Professional Documents
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Slides Prepared by John Loucks
Slides Prepared by John Loucks
by John Loucks
Inventory Management
2
Overview
3
Opposing
Opposing Views
Views of
of Inventory
Inventory
4
Why We Want to Hold Inventories
5
Why We Want to Hold Inventories
● Finished Goods
●
Essential in produce-to-stock positioning strategies
●
Necessary in level aggregate capacity plans
●
Products can be displayed to customers
● Work-in-Process
●
Necessary in process-focused production
●
May reduce material-handling & production costs
● Raw Material
●
Suppliers may produce/ship materials in batches
●
Quantity discounts and freight/handling $$ savings
6
Why We Do Not Want to Hold Inventories
7
Inventory
8
Nature
Nature of
of Inventory
Inventory
9
Two Fundamental Inventory Decisions
10
Independent Demand Inventory Systems
11
Dependent Demand Inventory Systems
12
Independent vs. Dependent Demand
Independent Demand
(finished goods and spare parts)
A Dependent Demand
(components)
B(4) C(2)
13
Inventory Costs
14
Inventory Costs (continued)
15
Balancing Carrying against Ordering Costs
Minimum
Higher
Total Annual
Stocking Costs
Total Annual
Stocking Costs
Annual
Carrying Costs
Annual
Lower
Ordering Costs
Order Quantity
Smaller EOQ Larger
16
Inventory
Inventory Costs
17
Fixed
Fixed Order
Order Quantity
Quantity Systems
Systems
18
Behavior of EOQ Systems
19
Behavior of EOQ Systems
20
Determining
Determining Order
Order Quantities
Quantities
● Basic EOQ
● EOQ for Production Lots
● EOQ with Quantity Discounts
21
Model I: Basic EOQ
● Assumptions (continued)
●
Stockout, customer responsiveness, and other costs
are inconsequential
●
acquisition cost is fixed, i.e., no quantity discounts
● Annual carrying cost = (average inventory level) x
(carrying cost) = (Q/2)C
● Annual ordering cost = (average number of orders per
year) x (ordering cost) = (D/Q)S
● . . . more
23
Model I: Basic EOQ
EOQ = 2 DS / C
24
Example: Basic EOQ
25
Example: Basic EOQ
26
Example: Basic EOQ
27
Example: Basic EOQ
28
Model II: EOQ for Production Lots
29
Model II: EOQ for Production Lots
2DS p
EOQ =
C p − d
30
Example: EOQ for Production Lots
31
Example: EOQ for Production Lots
EOQ = 2(292,000)(5,000)/2.10[3,500/(3,50
0-800)]
= 42,455.5 tons per order
32
Example: EOQ for Production Lots
33
Example: EOQ for Production Lots
34
Model III: EOQ with Quantity Discounts
35
Model III: EOQ with Quantity Discounts
36
Model III: EOQ with Quantity Discounts
37
Model III: EOQ with Quantity Discounts
38
Example: EOQ with Quantity Discounts
40
Example: EOQ with Quantity Discounts
41
Example: EOQ with Quantity Discounts
42
Determining
Determining Order
Order Points
Points
43
Basis for Setting the Order Point
44
Basis for Setting the Order Point
45
Basis for Setting the Order Point
46
DDLT Distributions
47
Setting Order Point
for a Discrete DDLT Distribution
● Assume a probability distribution of actual DDLTs is
given or can be developed from a frequency
distribution
● Starting with the lowest DDLT, accumulate the
probabilities. These are the service levels for DDLTs
● Select the DDLT that will provide the desired
customer level as the order point
48
Example: OP for Discrete DDLT Distribution
49
OP for Discrete DDLT Distribution
50
OP for Discrete DDLT Distribution
51
Setting Order Point
for a Continuous DDLT Distribution
● Assume that the lead time (LT) is constant
● Assume that the demand per day is normally
distributed with the mean (d ) and the standard
deviation (σ d )
● The DDLT distribution is developed by “adding”
together the daily demand distributions across the
lead time
● . . . more
52
Setting Order Point
for a Continuous DDLT Distribution
● The resulting DDLT distribution is a normal
distribution with the following parameters:
EDDLT = LT(d)
σ DDLT = LT( σd) 2
53
Setting Order Point
for a Continuous DDLT Distribution
● The customer service level is converted into a Z value
using the normal distribution table
● The safety stock is computed by multiplying the Z
value by σ DDLT.
● The order point is set using OP = EDDLT + SS, or by
substitution
OP = LT(d) + z LT(σ d )2
54
Example:
Example: OP
OP -- Continuous
Continuous DDLT
DDLT Distribution
Distribution
55
Example: OP - Continuous DDLT Distribution
● EDDLT = 15 gallons
● σ DDLT = 6 gallons
56
Example: OP - Continuous DDLT Distribution
Area = .2967
Area = .2033
Area = .5 z
0 .833
57
Example: OP - Continuous DDLT Distribution
58
Example: Setting Order Points
● We can also use Excel to get the stockout risk and the
corresponding customer service level given the value
of Z
● CSL = Normsdist(0.833)= 0.7976
● SR = 1-.7976 = .2024
59
Rules of Thumb in Setting OP
OP = EDDLT + EDDLT
60
Fixed
Fixed Order
Order Period
Period Systems
Systems
61
Behavior of Economic Order Period Systems
62
Behavior of Economic Order Period Systems
63
Determining the EOP
EOP = 2S / DC
64
Other
Other Inventory
Inventory Models
Models
65
Hybrid Inventory Models
66
Hybrid Inventory Models
67
Single Period Inventory Models
68
Single Period Inventory Models
69
Some Realities of Inventory Planning
● ABC Classification
● EOQ and Uncertainty
● Dynamics of Inventory Planning
70
ABC Classification
71
ABC Classification
● Typical observations
●
A small percentage of the items (Class A) make up
a large percentage of the inventory value
●
A large percentage of the items (Class C) make up
a small percentage of the inventory value
● These classifications determine how much attention
should be given to controlling the inventory of
different items
72
ABC Classification System
73
EOQ and Uncertainty
74
EOQ and Uncertainty
75
Dynamics of Inventory Planning
76
Miscellaneous Systems:
Optional Replenishment System
Maximum Inventory Level, M
q=M-I
Two-Bin System
79
End
End of
of Chapter
Chapter 14
14
80