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Inventory Problems

Inventory Problems

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this document contains some important questions of inventory
this document contains some important questions of inventory

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Solving Inventory Management Problems

Henry C. Co Technology and Operations Management, California Polytechnic and State University

Inventory
Inventory: stockpiles of raw materials, components, semi-finished or finished goods waiting to be processed, transported or used at a point of the supply chain. Reasons to have inventories
l l l l l

Improving service level, Reducing overall logistics costs, Coping with randomness in demand and lead times Making seasonal items available all year Speculating on price patterns, etc.

Annual inventory holding cost can be 30% of the value of the materials kept in stock, or even more.
Inventory Management Problems

Ghiani, p. 121
2

Relevant Cost
Procurement costs Holding costs Shortage costs Obsolescence costs

Ghiani, p. 122
Inventory Management Problems 3

Inventory Management Models
Deterministic vs. stochastic models Fast- vs. slow-moving items No. of stocking points No. of commodities Instantaneous resupply v. non-instantaneous resupply Discrete vs. continuous; finite vs. infinite horizon; shortage allowed/disallowed etc.
The Economic Order Quantity model you learned in TOM 301 is an example of a “single stocking point, single-commodity, instantaneous resupply, shortage not allowed, continuous model with infinite horizon.”
Ghiani, p. 123
Inventory Management Problems 4

EOQ represents trade-off between fixed cost associated with production or procurement against inventory holding costs. units/year Fixed cost of procurement. $/unit/year holding cost Quantity ordered. $/order Variable cost of procurement. units Inventory Management Problems 5 .The EOQ Model in TOM 301 The total cost curve reaches its minimum where the carrying and ordering costs are equal. D= S= v = H= Q= Rate of demand.

p. 129 Inventory Management Problems 6 .Instantaneous Resupply Ghiani.

The Classical EOQ Model The total cost curve reaches its minimum where the carrying and ordering costs are equal. Annual Cost TC = Q 2 H + D S Q Ordering Costs (optimal order quantity) QO Inventory Management Problems 7 Order Quantity (Q) .

Q OPT = 2DS = H 2(Annual Demand)(Or der or Setup Cost) Annual Holding Cost Inventory Management Problems 8 . we take the derivative of the total cost function (TC) and set the derivative (slope) equal to zero and solve for Q.Using calculus.

Shortages are not allowed. Ghiani. Its component Y02PN. Manufacturing this product requires a time-consuming set-up that costs $800. p. has a demand of 220 units per year and a unit production cost of $1200.Try This! Al-Bufeira Motors manufactures spare parts for aircraft engines in Saudi Arabia. including warehousing costs. The current annual interest rate p is 18%. produced in a plant located in Jiddah. 123 Inventory Management Problems 9 .

p. 126 .Non-instantaneous Resupply (Batch Production Model) Ghiani.

l In 10 days.Suppose production rate = p= 200 units/day. and demand rate = d = 80 units/day. l etc. l In 20 days. the inventory level would be 10 days * 120 unit/day = _____ units. Inventory Management Problems 11 . the inventory level would be 20 days * 60 unit/day = _____ units. inventory will increase at __________ (p-d) units/day. Since p>d. Suppose current inventory is 0.

The machine produces a batch. and when to stop. The run time is the amount of time the machine is producing a batch. if we want to produce 2. This is call batch production. then resumes production at some later time when the inventory of this item is low.000 units per batch. l l When a machine is used to produce two or more products. then stops. the run time is _____ days. Inventory Management Problems 12 . one product at a time. l Producing at 200 units/day. One decision the production manager has to make is when to start producing each product. Batch production is very common in industry.

200. The inventory at the end of the run time is the maximum inventory. how long will it take to deplete the inventory? l Answer: It will take (p-d)*t/d = _____ days to deplete the inventory. This is the off-time.000 units in 10 days. Why? After completing a batch.80 =120) units/day. It is equal to (p-d)*t = _____ units. The machine produced 2. the inventory level will be _____ units in 10 days. what is the inventory at the end of the run time? l l Since inventory will be rising at (200. Inventory Management Problems 13 .Maximum Inventory Level If current inventory level is 0. and the maximum inventory level is only 1.

there is a period of time the machine is producing the product (the run time). there are D/Q = 12 cycles per year.000 units. and a period to allow the inventory to deplete (the off time). there will be D/Q = _____ batches per year. In each cycle. Inventory Management Problems 14 .000 units per batch.Number of Runs Per Year If annual = D = 24. how many runs do we produce each year? l Answer: Since we are producing Q = 2. l In other words.

Average Inventory What is the average inventory level? l l During the run time. We can rewrite the expression for the average inventory as (p-d)*t/2 = (p-d)*(Q/p)/2 = (1-d/p)Q/2. Inventory Management Problems 15 . l Since p*t = Q. The average inventory level therefore = _____ units. the inventory level drops from a maximum of (p-d)*t units to 0. then t = Q/p. During the off time. the inventory level rises from 0 to the maximum level of (p-d)*t = _____ units.

Tradeoff What is the average inventory if the batch size equals the annual demand D = 24. We need to run one batch per year. What is the average inventory if the batch size equals the weekly demand of 480 units (assuming 50 weeks/year)? How many batches do we have to run per year? l Answer: _____ units. Inventory Management Problems 16 . Run _____ batches per year.000 units? How many batches do we have to run per year? l Answer: The average inventory = (1-d/p)Q/2 = _____ units.

Adding the two costs. we have H*(1-d/p) Q/2 + S*D/Q. the optimal batch size is Inventory Management Problems 17 . Using calculus. Since the average inventory level is (1-d/p)Q/2. Since we need to run D/Q batches per year. the annual inventory-carrying cost is H*(1-d/p) Q/2. the annual set-up cost is S*D/Q. Suppose the cost to set-up the machine to produce a batch is S.Optimal Tradeoff Suppose the cost to carry one unit of inventory for one year is H.

The replenishment rate r is 40 pallets per day. the demand rate d for tomato purée is 400 pallets a month.5% (including warehousing costs). Issuing an order costs £30. p.Try This! Golden Food distributes tinned foodstuff in Great Britain. 126 Inventory Management Problems 18 . The value of a pallet is c = £2500 and the annual interest rate p is 14. Shortages are not allowed. Ghiani. In a warehouse located in Birmingham.

133 Inventory Management Problems 19 .Quantity Discounts-On-All-Units Ghiani. p.

Placing an order costs €50. p. Ghiani. if the amount bought is less than 500 boxes.5% discount is applied. if more than 2000 boxes are ordered.Try this! Maliban runs more than 200 stationery outlets in Spain. 134 Inventory Management Problems 20 . The firm buys its products from a restricted number of suppliers and stores them in a warehouse located near Sevilla. Maliban expects to sell 3000 boxes of the Prince Arthur pen during the next year. an additional 0. The current annual interest rate p is 30%. The supplier offers a box at €3. The price is reduced by 1% if 500– 2000 boxes are ordered. Finally.

newspapers Fresh products l Services Airline industry .Single Period Stochastic Models Short product life cycles / Long lead times l l Computers Apparel Fresh food.

These models have the objective of properly balancing the cost of Underage – having not ordered enough products vs. this class of problems is typically called the “Newsboy” problem Inventory Management Problems 22 . Overage – having ordered more than we can sell These models apply to problems like: l l l Planning initial shipments of ‘High-Fashion’ items Amount of perishable food products Item with short shelf life (like the daily newspaper) Because of this last problem type.

and are represented by the random variable. Inventory Management Problems 23 ..e. Daily sales cannot be predicted exactly. D. The newsboy must carefully consider these costs: l l cU: underage cost (when D≥S). unit cost c . a newsboy must decide on the number of papers to purchase. This is the unit cost of overstocking.. unit revenue r unit cost c. (c-u). (r-c) cO: overage cost (when D≤S).Stochastic Model 1: The Newsboy Model At the start of each day. i. i. for example.unit salvage value u. This is the unit opportunity cost. for example.e.

0}] + co E[max{S-D. 141-142 Inventory Management Problems 24 . 0}] Solving for Q. p. the optimal order quantity S satisfies the following condition: Equation (4-36) can be rewritten as: cu r −c r −c r −c = = = r − u r − u + (c − c) (r − c )(c − u ) cu + c0 Ghiani.The objective is to Minimize the expected cost: cu E[max{D-S.

Graphical Representation Inventory Management Problems 25 .

Uniform Demand Between [A.B] Solve cu S* − A = B − A cu + co S = A+ (B − A) ⋅ * cu cu + co r −c = A+ (B − A) ⋅ r −u 26 Inventory Management Problems .

Ghiani. p.Try this on Excel! Emilio Tadini & Sons is a hand-made shirt retailer. Tadini faces the problem of ordering a new bright color shirt made by a Florentine firm. Thus co = 34 and cu = 11. close to Piazza di Spagna. 142 Inventory Management Problems 27 . The purchasing cost is c = €18 while the selling price is r = €52 and the salvage value is u = €7. This year Mr. located in Rome (Italy). Mr. S * = A+ (B − A) ⋅ cu cu + co 52 − 18 r −c = A+ (B − A) ⋅ = 200 + (350 − 200 ) ⋅ = 313 52 − 7 r −u = 200 + (350 − 200 ) ⋅ 34 = 313 34 + 11 Hence. l l He assumes that the demand is uniformly distributed between 200 and 350 units. Tadini should order S = 313 units.

Download Excel worksheet Inventory Management Problems 28 .

l l l l The unit cost of the handbag to the store is $28.50 and the handbag will sell for $150. how many bags should the buyer purchase? Example from Nahmias. Suppose that the sales of the bags are equally likely to be anywhere from 50 to 250 handbags during this season.Another Example … The buyer for Needless Markup. Production and Operations Analysis Inventory Management Problems 29 . Assume that this cost is attached to unsold bags only. a famous “high end” department store. the store accountants estimate that there is a cost of $.00.00.40 for each dollar tied up in inventory. Based on this. In addition. must decide on the quantity of a high-priced women’s handbag to procure in Italy for the following Christmas season. as this dollar invested elsewhere could have yielded a gross profit. Any handbags not sold by the end of the season are purchased by a discount firm for $20.

Equation (4-36) does not account for inventory-holding cost! Inventory Management Problems 30 .

Distribution of Demand Is Normal Inventory Management Problems 31 .

Weekly demand for the Journal is normally distributed with mean 10 and standard deviation 5. the owner of a newsstand purchases a number of copies of The Computer Journal. l Question: How many copies should he order? Example from Nahmias.Example Every week. l He pays 25 cents for each copy and sells each for 75 cents. Production and Operations Analysis Inventory Management Problems 32 .

Using NORMSINV Inventory Management Problems 33 .

Using NORMINV Inventory Management Problems 34 .

Using Table Inventory Management Problems 35 .

Otherwise. Ghiani. the best policy is to order S −q0. (ii) otherwise. p. the optimal replenishment policy can be obtained as follows. two cases can occur: (i) if the expected revenue ρ(S) − k − cq0 associated with reordering is greater than the expected revenue ρ(q0) − cq0 associated with not reordering. Hence. If q0 ≥S. then S − q0 units have to be reordered. S) Policy for Single Period : l l If there is an initial inventory q0 and a fixed reorder cost k. no reorder is needed.Stochastic Model 2 (s. 142 Inventory Management Problems 36 . no order has to be placed. provided that the expected revenue associated with this choice is greater than the expected revenue associated with not producing anything.

a constant quantity q is ordered. As soon as its net value I(t) (amount in stock . p. Ghiani. inventory level monitored continuously.unsatisfied demand + orders placed but not yet received) reaches a reorder point l. 143 Inventory Management Problems 37 .Stochastic Model 3 In reorder point policy (fixed order quantity).

Ghiani. T≥0). qi = S − I (ti) units are ordered. 145 Inventory Management Problems 38 . At time ti. The order-up-to-level S represents the maximum inventory level in case lead time tl is negligible.Stochastic Model 4 In the reorder cycle policy (periodic review policy) stock level is reviewed periodically at time instants ti (ti+1 = ti + T . p.

the (s. S) policy is similar to the reorder cycle inventory method. 147 Inventory Management Problems 39 . S −I(ti) items are ordered if I(ti) < s. if s is small (s → 0). At time ti . S) policy illustrated for the one-shot case. S) inventory policy is a natural extension of the (s. Ghiani. p.Stochastic Model 5 The (s. S) policy is similar to a reorder level policy with a reorder point equal to s and a reorder quantity q ≈ S. the (s. On the other hand. If s is large enough (s → S).

The capacity of each bin is 400 boxes. and the inventory level does not have to be monitored continuously. Browns supermarkets make use of the two-bin policy for tomato juice bottles. an order is issued for an amount equal to the bin capacity. 147-148 Inventory Management Problems 40 . Last 6 December.Stochastic Model 6 The two-bin policy is a variant of the reorder point inventory method where no demand forecast is needed. As soon as one of the two becomes empty. Ghiani.2). p. USA) the inventory level on 1 December last was 780 boxes of 12 bottles each. the inventory level was less than 400 boxes and an order of 400 boxes was issued (see Table 4. containing 12 bottles each. The order was fulfilled the subsequent day. In a supermarket close to Los Alamos (New Mexico. The items in stock are assumed to be stored in two identical bins.

Simulation of the (S. S) policy is a good compromise between the reorder level and the reorder cycle policies. Unfortunately. S and s are difficult to determine analytically. Inventory Management Problems 41 . S) Policy Excel Worksheet The (s. parameters T . Therefore. simulation is often used in practice.

Homework The Ortiz County Hospital Blood Bank Case .

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