Economic Order Quantity: A Cost-Effective Approach

Course : Managerial Finance Lecture : Marc Credit Hours : 3 Credits Semester Sessions : 3 Semester, 2021/2022 Session Prepared By : Kenzo LECTURE NOTES INVENTORY MANAGEMENT Inventory is the main part of working capital which are current assets that are experienced at any time change. Inventory is also an element of working capital the number is quite large, which according to research reaches 30% from company assets. Therefore, determining optimal investment in Inventory is a very important thing, because have a huge influence on utilization capital embedded in the inventory itself as well as the level efficiency that the company will achieve. Good company management and worthy of having several advantages, including: 1. Keep capital investment in inventory down the minimum. 2. Reduce waste and costs arising from excessive procurement. 3. Reduce the risk of running out of raw materials, which will hinder the production process. 4. Avoid the risk of damage, fraud or theft on inventory stock. 5. Avoid losses arising from decline price. Economic Order Quantity Economic Order Quantity is the amount of purchases raw materials at every order at the lowest cost low. This Economic Order Quantity is used by companies who obtain raw materials through advance orders cannot be done all the time. The use of this model is based on: 1. Price is constant. 2. The amount of raw materials needed can be determined more first definitely for use for 1 year. 3. Use of raw materials is always at a fixed level continuously.. 4. Orders are received exactly when inventory levels are the same with zero (0) or above the safety stock. To determine the Economic Order Quantity you can searched in several ways, as follows: 1. Basic Cost Approach. 2. Graphical Approach. 3. Mathematical Approach. 1. Basic Cost This method is basically counting everything costs tied up in inventory. Costs associated with these supplies can be classified into 3 groups, namely: a. Order Cost/Order Costs This order cost includes: - Costs during the order preparation process - Order delivery costs - Order acceptance costs - Payment processing fees b. Carrying Costs/Maintenance Costs. These costs include: - Warehouse Rental - Order maintenance costs - Insurance fee - Capital costs - Packing/weighing costs c. Total Cost. Namely the sum of Order Cost + Carrying Cost Accuracy in determining the classification of these costs will affect the calculation results, therefore it is necessary Be careful in determining what kind of costs calculated both as order costs and costs maintenance. As a guide in determining economic orders quantity can be outlined that: a. Order costs will be larger or smaller, depending to the frequency of purchases in a period. b.Carrying costs/maintenance costs will increase large/small depending on the size of th inventory. Re Order Point Re order point is a certain moment/time where the company must place orders for raw materials again, so that the order arrives exactly when it runs out raw material suppli Timeliness must be taken into account be careful, because if the order is not on time it will increase purchases of raw materials There are several ways to determine the size of the reorder points, namely: a) Determine the amount of raw material usage during lead time (time required to order raw materials) plus a certain percentage as iron/safety supplies stock. b) Sets the usage amount during the lead time plus use during a certain period as safety stock. Sources of Inventory Spending Sources of inventory-specific spending often used in company activities are as following: 1. Credit with fiduciary guarantee. As we have seen before, items Movables can be used as collateral for credit with fiduciary guarantee bonds, this also applies to collateralize the company's constantly rotating inventory and located in the company warehouse. This kind of spending is called top spending inventory of goods on a fiduciary basis. 2. Warehouse Receipt Financing. The company can guarantee/guarantee delivery orders issued by an agency/company for removing goods from a certain warehouse, either delivery order on behalf of or on behalf of. This is usually done if the goods are guaranteed the amount is large and indeed besides being impractical, too related to the costs that must be incurred if The goods are placed in the warehouse itself until the goods are sold to the final buyer. By handing over the delivery order to the party bank/other financial institution as collateral, then you can requesting a credit to purchase supplies are in the special warehouse, for example goods that are is in the Bonded Warehouse.