Inventory Control

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Inventory Control

Inventory Control


The scope of this research paper is to discuss inventory control systems as they relate to the overall production for a company. I will first discuss production factors for companies and costs associated with high inventories. Then, switch the focus to describe, discuss, and compare Just-in-time (JIT) Production and Material Requirements Planning (MRP) processes as methods to reduce and therefore minimize inventories for businesses.

Productivity can be defined as a common measure of how well a country, industry, or business unit is using its resources. See the equation below for the mathematical relationships used to define productivity.

Productivity (P) = Outputs or Goods and Services produced

Inputs All Resources Used

Expanding on results in: Productivity = Output t

Labor + Capital + Materials

These equations allow productivity to be defined in terms of relative measure. This allows a business to compare current productivity levels against previous productivity levels, or against their competition's productivity. The company defines what total or partial factors will be considered as output and input in these equations and then uses these values to calculate an initial productivity value. The value by itself is not important but it allows the company to make changes in the business model or operations and see how it affects the productivity of that company.

Now, let's look at costs associated with inventory. There are four major costs associated with inventory: Holding costs, Setup costs, Ordering costs, Shortage costs. Holding or carrying costs refer to the costs for storage facilities, handling (i.e. moving), insurance, pilferage, breakage, obsolescence, taxes, depreciation and the loss of opportunity costs of capital. These costs can be very significant to the company. Any amount of money spent towards holding costs is capital that is unavailable for other projects, research and development, etc thus the "opportunity loss".

Setup costs (a.k.a. production change costs) refers to changes in materials, arrangement or equipment, paperwork, costs for time and material involved in moving out one raw material and bringing in the next. Therefore, these costs can be reduced by attempting to minimize loss of time and material involved in changing from one product to another. This allows smaller lot sizes to be produced, which in turn would reduce the required inventory levels needed to produce these lots. One of the major goals of the just-in-time (JIT) system is to reduce the setup costs for a company.

Ordering costs refer to the managerial and clerical costs to prepare the purchase or order. These costs range from routine items such as counting stock and calculating order quantities to detailed process costs like the maintenance costs associated with an order tracking system.

The last inventory cost is shortage costs. This cost occurs when the stock of a particular item has been depleted resulting in orders requiring this stock to be delayed or cancelled. This results in a trade-off between the costs to maintain a "safety stock" and the costs occurring due to running out. Carrying a safety stock would ensure no orders will be lost or delayed due to running ...
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