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Inventory Management2 PDF
Inventory Management2 PDF
• Definition
• Inventory value: the dollar value of all spares and repairables that are
maintained in inventory and currently in order.
• Stock turnover ratio: (also known as stock rotation) is the value of stock
issues per time period expressed as a percentage of average inventory
value.
Spare parts
inventory
systems
Non-repairable Repairable
components components
Low rotation
items
10
Constant demand, zero lead time
Stock
Q
Average = ½ Q
time
Cost = P x I x ½ Q
P is the price of the component and
I is the factor associated with the holding costs
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Economic Order Quantity
12
Economic Order Quantity
13
Total stockholding and ordering costs
EOQ is the quantity at which total inventory cost will be minimum and
ordering cost will be equal to inventory holding cost.
Total cost
Cost ($/unit)
P x I x ½ Q = C x D/Q
Ordering cost = C x D/Q
EOQ Order Quantity
D is the annual demand for components
Q is the order quantity
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Example
½
Then EOQ = [(2x120x20)/)0.2x100)] = 15.49
or 15 spares, when rounded.
16
EOP Constant demand, constant lead time
Stock
Q
Q
Average =
R 2
time
TL TL
Formulation of EOP:
R = dTL, where d = demand rate per time period
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+∞ 1 1 𝑥𝑥−µ 2
−
𝑓𝑓 𝑥𝑥 = � 𝑒𝑒 2 σ 𝑑𝑑𝑑𝑑 … . . (1)
−∞ σ 2π
𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤, µ = 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑎𝑎𝑎𝑎𝑎𝑎 σ = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
𝑥𝑥 − µ
Considering =z
σ
𝑑𝑑𝑑𝑑 = σ𝑑𝑑𝑑𝑑
+∞ 1 1
− 𝑧𝑧 2
φ 𝑧𝑧 = � 𝑒𝑒 2 𝑑𝑑𝑑𝑑 … … (2)
−∞ 2π
𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤, 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 = 0 𝑎𝑎𝑎𝑎𝑎𝑎 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑=1
1
𝐼𝐼𝐼𝐼 𝑧𝑧 2 = 𝑡𝑡
2
𝑑𝑑𝑑𝑑 𝑑𝑑𝑑𝑑
2𝑧𝑧𝑧𝑧𝑧𝑧 = 2𝑑𝑑𝑑𝑑 𝑜𝑜𝑜𝑜, 𝑑𝑑𝑑𝑑 = =
𝑧𝑧 2𝑡𝑡
+∞ 1 𝑑𝑑𝑑𝑑
ψ 𝑡𝑡 = � 𝑒𝑒 −𝑡𝑡 …… 3
−∞ 2π 2𝑡𝑡
1
2 +∞ −𝑡𝑡 − 12
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Γ π
= ∫0 𝑒𝑒 𝑡𝑡 𝑑𝑑𝑑𝑑 = 2 = =1
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2 π π π
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19
Variable demand, constant lead time
Probability of demand
T x SD
demand
Mean demand D
Approx 6 x SD
If the mean demand = 50 items per month, and standard deviation
SD = 5 items per month, we can be 99.9% certain that demand will lie
between ±3 standard deviations, or 50 ± (3 x 5) items.
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Safety stock
EOP = D × TL + k × SD × T 1/ 2
L
90% 1.28
95% 1.65
99% 2.33
99.9% 3.0
Suppose that the demand for oil filters varies between 36 and 54 per
month,
lead time between ordering and receiving new oil filters is 2 months.
Assuming demand is normally distributed, then the average demand is
(36+54)/2 = 45 units, and Standard deviation SD = (54-36)/6 = 3 units.
Calculate EOP and Safety stock at 99% service level
Answer:
For a 99% service level, the Economic Order Point (EOP) should be:
EOP = 45 x 2 + 2.33 x 3 x 21/2 = 90 + 9.9 units = 99.9 or 100 units.
Safety Stock is second term in reorder point formula: 9.9 units
N × µ × TR
S=
L
where S is the expected number of components to be replaced in TR,
N is the number of components in service,
µ is the average effective utilization of the equipment,
TR is the door-to-door turn around time to repair a component, and
L is the average life of the component.
Wong, J.; Chung, D.; Ngai, D.; Banjevic, D. & Jardine, A. “Evaluation
of Spares Requirements Using Statistical and Probability Analysis
Techniques”, ICOMS 96, paper 33, 1996.