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Inventory Management 2
Inventory Management 2
Inventory meaning Independent demand VS Dependent demand Types of inventory Functions of inventory Objectives of inventory Requirements for effective inventory management. Inventory model
Basic EOQ model EPQ model Fixed Time period model Re-order model Single period model
Inventory
Is the stock of any item or resources used in an organization An inventory system is the set of policies and controls that monitor levels of inventory and determine
what level should be maintained, when stock should be replenished and how large order should be.
In mfg inventory refers to items that contribute to or become part of a firms product output In service inventory refers to the tangible goods to be sold and the supplies necessary to administer the service
Inventory
Independent Demand
Dependent Demand
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
Independent vs dependent
E.g. a computer
Types of Inventories
Raw materials & purchased parts Partially completed goods called work in progress Finished-goods inventories
Types of Inventories
Functions of Inventory
To meet anticipated demand To smooth production requirements To decouple operations To protect against stock-outs
To take advantage of order cycles To hedge against price increases To permit operations To take advantage of quantity discounts
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Costs of ordering and carrying inventory Inventory turnover is the ratio of average
A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of
A classification system
Periodic System
Physical count of items made at periodic intervals
Two-Bin System - Two containers of inventory; reorder when the first is empty Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached 0
214800 232087768
Ordering costs: costs of ordering and receiving inventory Shortage costs: costs when demand
exceeds supply
A B C
Percentage of Items
High
Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts
Usage rate
Reorder point
Receive order
Time
Lead time
Total Cost
Annual Annual Total cost = carrying + ordering cost cost TC = Q H 2 + DS Q
et differentiate TC with respect to Q. Setting the result =0, & solving Q TC/dQ= d QH/2 +d DS/Q = H/2- DS/Q2 H/2- DS/Q2 = 0 or DS/Q2 = H/2 or Q2 H= 2DS or Q= 2DS/H Note the second derivative is positive which indicates a minimum has been obtai
Q D TC = H + S 2 Q
Ordering Costs
QO (optimal order quantity)
Q OPT =
2DS = H
Production done in batches or lots Capacity to produce a part exceeds the parts usage or demand rate Assumptions of EPQ are similar to EOQ except orders are received incrementally during production
Q0 =
2DS p H p u
Derivation of EPQ
Annual carrying cost = I max* H/2 , Imax= Q/P ( p - u) where p = production and u= usage rate and Q/P is the run time or no of days. Annual carrying cost= QH(p-u)/2p Set up cost = DS/Q As we know the optimum size Q or EPQ occurs in the trade off between carrying cost and order cost. In other words when Carrying cost = Order cost. QH (p-u)/2p = DS/Q Q = 2DSp/H(p-u)
Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time. Service Level - Probability that demand will not exceed supply during lead time.
The rate of demand The lead time Demand and/or lead time variability Stock out risk (safety stock)
Safety Stock
Quantity Maximum probable demand during lead time Expected demand during lead time
ROP Safety stock reduces risk of stockout during lead time Safety stock
LT Time
Reorder Point
Risk of a stockout
ROP
Safety stock z
Quantity
z-scale
ROP
For constant Demand & Lead Time ROP= d L d= Average daily demand L = Lead Time
When demand is uncertain ? Of saftey stock comes Reorder point is ROP= d L+zL d= Average daily demand L= Lead time Z= number of std deviation L = Std deviation of usage during lead time zL = amount of safety stock
d refers to one day if lead time extends over several days we can use statistical premises that the std deviation of a series of independent occurrences is equal to the square root of the sum of the variances.ie L = 21+ 22+ 23+.+ 2L To find out Z use formula NORMSINV() or see
Example
Daily demand for a certain product is normally distributed with a mean of 60 and standard deviation of 7.The source of supply is reliable and maintains a constant lead time of six days.The cost of placing the order is $10 and annual holding cost are $.50 per unit.There are no stock out cost and unfilled orders are filled as soon as order arrives.Assume sales occur over the the entire 365 days of a year.Find the order quantity and rop to satisfy a 95% probability of not stocking out during lead time.
Solution
EOQ = 2DS/H = 2*60*365*10/.5= 876000= 936 units ROP= d L+zL = 60*6 +1.64*17.15=388 units L = 21+ 22+ 23+.+ 2L L = 6*72 =17.15
Fixed-Order-Interval Model
Orders are placed at fixed time intervals Fixed time period model generates order quantities that vary from period to period, depending on usage rate This generally requires higher safety stock FOIMQ = Average demand over the vulnerable
period+Safety Stock- Inventory currently on hand
Q= d(T+L) + zT+L -I T= Number of days b2n reviews, T+L = std deviations of demand over the review and lead time
FOIM
Daily demand for a product is 10 units with a standard deviation of 3 units.The review period is 30 days and lead time is 14 days.Mgt has set a policy of satisfying 98 % demand from items in stock.At the beginning of this review period there are 150 units in inventory.How many units should be ordered?
Q= d(T+L) + zT+L -I = 10(30+14) +2.05 (T+L) 2d 150 =10*44+2.05 (30+14)(3)2-150 440+2.05*19.9-150=331 units
Fixed-Interval Benefits
Tight control of inventory items Items from same supplier may yield savings in:
Fixed-Interval Disadvantages
Requires a larger safety stock Increases carrying cost Costs of periodic reviews
model for ordering of perishables and other items with limited useful lives Shortage cost: generally the unrealized profits per unit Excess cost: difference between purchase cost and salvage value of items left over at the end of a period
Identifies optimal stocking levels Optimal stocking level balances unit shortage and excess cost
Service levels are discrete rather than continuous Desired service level is equaled or exceeded
Cs Cs + Ce
Example
Ce = $0.20 per unit Cs = $0.60 per unit Service level = Cs/(Cs+Ce) = Ce Cs .6/(.6+.2) Service level = .75
Quantity
Operations Strategy
Tends to hide problems Easier to live with problems than to eliminate them Costly to maintain Reduce lot sizes Reduce safety stock
Wise strategy