Professional Documents
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Chapter 14
Inventory Control
OBJECTIVES
Inventory System
Defined
Purposes of Inventory
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw
material delivery time
5. To take advantage of economic purchaseorder size
The McGraw-Hill Companies,
Inventory Costs
Holding (or carrying) costs
Costs for storage, handling, insurance, etc
Setup (or production change) costs
Costs for arranging specific equipment setups, etc
Ordering costs
Costs of someone placing an order, etc
Shortage costs
Costs of canceling an order, etc
Finished
product
E(1
)
Component parts
Dependent
Demand
(Derived demand
items for
component
parts,
subassemblies,
raw materials,
etc)
The McGraw-Hill Companies,
Inventory Systems
Single-Period Inventory Model
One time purchasing decision (Example: vendor
selling t-shirts at a football game)
Seeks to balance the costs of inventory overstock
and under stock
Multi-Period Inventory Models
Fixed-Order Quantity Models
Event triggered (Example: running out of
stock)
Fixed-Time Period Models
Time triggered (Example: Monthly sales call by
sales representative)
The McGraw-Hill Companies,
C
Cuu
P
P
C
Coo C
Cuu
This
Thismodel
modelstates
statesthat
thatwe
we
should
shouldcontinue
continueto
toincrease
increase
the
thesize
sizeof
ofthe
theinventory
inventoryso
so
long
longas
asthe
theprobability
probabilityof
of
selling
sellingthe
thelast
lastunit
unitadded
addedisis
equal
equalto
toor
orgreater
greaterthan
thanthe
the
ratio
ratioof:
of:Cu/Co+Cu
Cu/Co+Cu
Where :
Co Cost per unit of demand over estimated
Cu Cost per unit of demand under estimated
P Probability that the unit will be sold
The McGraw-Hill Companies,
10
11
Multi-Period Models:
Fixed-Order Quantity Model Model
Assumptions (Part 1)
Demand for the product is constant and
uniform throughout the period
Lead time (time from ordering to receipt) is
constant
Price per unit of product is constant
The McGraw-Hill Companies,
12
Multi-Period Models:
Fixed-Order Quantity Model Model
Assumptions (Part 2)
Inventory holding cost is based on average
inventory
Ordering or setup costs are constant
All demands for the product will be satisfied
(No back orders are allowed)
The McGraw-Hill Companies,
13
R = Reorder point
Q = Economic order quantity
L = Lead time
Time
L
3. When you reach down to
a level of inventory of R,
you place your next Q
sized order.
The McGraw-Hill Companies,
14
Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
The McGraw-Hill Companies,
15
Annual
Annual
Annual
Purchase + Ordering + Holding
Cost
Cost
Cost
D
Q
D
Q
TC
TC == DC
DC ++ SS++ H
H
Q
22
Q
TC=Total
TC=Totalannual
annual
cost
cost
DD=Demand
=Demand
CC=Cost
=Costper
perunit
unit
QQ=Order
=Orderquantity
quantity
SS=Cost
=Costof
ofplacing
placing
an
anorder
orderor
orsetup
setup
cost
cost
RR=Reorder
=Reorderpoint
point
LL=Lead
=Leadtime
time
H=Annual
H=Annualholding
holding
and
andstorage
storagecost
cost
per
perunit
unitof
ofinventory
inventory
16
2DS
2DS =
=
HH
We
Wealso
alsoneed
needaa
reorder
reorderpoint
pointto
to
tell
tellus
uswhen
whento
to
place
placean
anorder
order
2(Annual
2(AnnualDemand)(Order
Demand)(Orderor
orSetup
SetupCost)
Cost)
Annual
AnnualHolding
HoldingCost
Cost
__
Reorder
Reorder point,
point, R
R == ddLL
17
18
2DS
2DS =
=
H
H
2(1,000
2(1,000)(10)
)(10) = 89.443 units or 90 units
= 89.443 units or 90 units
2.50
2.50
1,000
units
//year
1,000
units
year = 2.74 units / day
dd ==
= 2.74 units / day
365
days
/
year
365 days / year
__
Reorder
Reorderpoint,
point, RR==dd LL==2.74units
2.74units//day
day(7days)
(7days)==19.18
19.18or
or 20
20units
units
In
Insummary,
summary,you
youplace
placean
anoptimal
optimalorder
orderof
of90
90units.
units. In
In
the
thecourse
courseof
ofusing
usingthe
theunits
unitsto
tomeet
meetdemand,
demand,when
when
you
youonly
onlyhave
have20
20units
unitsleft,
left,place
placethe
thenext
nextorder
orderof
of90
90
units.
units.
The McGraw-Hill Companies,
19
20
10,000
units
//year
10,000
units
year = 27.397 units / day
dd==
= 27.397 units / day
365
days
/
year
365 days / year
__
R
R ==dd LL==27.397
27.397units
units//day
day(10
(10days)
days)==273.97
273.97or
or 274
274units
units
Place
Placean
anorder
orderfor
for366
366units.
units. When
Whenin
in the
thecourse
courseof
of
using
usingthe
theinventory
inventoryyou
you are
areleft
left with
with only
only274
274units,
units,
place
placethe
thenext
next order
orderof
of366
366units.
units.
The McGraw-Hill Companies,
II==current
currentinventory
inventorylevel
level(includes
(includesitems
itemson
onorder)
order)
21
T+
L
T+L
i i 11
22
ddi
i
Since
Sinceeach
eachday
dayisisindependent
independentand
anddd isisconstant,
constant,
22
T+T+LL == (T
+
L)
(T + L)dd
22
23
24
(T
(T++ L)
L) ==
22
dd
30
30++10
10 44 == 25.298
25.298
22
The
The value
value for
forz
z isis found
found by
byusing
using the
theExcel
Excel
NORMSINV
NORMSINVfunction,
function, or
oras
as we
we will
will do
do here,
here, using
using
Appendix
Appendix D.
D. By
Byadding
adding 0.5
0.5 to
to all
all the
the values
values in
in
Appendix
Appendix D
D and
and finding
finding the
the value
value in
in the
the table
table that
that
comes
comes closest
closest to
to the
the service
service probability,
probability,the
the z
z
value
value can
can be
be read
read by
by adding
adding the
thecolumn
column heading
heading
label
label to
to the
the row
rowlabel.
label.
So,
So,by
byadding
adding0.5
0.5to
tothe
thevalue
valuefrom
fromAppendix
AppendixDDof
of0.4599,
0.4599,
we
wehave
haveaaprobability
probabilityof
of0.9599,
0.9599,which
whichisisgiven
givenby
byaazz==1.75
1.75
The McGraw-Hill Companies,
25
So,
So, to
to satisfy
satisfy 96
96 percent
percent of
of the
the demand,
demand,
you
you should
should place
place an
an order
order of
of 645
645 units
units at
at
this
this review
review period
period
The McGraw-Hill Companies,
26
Q OPT
2DS
2(Annual Demand)(Order or Setup Cost)
=
=
iC
Annual Holding Cost
27
28
Q OPT =
2DS
=
iC
2(10,000)(4)
= 1,826 units
0.02(1.20)
Q OPT =
2DS
=
iC
2(10,000)(4)
= 2,000 units
0.02(1.00)
2DS
=
iC
2(10,000)(4)
= 2,020 units
0.02(0.98)
29
Total
annual
costs
So
So the
thecandidates
candidates
for
forthe
thepricepricebreaks
breaks are
are1826,
1826,
2500,
2500,and
and4000
4000
units
units
0
1826
2500
4000
Order Quantity
The McGraw-Hill Companies,
30
D
Q
D
Q iC
TC
=
DC
+
S
+
TC = DC +
S+
iC
Q
2
Q
2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
==$12,043.82
$12,043.82
TC(2500-3999)=
TC(2500-3999)=$10,041
$10,041
TC(4000&more)=
TC(4000&more)=$9,949.20
$9,949.20
Finally,
, which is this
Finally,we
weselect
select the
theleast
least costly
costlyQ
Qopt
opt, which is this
problem
problem occurs
occursin
in the
the4000
4000 &&more
more interval.
interval. In
In summary,
summary,
our
ouroptimal
optimal order
orderquantity
quantityis
is4000
4000units
units
The McGraw-Hill Companies,
31
Miscellaneous Systems:
Optional Replenishment System
Maximum Inventory Level, M
q=M-I
Actual Inventory Level, I
M
I
32
Miscellaneous Systems:
Bin Systems
Two-Bin System
Empty
One-Bin System
Order Enough to
Refill Bin
Periodic Check
The McGraw-Hill Companies,
33
dollars invested
profit potential
60
% of
$ Value 30
0
% of
Use
30
A
B
60
stock-out penalties
34
35
End of Chapter 14