Multi Product Economic Order Quantity with Joint Ordering and no Stock Outs - Case Study Example

Inventory Management Policy Inventory Cost Various elements of inventory cost include ordering cost, carrying cost, purchasing cost and stock-outs cost. Variation in ordering quantity results into variation in cost. The important elements of ordering cost includes preparation and Cost of tendering or bidding, negotiations with the suppliers, selection of suppliers and placement of purchase order. Ordering cost per unit comes down with increase in quantity. Ordering – Cost Curve Rationale for inclusion in Joint Ordering We have considered cement, paint and tiles for joint ordering purposes.

Once the frame of the building is in place, the need for cement, tiles and paint arises, though use of cement is involved in all stages of construction. Plastering of walls with cement, flooring and painting work are simultaneously done at different parts of the building in an alternative manner in view of curing. Therefore, clubbing these materials for joint ordering is eminently justified since mostly suppliers of building materials deal with all these materials under one roof. Order Quantity and Joint Ordering Cost Since ordering cost is a component of material cost, order quantities for various materials considered for joint ordering need to be matched and fixed.

It is mostly a question of alignment in the operations, taking into account the constraints such as availability of storage space or other factors. Stock Outs Situation Shortages or stock-out situations are avoided under efficient inventory management system. A system where purchases are based on pre-determined re-order level at which replenishment of stock takes place, considering the lead times and contingencies based on experience and market conditions, this issue of shortages or stock out situations arise when the stock level breaches the minimum level which is set below the re-order level.

The cost of emergency purchasing and transportation will be high in these cases. Also, these situations involve additional cost since the customers’ demand in relation to delivery may not be fulfilled and result into penalties in the construction industry. Inventory Control Inventory comprises stocks of various materials required in the operation of the business, in this case construction. The main objective of inventory control is to achieve maximum efficiency in the operations with the minimum investment in inventory.

Various organizations in various types of industries adopt different inventory models depending upon the level of uncertainty with reference to lead time and demand. The understanding of ordering cost and carrying cost and its relationship for striking a balance in order quantity will be useful in deciding the minimum, maximum and reorder levels for various items of stocks for joint ordering in a multiproduct environment to keep the inventory cost at minimum level. The inventory carrying cost will be very high if the order quantity is at higher level.

On the other hand, if the size of the order is small, the ordering cost will be very high. The relationship between carrying cost and ordering cost is used in working out economic order quantity. Economic Order Quantity = SQRT((2*A*S)/C) Where A = Annual usage in units S = Ordering cost per order C = Annual