Economical Order Quantity

Topics: Inventory, Economic order quantity, Inventory control system Pages: 46 (14264 words) Published: February 8, 2013
Inventory Management System-Particular focus on Economic Order Quantity A case of Kaliti Food Share Company

Correct management of inventory can be the difference between a business that hums along efficiently and one that sputters out prematurely. Management of inventory is important to any business that wants to succeed. Inventory systems are used in different companies today as a tool to make sure that the company strives into success. Inventory systems serve several functions for businesses; one purpose is raw material inventory system which is ensuring a sufficient amount of input is stocked for production. Currently the main problem faced in Kaliti Foods S.C is that the company is not in a position to know the adequate quantity of inventory to have in stock. Rather in the existing system it is believed that the more stock a company has is the best. It is true that having a large amount of inventory will help customers to make faster and immediate purchases; shipments will be done quicker, and will prevent the company of being out of stock of certain product and causing some opportunity cost with the customers. Therefore, in this research the group tried to examine the existing inventory management and cost evaluation methods applied and to recommend an inventory management systems that enable Kaliti Foods S.C has the best cost minimizing raw material order quantity, known as the Economic Order Quantity (EOQ).


Unity University-Quantitative Methods for Decision Making

Inventory Management System-Particular focus on Economic Order Quantity A case of Kaliti Food Share Company

1.1. Introduction
Inventory is generally defined as “stock at a particular location”. Traditionally inventory for a manufacturing business is classified as raw materials, work-inprogress, finished goods and MRO (Maintenance, Repairs and Operating supplies). Effective inventory management plays a critical role in the smooth and efficient running of any business. Reducing excess inventory and investing in the right inventories lead to improved customer service, increased inventory turnover, reduced costs and increased profitability. Successful Inventory Management is important for most businesses even for those, which do not sell any physical products. However, if you are a manufacturer, distributor or retailer of any products, inventory is the life blood of your business. The smooth running and profitability of your business is very much dependent upon how effectively you manage various inventory items you use or sell. The key decisions for effective inventory management include what to order, how much to order, when to order and when to schedule delivery. As a manufacturer have to make these decisions related to materials and components that are used in making the products you manufacture and also in relation to the products themselves. Here the decisions may be related to “manufacture” as opposed to “order”. Of course there are a number of other decisions a manufacturer need to make in terms of transportation, warehousing, internal movement of materials, maintaining accurate records and more. Overall speaking effective inventory management is aimed at having the right items or products at the right locations at the right time. That said, companies face a paradox; holding too much inventory ties up valuable cash, but too little inventory is risky as you may run out of stock to meet the demands of your customers. There are costs associated either way; to carry inventory, you incur warehousing costs, costs of capital tied up in inventory, 2 Unity University-Quantitative Methods for Decision Making

Inventory Management System-Particular focus on Economic Order Quantity A case of Kaliti Food Share Company

cost of keeping accurate records and more. If you carry too much inventory, you also run the risks of obsolescence. On the other hand, if you do not have enough inventory you can have stock-out,...
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