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Inventory Analysis

In: Business and Management

Submitted By sharlin
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The advent of low-cost computing should not be seen as obviating the need for the ABC inventory classification scheme. Although the cost of computing has decreased considerably, the cost of data acquisition has not decreased in a similar fashion. Business organizations still have many items for which the cost of data acquisition for a “perpetual” inventory system is still considerably higher than the cost of the item. The standard EOQ model assumes instantaneous delivery (delivery of the entire lot is made at one instant of time), whereas the Production Inventory Model assumes that delivery takes place at a constant rate over time.

3. Reasons for an organization to maintain inventory include:
* The decoupling function:
* inventory can be used to decouple stages in the production process within an organization
* inventory can be used to decouple the production process from instabilities or irregularities in supply of raw materials or labor
* inventory can be used to decouple the production process from unstable demand and thus (a) allow production scheduling to develop a “smoother” schedule, and (b) avoid shortages or stockouts
* Quantity discounts:
* inventory can be used to enable the organization to purchase goods in larger lot sizes and take advantage of quantity discounts
* A hedge against inflation:
* investing in inventory now assures one that the price will not increase

4. Costs that are associated with ordering and maintaining inventory include:
* Initial purchase cost of the item
* Holding cost (insurance, space, heat, light, security, warehouse personnel, etc.)
* Obsolescence or deterioration cost (particularly important in perishable goods or in a product that is undergoing rapid technological evolution)
* Ordering or setup cost (cost of forms, clerical processing, etc., or cost of machine setup)

5. The more important...

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