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INVENTORY CONTROL (KNOWN DEMAND)

IE 505 PRODUCTION PLANNING AND CONTROL

Inventory Control (known demand)

Introduction

\3rd quarter of '91 total US inventories = $1.03 trillion"

1. Types of Inventories

 Raw Material - direct & indirect


 Components
 Work in Process (WIP)
 Finished Good

2. Reasons for Inventory Holding

 Set-up costs / Economies of scale


 Uncertainties - internal & external
 Smoothing
 Speculation, Quantity discounts, Logistics
 Transportation, Control costs

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University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Inventory Control (known demand)

3. Relevant Costs

 Holding (carrying): space, tax/insurance, breakage, interest


 Order: bookkeeping, receiving, handling
 Shortage (stock-out): lost sales, loss-of-goodwill

4. Characteristics of Inventory Systems

 Demand: constant / variable; known / random


 Lead time
 Review time: continuous / periodic
 Excess demand
 Changing Inventory

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University at Bu alo - IE

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THE EOQ MODEL

IE 505 PRODUCTION PLANNING AND CONTROL

The EOQ Model

Assumptions

 Demand rate, known, constant =  units/time


 No shortages
 Zero Lead Time (will be relaxed later)
 Costs include
1. Order Setup cost = K
2. Order per unit cost = c
3. Holding per unit cost per period = h

Constant Quantity to be ordered = Q


Min. average cost per unit time, G(Q): Find Q

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University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

The EOQ Model

Ordering cost for each cycle = K + cQ


Ordering cost per unit time = (K + cQ)=T ; T = Q=
Average inventory holding cost = hQ=2

K + cQ hQ K + cQ hQ
+
=
+
T
2
Q=
2
K
hQ
+ c +
=
Q
2

G(Q) =

To minimize G(Q) set 1st derivative = 0


K h
+ =0
G0(Q) =
2
Q
2
v
u

Q = ut 2K

Check G00(Q)

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2K
00
G (Q) = 3 > 0 for Q > 0

c Rakesh Nagi

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University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

The EOQ Model

Inclusion of Order Lead Time

Order Lead time, ;  < T


Reorder point, R: on-hand inventory at order instant
R = 
If  > T; subtract from  whole cycles: R =  remainder

 Suggested Reading: Sensitivity, p. 208.


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University at Bu alo - IE

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EXTENSIONS TO THE EOQ MODEL

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Finite Production Rate

 Finite and constant production rate = P units/time


 Demand rate, known, constant =  units/time
 P >  for feasibility
 No shortages
 Costs include
1. Order Setup cost = K
2. Ignore per unit cost = c
3. Holding per unit cost per period = h

c Rakesh Nagi

University at Bu alo - IE

67

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Notation & Relations:

 Cycle length = T
 T = T1 + T2; T1 is the uptime, T2 is the downtime
 Maximal inventory level = H (H =6 Q)
 Per cycle: # ordered (Q) = # produced (P T1) = # consumed (T )
T1 = Q=P
H=T1 = P 
H = Q(1 =P )

c Rakesh Nagi

University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Average annual cost function:

K hH
+
T
2
K hQ
=
+
(1 =P )
Q
2
h0 = h(1 =P )
v
u
u

Q = t 2K
h

G(Q) =

(25)
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University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Back-ordering model: shortages permitted

 Shortage cost per unit per period = p

Notation & Relations:

 T = T1 + T2; T1 is +ve inv period, T2 is -ve inv period


 Maximal inventory level = M (M 6= Q)
T1 = M=
T2 = (Q M )=

c Rakesh Nagi

University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Ordering cost per unit time = (K + cQ!)=T


2
M
Average inventory holding cost = h 20 =T

1
2
(
Q
M
)
@
A
2

Average inventory backlogging cost = p


v
u
u
u
t2

=T
v
u
u
u
t

(h+p)
h+p
Q = Khp
= QEOQ
p
v
v
u
u
u
2
Kp
u p

u
t
= QEOQt
M =

h(h+p)

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University at Bu alo - IE

h+p

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Quantity Discount Models

 Cost per unit c is dependent on order size Q


Discount schedules

 All-Units
 Incremental

Example: all-unit

:30Q for
C (Q) = :29Q for
:28Q for
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0  Q < 500
500  Q < 1000
1000  Q

University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

EOQ Extensions: Quantity Discounts...

ALGORITHM: all-unit
1. Compute the largest realizable EOQ value.
1.1. compute EOQ for lowest price.
1.2. if feasible: stop
1.3. otherwise: continue with next higher price
2. Compare annual cost at largest EOQ and break-point prices
2.1. for each break-point price, compute annual cost
2.2. select lowest of above and EOQ
3. Optimal Q is the one for which annual cost is minimal.
c Rakesh Nagi

University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

EOQ Extensions: Quantity Discounts...

ALGORITHM: incremental
Example

so that

:30Q for 0  Q  500


C (Q) = 150 + :29(Q 500) for 500  Q  1000
295 + :28(Q 1000) for 1000  Q

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:30 for 0  Q  500


C (Q)=Q = :29 + 5=Q for 500  Q  1000
:28 + 15=Q for 1000  Q

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Average annual cost function:

G(Q) = C (Q)=Q + K=Q + I [C (Q)=Q]Q=2


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University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

ALGORITHM: incremental
1. Determine the expression for C (Q)=Q
2. De ne equation of G(Q) using C (Q)=Q
3. Compute Q for each price interval

4. From realizable Q 0s above pick EOQ corresponding to the lowest


annual cost

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University at Bu alo - IE

75

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Resource Constrained Multi-Product Systems

 Multiple products
 Resource constraints: total $ value, space
Downscaling method:
or space consumed) = constant
Assumption: (per unit cost
holding cost

 Compute unconstrained EOQ's for all products


 If EOQ's satisfy constraints, stop
 Otherwise, compute smallest downscaling ratio (available/required)
 Downscale every EOQ by the above ratio

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University at Bu alo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Resource Constrained Multi-Product Systems

If assumption does not hold:

 Formulate a Lagrangean Function


 Find partial derivatives of LF and set = 0
v
u
u
Kii

 Qi ut h2i+2
wi
 Determine Lagrange multiplier  by interval bisection
=

See Appendix 4-A for details


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University at Bu alo - IE

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