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Chapter13 Inventory Small - Compressed
Chapter13 Inventory Small - Compressed
Inventory Management
Lecture Outline
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-2
What Is Inventory?
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-4
Supply Chain Management
• Bullwhip effect
• demand information is distorted as it moves away
from the end-use customer
• higher safety stock inventories to are stored to
compensate
• Seasonal or cyclical demand
• Inventory provides independence from vendors
• Take advantage of price discounts
• Inventory provides independence between
stages and avoids work stoppages
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-5
Quality Management in the Supply Chain
• Customers usually perceive quality service as
availability of goods they want when they want
them
• Inventory must be sufficient to provide high-
quality customer service in QM
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-6
Types of Inventory
• Raw materials
• Purchased parts and supplies
• Work-in-process (partially completed) products
(WIP)
• Items being transported
• Tools and equipment
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-7
Two Forms of Demand
• Dependent
• Demand for items used to produce final
products
• Tires for autos are a dependent demand
item
• Independent
• Demand for items used by external
customers
• Cars, appliances, computers, and houses
are examples of independent demand
inventory
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-8
Inventory Costs
• Carrying cost
• cost of holding an item in inventory
• Ordering cost
• cost of replenishing inventory
• Shortage cost
• temporary or permanent loss of sales when
demand cannot be met
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-9
Inventory Control Systems
• Continuous system (fixed-order-quantity)
• constant amount ordered when inventory
declines to predetermined level
• Periodic system (fixed-time-period)
• order placed for variable amount after fixed
passage of time
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-10
ABC Classification
• Class A
• 5 – 15 % of units
• 70 – 80 % of value
• Class B
• 30 % of units
• 15 % of value
• Class C
• 50 – 60 % of units
• 5 – 10 % of value
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-11
ABC Classification
PART UNIT COST ANNUAL USAGE
1 $ 60 90
2 350 40
3 30 130
4 80 60
5 30 100
6 20 180
7 10 170
8 320 50
9 510 60
10 20 120
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-12
ABC Classification
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.0
8 16,000 18.7 5.0 11.0
2 14,000 16.4 4.0
A 15.0
1 5,400 6.3 9.0 24.0
4 4,800 5.6 6.0 B 30.0
3 3,900 4.6 10.0 40.0
6 3,600 4.2 18.0 58.0
5 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 C 83.0
7 1,700 2.0 17.0 100.0
$85,400
Example 10.1
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-13
ABC Classification
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0
B 1, 4, 3 16.5 25.0
C 6, 5, 10, 7 12.5 60.0
Example 10.1
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-14
Economic Order Quantity
(EOQ) Models
• EOQ
• optimal order quantity that will
minimize total inventory costs
• Basic EOQ model
• Production quantity model
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-15
Assumptions of Basic EOQ Model
• Demand is known with certainty and is constant
over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• Order quantity is received all at once
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-16
Inventory Order Cycle
Order quantity, Q
Demand Average
rate inventory
Inventory Level
Q
2
Reorder point, R
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-17
EOQ Cost Model
Co D
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
CoD CcQ
Total cost = +
Q 2
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-18
EOQ Cost Model
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-19
EOQ Cost Model
Annual
cost ($) Total Cost
Slope = 0
CcQ
Minimum Carrying Cost =
2
total cost
CoD
Ordering Cost = Q
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-20
EOQ Example
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-21
Production Quantity Model
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-22
Production Quantity Model
Inventory
level
Production
Demand only
and demand
Maximum
Q(1-d/p) inventory
level
Average
Q inventory
(1-d/p)
2 level
0
Begin End Time
order order
Order
receipt receipt
receipt period
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-23
Production Quantity Model
=Q1- d 2CoD
p
Qopt = d
Q d Cc 1 -
Average inventory level = 1- p
2 p
CoD CcQ d
TC = Q + 2 1 - p
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-24
Production Quantity Model
Cc = $0.75 per gallon Co = $150 D = 10,000 gallons
d = 10,000/311 = 32.2 gallons per day p = 150 gallons per day
2CoD 2(150)(10,000)
Qopt = = = 2,256.8 gallons
Cc 1 - d 0.75 1 -
32.2
p 150
CoD CcQ d
TC = Q + 2 1 - p = $1,329
Q 2,256.8
Production run = = = 15.05 days per order
p 150
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-25
Production Quantity Model
D 10,000
Number of production runs = = = 4.43 runs/year
Q 2,256.8
d 32.2
Maximum inventory level = Q 1 - = 2,256.8 1 -
p 150
= 1,772 gallons
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-26
Solution of EOQ Models With Excel
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-27
Solution of EOQ Models With Excel
=(D4*D5/D10)+(D3*D10/2)*(1-(D7/D8))
=D10*(1-(D7/D8))
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-28
Solution of EOQ Models With OM Tools
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-29
Quantity Discounts
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-30
Quantity Discount Model
ORDER SIZE PRICE
0 - 99 $10 TC = ($10 )
100 – 199 8 (d1)
200+ 6 (d2) TC (d1 = $8 )
TC (d2 = $6 )
Inventory cost ($)
Carrying cost
Ordering cost
2CoD 2(2500)(200)
Qopt = = = 72.5 TVs
Cc 190
=IF(D10>B10,D10,B10) =(D4*D5/E10)+(D3*E10/2)+C10*D5
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-33
Reorder Point
• Inventory level at which a new order is placed
R = dL
where
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-34
Reorder Point
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-35
Safety Stock
• Safety stock
• buffer added to on hand inventory during
lead time
• Stockout
• an inventory shortage
• Service level
• probability that the inventory available
during lead time will meet demand
• P(Demand during lead time <= Reorder
Point)
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-36
Variable Demand With Reorder Point
Q
Inventory level
Reorder
point, R
0
LT LT
Time
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-37
Reorder Point With Safety Stock
Inventory level
Q
Reorder
point, R
Safety Stock
0
LT LT
Time
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-38
Reorder Point With Variable Demand
R = dL + zd L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-39
Reorder Point For a Service Level
Probability of
meeting demand during
lead time = service level
Probability of
a stockout
Safety stock
zd L
dL R
Demand
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-40
Reorder Point For Variable Demand
R = dL + z d L Safety stock = z d L
= 30(10) + (1.65)(5)( 10) = (1.65)(5)( 10)
= 326.1 gallons = 26.1 gallons
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-41
Determining Reorder Point with Excel
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-42
Order Quantity for a
Periodic Inventory System
Q = d(tb + L) + zd tb + L - I
where
d = average demand rate
tb = the fixed time between orders
L = lead time
d = standard deviation of demand
zd tb + L = safety stock
I = inventory level
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-43
Periodic Inventory System
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-44
Fixed-Period Model With
Variable Demand
d = 6 packages per day
d = 1.2 packages
tb = 60 days
L = 5 days
I = 8 packages
z = 1.65 (for a 95% service level)
Q = d(tb + L) + zd tb + L - I
= (6)(60 + 5) + (1.65)(1.2) 60 + 5 - 8
= 397.96 packages
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-45
Fixed-Period Model with Excel
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-46
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© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 13-47