IMC Essay Example | Topics and Well Written Essays - 3000 words

IMC - Essay Example Investment in large inventories believed to have an adverse effect on a firm’s cash flow as well as working capital. It basically represents a considerable portion of entire capital investment in any entity. It is in as a result essential to create a balance between the advantages of having a resources inventory of resources and the costs associated with maintenance in order to establish the optimum inventory level associated with each and every resources and keep the inventory costs minimal. Holding of stock can be quite expensive and hence controls are necessary to make sure that stock levels are kept at as low as possible. Stocks need to be controlled based on rational policies to create a balance between the cost of holding and the demand for the same. One of the approaches often adopted is the economic order quantity for stock replenishment which results into lowered holding cost reduces as well as a low total yearly inventory cost. Although maintaining exact EOQ is somet ime impossible, working within vicinity of it outcomes in lower total yearly inventory cost is possible and commendable. Holding cost is considered a straight line that directly varies with ordering quantity. This is according to the classic EOQ model and is substantially true for non-perishable products. This research will check through linear regression the relation of holding cost with time and quantity that it is a curve. Introduction In the period of recession of each and every firm is keen on to cutting their costs and inventory cost management plays a vital role in this endeavor. Managing inventory effectively is an important way of regulating costs and, as a result, improving the profitability of organization. Given that a higher quantity is not the best †¦ and a lower quantity is not similarly the best †¦ there has to be some â€Å"Economic order quantity (EOQ)† which ensures minimal total variable costs associated with the inventory (Cardenas 950). Total v ariable costs are often computed based on a yearly terms and incorporates two components, which are the costs of ordering and holding inventory. Yearly ordering cost is defined as the number of orders that one places multiplied by the marginal or incremental cost one incurs for every order. This incremental cost incorporates various components such as the costs of preparing purchase orders, making pay for vendor's invoice, as well costs associated with inspection and handling of the material upon arrival. It is not easy to estimate these components precisely but a ball?park figure is good a good option for doing this. The holding costs are used within the EOQ model needs to also be marginal in nature. Such may include although not limited to insurance, taxes, as well as storage charges (Liberatore 394). Some of the entities also include the interest cost associated with the money tied up within the inventory. In classical EOQ model, as the quantity rises holding cost as well rise pr oportionally i.e. it remains lineal to the time function although in real life, the cumulative holding cost is indeed a convex time function due to the fact that the handling and holding costs work side by side to rise alongside cumulative rise in daily cost due to wastage, pilferage as well as obsolescence (Liberatore 395). This is however not common with non-perishable goods such as