Inventory Management in Working Capital

The three key drivers of working capital management are accounts receivable, inventory and accounts payable. While accounts receivable and accounts payable are mainly concerned with negotiation power, inventory management is fairly dependent on technical calculations. 

Inventory management is critical since it allows companies to avoid stockouts, manage different locations and preserve correct records. One of the aspects to be considered in inventory management is to optimise batch production quantity. 

Let’s watch the next video to understand the concept of batch production optimisation.

Note: Inventory-holding cost is also known as warehousing cost. 

In the video,  you learnt to optimise the overall cost of production. It is important to determine the optimum batch size and number of units to be produced in each batch. This prevents an organisation from paying additional set-up costs and warehousing costs. 

You also learnt to determine the total cost of production through the following formulas:

• Total cost = Inventory holding cost + Set up cost

• Inventory holding costs = (Inventory holding costs per unit) * (Average number of units held in inventory)

• Average quantity held in inventory = $\frac{Batchsize}{2}$

• Size of a batch = $\frac{Totalquantitysoldduringtheyear}{Numberofbatches}$

Additionally, you learnt to determine an optimum number of batches through a graphical representation. 

In the next segment, you will learn about the long-term versus the short-term need for working capital. 

Finally, you learnt to calculate the optimal batch size by using the optimum batch size formula:

$Optimumbatchsize=\sqrt{\frac{Inventory-holdingcostperunitXAnnualquantityproduced}{2XSetupcostperbatch}}$

$Economicorderquantity=\frac{Annualquantityproduced}{Optimumnumberofbatches}$

In the next segment, you will learn about the long-term versus the short-term need for working capital.