and use of
components that a company will use in the production of the items it
will sell as well as the overseeing and controlling of quantities of
finished products for sale. A business’s inventory is one of its major
assets and represents an investment that is tied up until the item is
sold or used in the production of an item that is sold. It also costs
money to store, track and insure inventory. Inventories that are
mismanaged can create significant financial problems for a business,
whether the mismanagement results in an inventory glut or an inventory
shortage.
The Meaning of Receiving; Issuing; Stocktaking; Care of Stock; Placement of Stock Items
Explain what is meant by: Receiving; Issuing; Stocktaking; Care of stock; Placement of stock items
FUNCTIONS OF STOCK ADMINISTRATION
Receiving the stock:
the major function of receiving section of the organisation are
unloading and packaging. Receiving involves accepting deliveries from
carriers, unpacking the deliveries, checking the deliveries on the kind,
quantity and quality etc
Placing the goods:
the stores convenient for the organisation and the layout should be
convenient to the class of goods handled and bins etc should be arranged
in logical order.
Basic rules for placing goods in the warehouse
  • Stock must be kept in a way that will clearly show which ones are old stocks and new stocks
  • heavy goods should be kept near the flow
  • goods most frequently required should be easily accessible.
  • valuable or fragile goods should receive special protection.
Care of stock:
the shopkeeper should cleaning a warehouse in and outside including the
general cleaning of floors, walls, ceiling boards, rooms, container
etc, Dusting of various items kept in rooms or stocks. Ensuring that the
materials are well preserved, sorting out spoilt goods, for fragile
goods and perishable materials needs special handling care.
Issuing of stock:
issuing of stocks should be done by the storekeeper and has assistance
who have free access to the storeroom. When a department needs materials
from the store, stock should be issued against voucher or requisition
order signed by the person who authorized to issue. This is purposely
done to keep proper records and control the movement of stock i.e.
delivery is done against vouchers to ensure that the outflow of stock is
equal to inflow of stock.
Inventory Control:
refers to the process of checking and keeping records of the quality
and value of goods in stock. It includes all activities that are
necessary to ensure that the right stock levels are maintained at all
time to ensure that overstocking and shortages do not occur. The goal
for a business is to invest the least amount in inventory while
maintaining specific operating requirements. Ideally, the inventory
control in place allows the business to supply needs in regards to
production or to the customer at the precise moment needed, at the
minimal price. Successful inventory control keeps waste and surplus at a
minimum and efficiently handles storage, production and distribution of
inventory.
Basic duties of stock control.
  • Assessing the items to be held in stock.
  • Deciding the extent of stock holding of items.
  • Regulating receipts and issues into store houses.
The Meaning and Determination of Turnover; Stock leve
Give the meaning and determination of Turnover; Stock level
Stock Levels Definition:
To
overcome the problem of over-stocking or under-stocking it is very
essential that pace of consumption should be studied carefully for a
number of months and following stock – levels should be fixed by
management for all individual items of material except low value items.
  1. Maximum Level.
    It means maximum quantity which may be held in stock. This level is
    fixed on basis of various considerations main of which are : rate of
    consumption, finances and storage space available.
  2. Minimum Level.
    It means the lowest level below which stocks should not be allowed to
    fall. It is essentially a buffer stock. This level is fixed by taking
    into account the rate of consumption and the time necessary to obtain
    delivery of fresh materials (called lead time).
  3. Danger Level.
    This is a very critical level which is below minimum level If stock of
    any particular item reaches this level immediate action to make purchase
    in a quantity sufficient to tide over the delay in the regular supply,
    may be necessitated so that production may not stop. In view of the
    above levels it is necessary that a level of stock should be fixed at
    which further action for purchases is made for normal procurement. This
    level is called REORDER LEVEL.
  4. Fixation of Stock Levels.
    The levels of stocks to be held may be determined by policy decision of
    the management keeping in view the level of production, finances
    available, lead time and the storage capacity.
Formula:
Economic order Quantity (EOQ) is generally worked out by using the following formula:- FOQ = 2 C O/I where
  • C = Annual consumption quantity
  • O = Cost of placing one order
  • I = Carrying cost of one unit of materials inventory
Example 1
Example:
One
Unit of Material Omega Costs Rs.0.50, yearly consumption is 20,000.
Cost of placing one order is Rs.20 and carrying cost of inventory is
20%.
  1. EOQ = 2 x CO/I = 2 x 20,000 x 20/20% of 0.50 = 800,000/ 0.1 = 8.000.000 = 2,828 units approx per order.
  2. Finances required for each order = 2828 x 0.50 = Rs.1414.
  3. Number
    of orders to be placed in a year = Total annual consumption/EOQ
    = 20,000/2828 Approximately 7 orders.
What is ‘Inventory Turnover’
Inventory
turnover is a ratio showing how many times a company’s inventory is
sold and replaced over a period. The days in the period can then be
divided by the inventory turnover formula to calculate the days it takes
to sell the inventory on hand or “inventory turnover days.”
Generally it is calculated as:
  • Inventory Turnover = Sales / Inventory
  • However, it may also be calculated as:
  • Inventory Turnover = Cost of Goods Sold / Average Inventor.
FORMULAS
  1. Maximum
    Level of Stock = (Reorder Level + Reorder Quantity) – (Minimum rate of
    consumption x Minimum reorder period) Maximum Level may be alternatively
    fixed as Safety Stock + Reorder Quantity or EOQ.
  2. Minimum level of stock = Reorder level – (Average rate of consumption x Average reorder period)
  3. Safety Stock = (Annual Demand/365) x (Maximum Reorder Period – Average Reorder Period)
  4. Reorder
    level or Ordering level = Maximum rate of consumption × Maximum reorder
    period. Alternatively, it will be = safety stock + lead time
    consumption [lead time consumption will be = (Annual consumption -s-
    360) × lead time]
  5. Danger level = It is slightly below the
    minimum level. It is a level at which special efforts should be made to
    obtain supplies of materials, i.e. Minimum rate of consumption ×
    Emergency delivery time
  6. Average Stock level = (Maximum stock
    level + Minimum stock level) x 14 or Minimum Stock level + 14 Reorder
    Quantity. Obviously, the Reordering level is below the Maximum level,
    and Minimum level is below the Reordering level and the Danger level is
    below the Minimum level. Safety Stock is above minimum level.
Important Elements:
In above calculations, the following elements are important:
  1. Consumption Rate:
    It is consumption or use of material per day (or per week) by
    production department. These rates will be maximum and minimum, the
    simple average of maximum and minimum rates is average consumption rate
    per day or per Week.
  2. Reorder Period: It is
    period between materials ordered and materials received. The average
    reorder period is simple average of maximum and minimum reorder periods.
  3. Reorder Quantity:
    At the time of purchase of material, one of the important problems to
    be faced is how much quantity of a particular materials to be purchased
    at a time. If purchases are made frequently in small quantities it will
    result in loss of trade discounts and economies in purchasing. On the
    other hand if purchases are made in large quantities it will lead to
    over stocking and cost of storage will be high. The ordering quantity
    should be economic and reasonable by all aspects. It should be Economic
    Order Quantity (EOQ). The calculation of EOQ has been discussed later
    on.
Example 2
Illustration 1: [Fixation of stock levels]:
Two components A and B are used as follows:
  • Normal usage 50 units per week each
  • Minimum usage 25 units per week each
  • Maximum usage 75 units per week each
  • Reorder Quantity A 300 units; B 500 units
  • Reorder Period A 4 to 6 weeks, B 2 to 4 weeks
Calculate for each component:
  1. Reorder level,
  2. Minimum Level,
  3. Maximum level,
  4. Average Stock Level.
Solution:
  1. Reorder Level = Maximum Rate of Consumption x Maximum Reorder Period. A = 75 x 6 = 450 units B = 75 x 4 = 300 units
  2. Minimum
    Level = Reorder Level – (Average Rate of consumption x Average Reorder
    Period) A = 450 – (50 – 5) = 200 units B = 300 – (50 x 3) = 150 units
  3. Maximum
    Stock Level = (Reorder Level + Reorder Quantity) – (Minimum Consumption
    Rate x Minimum Reorder Period) A = (450 + 300) – (25 x 4) = 650 units B
    = (300 + 500) – (25 x 2) = 750 units
  4. Average Stock Level = (Maximum Stock Level + Minimum Stock Level)/2 A = (650 + 200)/2 = 425 units B = (750 + 150)/2 = 450 units
  • Average Stock Level can also be calculated by the formula.
  • Minimum Stock Level + ½ of Reorder Quantity
  • A = 200 + ½ x 300 = 350 units
  • B = 150 + ½ x 500 = 400 units
Example 3
Illustration 2:
If
the minimum stock level and average stock level of raw material A are
4,000 and 9000 units respectively, find out its reorder quantity.
Solution:
  • Average stock level = Minimum stock level + ½ of Reorder Quantity
  • 9000 = 4000 + of Reorder Quantity
  • ½ Reorder Quantity = 9000 – 4000 = 5000
  • Reorder Quantity = 10,000 units
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