Sustainable Solutions for SCM

Limitations The inventory system has physical, economical and administrative limitations. The physical limitations are for example storage room, material handling capacity and personnel. The economical limitations are, for instance, the limited operating capital. The management of the company can set some limitations to the inventory systems such as setting the service level target near one hundred percent for certain articles. Costs The decision problem of material management concerning the inventories is to define the optimal inventory level by the benefits and costs of the inventories. The costs of an inventory system can be divided into four groups: Purchasing costs These include the price and possible delivery costs. In the product inventory, it equals the own cost price of the production (= direct labour and material + the general costs of the production). Order/setting costs These include all costs caused by issuing one order. Order/setting costs are not dependent on the batch size. The order costs come from preparing the order and the setting costs from setting the production to produce the ordered batch into the product inventory. The holding costs of the inventory These can be determined as costs which alter when inventory levels alter. The holding costs include the following components: • Decreasing of the inventory value for example because of the physical deterioration, vanishing or technical-economical ageing. • Physical costs of the storage which include the handling costs, the operational costs of the inventory (heating, cooling etc.) And the protection costs of the material. • Insurance costs are in the long run dependent on the inventory value. • Capital costs are in principle the alternative costs of the capital bound into inventories; in practise it is the interest of the short-term external capital or marked deposition. It must be noticed that the holding costs of the inventory depends on excluding the capital costs on more or less the physical nature of the stored material. The holding costs then vary significantly between different lines of business. Most of the estimations vary between 20-40% of the inventory investment per year. Stock-out costs These are caused by the situations when the inventory is unable to serve the production (internal stock-out) or the customer (external stock-out). These costs include the after-delivery costs caused by delivery delays, sales lost because of the stock-out and the loss of good will (= bad will) because of the stock-out. Usually it is very difficult to determine the stock-out costs. The company management have to set a service level to the inventories and this level must be met.

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