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Explain Inventory system. Discuss the cost involved in inventory systems.

Short note on Cost of inventory System.

Explanation of inventory system

• The Inventory System provides a complete set of methods to support inventory handling. All users of the Inventory System need the same functionality to complete their varied tasks.

• The Inventory System allows you to:

1. Remove items from inventory.

2. Notify the store of a customer’s intent to purchase an item that is not currently in stock. (back order)

3. Notify the store of a customer’s intent to purchase an item that has never been in stock. (pre order).

• The administrator of the store uses the inventory system to:

1. Place a specific number of items on a shelf for customers to purchase, backorder, or pre order.

2. Decrease the number of items available for purchase, back order, or pre order, perhaps because of an error in stocking the item.

3. Determine the number of items available for purchase, back order, or pre order.

4. Determine when a specific item will be back in stock.

   There are three types of costs that must be considered in setting inventory levels:

   Ordering Cost or Setup cost

5. Ordering costs are those fees associated with placing an order, including expenses related to personnel in purchasing department, communications, and the handling of related paper work.

6. Lowering these costs would be accomplished by placing small number of orders, each for a large quantity. Unlike carrying costs, ordering expenses are generally expressed as a monetary value per order.

   Holding or Carrying cost:

7. They are expenses such as storage, handling, insurance, taxes, obsolescence, theft, and interest on funds financing the goods.

8. These charges increase as inventory levels rise. To minimize carrying costs, management makes frequent orders of smallquantities.

9. Holding costsare commonly assessed as a percentage of unit value, rather than attempting to derive monetary value for each of these costs individually.

10. This practice is a reflection of the difficulty inherent in deriving a specific per unit cost, for example, obsolescence or theft.

• Stock-out costs or shortage cost:

1. They include sales that are lost, both short and long term, when a desired item is not available; the costs associated with back ordering the missing item; or expenses related to stopping the production line because a component part has not arrived.

2. These charges are probably the most difficult to compute, but arguably the most important because they represent the costs incurred by customers when an inventory policy falters.

3. Failing to understand these expenses can lead management to maintain higher inventory levels than customer requirements.