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Sem 5 Prep
← OperationsInventory: types, functions and costs

Formulas for this chapter

Annual holding cost

Annual holding cost = (Q / 2) x H

Whenever stock runs down evenly from Q to zero. Q/2 is the average inventory over the cycle.

Q
Order quantity in units
H
Holding cost per unit per year; convert from a percentage of price first

Annual ordering cost

Annual ordering cost = (D / Q) x S

D/Q is the number of orders placed a year. Ordering cost never depends on how big each order is.

D
Annual demand in units
S
Ordering cost per order, or setup cost per run

Holding cost from a percentage

H = carrying charge % x unit price

The first line of almost every inventory numerical. Do it before touching Q.

carrying charge %
Annual carrying cost as a fraction of inventory value, e.g. 0.09
unit price
Cost of one unit
Step 2 of 20
The real wordsTheory

Inventory, defined

InventoryA stock or store of goods.
Independent-demand itemsItems that are ready to be sold or used. Their demand comes from outside the firm and must be forecast, not calculated.

Inventories are a vital part of business: they are necessary for operations, and they contribute to customer satisfaction.

Independent demand is the key phrase. Everything in this chapter and the next four applies to independent-demand items. Dependent-demand items are handled by MRP, later in this half.

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