INVENTORY MANAGEMENT

PRODUCTION & OPERATIONS MANAGEMENT

Instructor: Huynh Thi Phuong Lan (M.Sc)
 Inventory management
When to
How much/ how many to order?
order

Quantity
EOQ POQ ROP
Discount

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EOQ – Basic Economic Order Quantity

T = time T = time T = time

between between between
2 orders 2 orders 2 orders
2
 2 SD
Q* 
H
𝐷
𝑁=
Q*
𝑡𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝑇=
N
Q= Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D= Annual demand in units for the inventory item
S= Setup or ordering cost for each order
H= Holding/carrying cost per unit per year
N = numbers of order in a year
T = time between 2 orders1
 POQ – Production Order Quantity

Production & Usage only

usage period =Tp period =Td

T = time between T = time between

2 orders 2 orders
 POQ – Production Order Quantity
1. Used when inventory builds up over a period of time
after an order is placed
2. Used when units are produced and sold simultaneously
• Q = Number of units per order
2 SD p • H = Holding cost per unit per year
Q*  x
H pd • p = Daily production rate
• d = Daily demand rate, or usage rate
 pd  • Imax = Maximum Inventory Level
I max  Q  • Tp = Production period (days)
 p 
(Length of the production run in days )
𝑄∗ 𝐼𝑚𝑎𝑥
• Td = Usage only period (days)
𝑇𝑝 = 𝑇𝑑 =
𝑝 𝑑 • T = time between 2 orders
𝑡𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑇= = Tp + Td
N
 Quantity Discount Models
 Reduced prices are often available when larger
quantities are purchased
 Trade-off is between reduced product cost and
increased holding cost

Steps in analyzing a quantity discount problem

1. calculate Q* for each price range
2. Adjust the Q to meet price condition (find feasible Q)
3. Calculate the total annual cost for each possible order
quantity determined in Step 2. Select the quantity that
gives the lowest total cost.

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Reorder point (ROP)

Reorder point (ROP) is the inventory level at which an order

should be placed/ action is taken to replenish the stocked
item.
ROP = Demand per day (d) * Lead time for a new order
in days (L)
ROP = d * L
Exercise 1
A toy manufacturer uses approximately 32,000
silicon chips annually. The chips are used at a
steady rate during 240 days a year that the plant
operates. Annual holding cost is $3 per chip, and
ordering cost is $120. Determine:
a. The optimal order quantity
b. The number of workdays in an order cycle.

(answer: a. 1,600 chips; b. 12 days)

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Exercise 2
The Dine Corporation is both a producer and a user of brass
couplings. The firms operates 220 days a year and uses the
couplings at a steady rate of 50 per day. Couplings can be
produced at a rate of 200 per day. Annual carrying cost is $2
per coupling, and machine set up cost is $70 per run.
A. Determine the economic run quantity
B. How many run per year will be there?
C. Compute the maximum inventory level.
D. What is the average inventory on hand.
E. Determine the length of pure consumption time of the
cycle.

(answer: a. 1,013 units; b. approximately 11; c. 760 units; d. 380 units; e. 15.2 days)
Exercise 3
A bakery buys flour in 25-pound bags. The bakery
uses 1,215 bags a year. Ordering cost is $10 per
order. Annual carrying cost is $75 per bag.

a. Determine the economic order quantity.

b. What is the average number of bags on hand?
c. How many orders per year will there be?
d. Compute the total cost of ordering and carrying
flour.
(answer: a. 18 bags; b. 9 bags; c. 67.5 orders; d. $1350)
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Exercise 4
The Friendly Sausage Factory (FSF) can produce hot dogs at a
rate of 1,500 per day. FSF supplies hot dogs to local
restaurants at a steady rate of 250 per day. The cost to prepare
the equipment for producing hot dogs is $66. Annual holding
costs are 45 cents per hot dog. The factory operates 300 days
a year. Find:
a. The optimal run size.
b. The number of runs per year.
c. How many days does it take to produce the optimal run
quantity?

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Exercise 5
A chemical firm produces sodium bisulfate. Demand for this
product is 20 tons per day. The capacity for producing the product
is 50 tons per day. Setup costs $100, and storage and handling
costs are $5 per ton a year. The firm operates 200 days a year.
a. How many tons per run are optimal?
b. What would the average inventory be for this lot size?
c. Determine the approximate length of a production run, in days.
d. How many runs per year would there be?
e. How much could the company save annually if the setup cost
could be reduced to $25 per run?

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Exercise 6
A company manufactures hair dryers. It buys some of the
components, but it makes the heating element, which it can
produce at the rate of 800 per day. Hair dryers are assembled
daily, 250 days a year, at a rate of 300 per day. Setup costs $200,
and storage and handling costs are $5 per hair dryer a year.
a. How many heating element per run are optimal?
b. What would the average inventory be for this lot size?
c. Determine the approximate length of a pure consumption, in
days.
d. About how many runs per year would there be?
e. Calculate the number of workdays in an order cycle

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Exercise 7
Annual demand for notebook binders at Meyer’s stationery
shop is 10,000 units. This shop operates 300 days a year,
and deliveries from the supplier generally take 5 working
days. Calculate the reorder point for the notebook binder.

Answer: 166.7 units

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Exercise 8
Southeastern Bell stocks a certain switch connector at its
central warehouse for supplying field service offices. The
yearly demand for these connectors is 15,000 units.
Southeastern estimates its annual holding cost for this item to
be $25 per unit. The cost to place and process an order from
the supplier is $75. The company operates 300 days per year,
and the lead time to receive an order from the supplier is
2 working days.
a) Find the economic order quantity.
b) Find the annual holding costs.
c) Find the annual ordering costs.
d) What is the reorder point?
Exercise 9
Bell Computers purchases integrated chips at $350 per chip.
The holding cost is $35 per unit per year, the ordering cost is
$120 per order, and sales are steady, at 400 per month. The
company’s supplier, Rich Blue Chip Manufacturing, Inc., decides
to offer price concessions in order to attract larger orders. The
price structure is shown below.
Quantity purchased Price per unit
1-99 $350
100-199 $325
200 or more $300

What is the optimal order quantity and the minimum annual cost for
Bell Computers to order, purchase, and hold these integrated chips
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Exercise 10
Bell Computers purchases integrated chips at $350 per chip. The
annual holding cost is 15% of unit price, the ordering cost is $120
per order, and sales are steady, at 400 per month. The company’s
supplier, Rich Blue Chip Manufacturing, Inc., decides to offer price
concessions in order to attract larger orders. The price structure is
shown below.
Quantity purchased Price per unit
1-99 $350
100-199 $325
200 or more $300

What is the optimal order quantity and the minimum annual

inventory cost for Bell Computers.
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Exercise 11
A mail-order house uses 18,000 boxes a year. Carrying costs are
$0.6 per box a year, and ordering costs are $96. The following
price schedule applies. Determine
a. The optimal order quantity.
b. The number of orders per year.

Number of boxes Price per box

1,000 to 1,999 $1.25
2,000 to 4,999 $1.20
5,000 to 9,999 $1.15
10,000 or more $1.10

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Exercise 12
Wang Distributors has an annual demand for an airport metal
detector of 1,400 units. The cost of a typical detector to Wang
is $400. Carrying cost is estimated to be 20% of the unit cost,
and the ordering cost is $25 per order. If Ping Wang, the
owner, orders in quantities of 300 or more, he can get a 5%
discount on the cost of the detectors. Should Wang take the
quantity discount?

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THANKS FOR YOUR ATTENTION!