Inventory Management & Asset Utilization- Key to Procurement Success


By: Arun NV -- Senior Research Analyst

31 December, 2014

Inventory Management & Asset Utilization- Key to Procurement Success

The year 2014 saw mineral prices dropping, particularly gold prices touching USD 1250 per ounce (which is about 10% lower than the cash cost for most of the mining companies). An excess inventory pileup has been observed with various mining firms due to this drop in market prices for minerals. A mining firm has over 30% of its current assets and working capital invested in inventory and hence there is a need to optimize their inventory in reducing the holding cost. An improper procurement strategy may lead to operational downtime (due to capacity mismatch and sub optimal level of stock requiring storage) and a decentralized procurement leads to duplicate orders being placed, causing excess and redundant stock issues. A clear stock holding policy is a must for optimum working capital management. Similarly, efficient coordination between store department and facilities department is mandatory to ensure optimized inventory holding. Mathematical analysis of inventories held, such as ABC inventory classification, can be used by inventory managers to put their efforts where greatest benefits, in terms of cost reduction as well as maintaining a smooth availability of stock. This whitepaper reflects on the types, uses and cost associated with inventory along with explaining the various strategies that can be used by mining companies in determining absolute order quantities. The paper also reflects on why companies practicing an optimal order quantity may not succeed all the time. The paper includes excel based tools that illuminates calculation of order quantities based on requirement and an assessment of inventory management. The tool attached helps in calculating appropriate safety stock inventory policies including Minimum Cost Service Level, Inventory Reorder Point, One Time Buy Inventories and Economic Order Quantity (EOQ)


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