Q/2 (Cc) + D/Q (Co) - EOQ

Annual Inventory Holding

What is the impact on the Economic Reorder Continuous Inventory System  Fixed Order Quantity ROP Model “WHEN”
Production Quantity when production Point: ROP = -Inventory of goods kept on a continual basis, once inventory has dropped to
doubles? d X LT + specific level (reorder point) an order placed for fixed quantity, costly in terms of
Safety Stock
Q = sqrt[(2*D*Cs)/Cc] x sqrt[p/(p-d)] inventory management, exact quantity always known, example: UPC scanners at
(d = lead
Set ‘sqrt[(2*D*Cs)/Cc]’ = 10 or if you like
time, day, grocery checkouts
just ignore it
Focus on ‘sqrt[p/(p-d)’ and set p = 150 week, month) Periodic Inventory System  Fixed Order Quantity Order-up-to Model “HOW
and d = 125. Solving you get 2.45 Use when MUCH Model”
Now double p to 300 and solving you get demand NOT -Inventory is counted at set times, orders placed on a fixed internal, order
1.31 --There EPQ decreases by about half constant quantity = desired inventory level – inventory on hand, lower level of control,
larger quantity, example: independent pet food stores
Two Levels of Inventory Costs: Carrying (Holding Costs): Reorder
Facility – rent, insurance, taxes, utilities, financing, annual Point: ROP = Turnover & Days of Supply Structure Tree: look at what is needed for
carrying costs usually expressed as: $/unit/year (the cost to d X LT (d = each part to get desired # of x’s, multiply as
hold one unit for a year), direct labour in the warehouse, lead time, you go down and subtract current inventory
spoilage, theft records, records, mat hand equip. day, week, (item, component, sub-component)
Ie: mark pays $480 each per tv & pays his bank 15% annually to month)
finance them --> Cc = 480*0.15 =$72 Use when Kanban System: Objective to move
demand is batches or units of good though system as
Order Costs (A multi-stage process): Cost of actually placing constant needed to minimize work in progress
EOQ Sample Question an order, shipping, receiving, inspection, payment for
Store sells 2,500 mid-range TVs per year. Mark goods, as the order size decreases the number of orders Kanban Calculation: Number of Kanbans can eithe
pays $ 480 each and pays his bank 15% annually to shrink or expand buffer inventory levels:
EACH YEAR increases (order costs increase but carrying
finance. Cost of maintaining his purchasing Ice cream factory uses average 2000 litres of cream
department and processing the order is $ 75 per costs decrease)
Ie: cost of processing the order through depart. is $7 per order daily with a standard deviation of 300 litres. Wants
order. Store is open seven days a week 51 weeks of
the year placed (Co=7) service level of 97%. A lead time of one week is N = Total number of Kanban’s (one Kanban per
Calculate: 1) Efficient Order quantity 2) How many required. What is the reorder point? container)
purchase orders issued each year 3) Length of time EOQ Assumptions: Single product, annual demand is known, D = Average usage rate
between orders 4) Total inventory control costs constant demand, constant lead time, single delivery per order, D=2000 Stdv = 3000 LT = 7 days LT 97% = 1.88 (Z T = Lead time for replenishment
no quantity order discounts, no transportation discount table) If safety stock levels on Kanban production system, X = Safety stock demand
numerator will so # of Kanban cards will C = capacity of a standard container
-minimizes Q = sqrt (2DCo/Cc)
ROP = dL + Zstdv square root d(L) if the Stock Out Risk goes up, the Service Level goes
Cycle length --> sometimes [(Q/D) * (days per week * # of = 2000(7) + 1.88 (300) (square root (7)) down, and ‘z’ decreases, so the Safety Stock decreases Workstation within machine shop uses 2400
weeks)] =$15,492.20 and the ROP decreases units of specific part during 8-hour
workday. Supplied in containers of 50 parts
EPQ Sample Question: Fixed Interval (Periodic) Model Notation: Measuring Supply Chain Performance (KPI’s): each. Takes 30 minutes from time Kanban
The cost for factory setup machinery in order to manufacture Inventory turnover rate – ratio of annual cogs to issued and parts arrive. Company safety
bicycles is $175 and cost to hold one bike for one year at retail
average inventory value. How many times retail stock 25%. How many Kanban cards need to
level is $32.25. If demand for bicycles is 39,000 per year, the be issued?
plant can produce 145 bikes per day, and there are 312 days in a
location sell entire contents.
year; determine: -Inventory turns = COGS Sold / Average
1)Length of order cycle 2) minimum total annual inventory aggregate inv value D = 2400/8 hours = 300/hour T=30 minutes
control costs 3)maximum number of bikers that will be on Higher the number the lower the inventory or 0.5 hours Safety Stock = 25% or 0.25 C –
hand 4) number orders per year 5) optimal number of bikes holding costs. Done on an annual basis annual 50
per order COGS/Aver monthly inventory. Allow for
Cs = 175 Cc = 32.35 D = 39,000 d = 39,000/312 = 125 P = 145
EOQ with Quantity Discounts: comparison to firms in similar sector.
Quantity Discounts: Price discounts used as an
incentive for purchasers to order in larger
quantities
Level Production: Labour stays same, output stays same. Output in
Objective: To compare the benefits of excess current demand goes in inventory.
purchase price savings for buying in quantity Chase Production: Makes exactly what needed to satisfy demand.
as opposed to the increase in annual holding Demand next period decreases, workers fired/hired.
costs of maintaining larger average inventories -add minimum inv to last period
(keeping in mind that ordering in larger -workers needed = production / # units each employee will make
The Elora Oil Change Shop (EOCS) purchases oil to service
quantities will decrease annual ordering costs)
both cars and trucks. They use an average of 300 litres per -hired/fired is whats needed compared to what you have
day with a standard deviation of demand of 10 litres. The -hiring/firing costs = multiply by given
holding cost is $0.2 per liter per day and the ordering cost
is $15 per order. A 2% stockout risk is acceptable by the
station. Assume that a fixed order interval of 14 days is
used and the lead time is consistently 5 days. How much
safety stock should the EOCS keep?
2% Stock out Risk = 98% Service level – z-value of 2.05
Demand 300 litres per day
Std.Dev. Demand 10 litres
Order Interval = 14 days
Lead time = 5 days

Q = d(OI + LT) + z σD √OI + LT – I

--> 840 may have been FEASIBLE quantity but 1,000 is OPTIMAL to minimize costs
Safety stock = z σD √OI + LT = 2.05(10) √14 + % = 89.36L
 Single Period Model (SPM) Characteristics:
Work Breakdown Structure: hierarchical ranking of what must Project Scope (Statement of Work): A prerequisite to maintaining Seasonality: adj factors each < 1 (add to 1) OPTIMAL STOCKING LEVEL Q = Mu + SIGMA*Z
be done to complete project. ongoing control; want to avoid scope creep. -Used for ordering PERISHABLE goods: newspaper that go out of date, bread,
1)Identify major components 2) Break components down into flowers, goods cannot be held to next period and when they do, incur
sub-components 3) Continue until each component broken Demand forecasting  strategic planning. significant price reductions
down into work packages -medium term: employment, inventory inputs & goods
Work package (WP) = size that can be completed by individual -short term: production, staffing, immediate input needs Shortage Costs: Include costs associated with loss of customer goodwill which
or team, WBC marks start of documentation so can be traced Judgemental--> subjective, opinions, surveys etc. can be often overlooked, unrealized profit that could have been earned
to progress and cost and respect to state completion. Reduce Quantitative--> hard data from past
projects to manageable WP, completed by 1 person or group. 1.Associative models – independent casual variables
D4 = 40.97 + 4.30(x) –>S4, x=4 Excess Costs: Costs associated with a leftover product, cost per unit less
2.Time Series models – Identify patterns in historical data and
revenue earned through salvage
Gantt Charts: Jobs that need to be done, duration, when project trends into future without casual relationships, time-ordered
should get done. Enable project manager to: see what’s seq of abs taken at regular intervals over time
ahead/ behind, attention to items require attention. Don’t Service Level (SL) is the probability that demand will not be greater than the
contain info sequential dependence. Naïve method: value last period --> next period quantity of goods on hand
-applied to average, trend & seasonal
The expected -trend--> value next = last period + difference
duration of a between 2 previous periods Single Period Continuous Demand: Calendars cost $1.50, and J&B sells for $3 each. End of July calendar price reduced to $1 and
path is equal to Averaging: can sell at surplus. How many calendars should J&B order? (Normal distribution with Mean = 500 and Sigma – 120) ANSWER: R =
the sum of the 1.moving average  when # data pts , forecast 3 C = 1.5 SV = 1.00 CS = 3 – 150 = 1.50 CE = 1.50 -1 = 0.50 THEREFORE: CS(CE + CS) = 1.50/2.0 =.75 .75  Z = .675
expected times becomes more sensitive OPTIMAL Q = MU+ ZSIGMA = 500+.675(120) = 581 *Z LOOKUP IN THE STANDARD TABLE*
of the activities 2.weighted moving average  highest weight
on that path. assigned to most recent obs, all weights add to 1,
CP is the choice of weight is arbitrary Single Period DISCRETE Demand:
LONGEST path. 3.Exponential smoothing
If given Ts, Tl, Tm +/or variances & Te = Probabilistic network
Probabilistic Time Estimates: Path slack =
Shortest likely duration (ts) –best conditions (optimistic) difference 0 < a < 1 --> speed forecast
Longest likely duration (tl) –worst conditions (pessimistic) between length adjusts to error in previous.
Most likely duration (tm) – most probable length of time of CP & length forecast is dep on size of a
if given: A4, A5, F4, a –want F6.
1. calc expected Time tE, for each activity: of any other
solve F5, then plug to find F6.
non-CP

2.Path – List all paths and path lengths --> Select longest path as the critical path Building the Master Production Schedule: (MPS)
3.Activity – Calculate variance (sigma^2) for each activity on the critical path Before scheduling, you need to know: Beginning inventory (Ex. Product on hand), Forecast
demand (marketing), current inventory commitments (orders been promised)
When net inventory is negative; production run is scheduled.
ATP = Begin Inventory + Production – Sum of Committed Orders to Next Production Run
Weeks thereafter: ATP = production – sum committed orders to next production run
4.Path – Take the square root of the sum of variances of CP activities to get Std. Available-to-Promise Inventory (ATP): Uncommitted planned inventory Ex. Have 100 units promised
Deviation of the CP (sigmacp) 65, ATP =35

5. Calculate z-value where --> Objective for MRP Process: 1) Have inventory on hand when
required in sufficient quantitates as needed 2) Maintain and
control low inventories of demand-dependent goods to min $
6.Convert ‘z’ into its probability value using the Standard Normal Distribution Table
If asked: what’s the probability being completed by T --> number calc above
Bill of Material (BOM): List of all parts/materials used to
If asked: what’s the prob NOT completed by T --> 1 – number calc above produce a finished product. Ex. How many nuts/bolts needed.
# weeks req with prob of x% --> % on left side as z, solve for T Inaccurate BOM makes effective purchasing impossible.
Remedy: put someone in charge to assure accuracy, provide
Crashing –s paper trail, keep track, maintain accurate inputs
Motivations: 1) desire to
ensure penalties avoided Bullwhip Effect: D becomes more concentrated as
2) incentives for early move backwards through distribution chain, Characteristics of Just-in-Time Production System (5):
completion 3) benefits causes include: 1) unscheduled promotions, 2)lack 1.Balanced flow of product within a production system
freeing resources for of dialogue between supply chain participants, -Avoid over-working individuals, increase efficiency and product flow
another project 4) 3)unforeseen events, 4)errors in forecasting 2. Elimination of Disruptions – causes worker to disconnect and economic
reduce (indirect) costs loss
-Caused by late part delivery, poor quality output, equip breaks, sched
like cost of capital,
Scheduled Receipts: Order that has been placed for parts changes
supervision but not received yet. 3. System flexibility – reduction in changeover to allow for flexibility diff items
Options to crash: Inventory on Hand: Amount of a part expected to be on - car setting, use of same production line to make more than one model and
1) increase personnel to MAD: the lower the value, the greater the accuracy of hand at end of period. colour of a car depending on customer demands.
get jobs (activities done) forecasting method 4. Waste reduction - deals with inefficient use of resources (labour and
2) work overtime 3) use Benefits of Lean Manufacturing System: capital)
more (or more efficient) 1)System flexibility, design process to inc. efficiency., continuous - overproduction goods, increases waiting times, excessive inventory, rework
Forecast Error: Et = At – Ft 5. Continuous Improvement – characterized by continuous (and deliberate)
equipment 4) relaxing improvements 2) Improved relations w suppliers, avoid disruptions 3)
Negative –over forecasted, improvement mindset. Learning by doing. Deliberate observation
project specs Simplified inventory, reduce waste, balance workflow
Positive –under forecasted