Professional Documents
Culture Documents
Inventory
Management
12-2
Learning Objectives
Describe the basic EOQ model and its
assumptions and solve typical problems.
Describe the economic production quantity
model and solve typical problems.
Describe the quantity discount model and
solve typical problems.
Describe reorder point models and solve
typical problems.
Describe situations in which the single-
period model would be appropriate, and
solve typical problems.
12-3
Inventory
Inventory: a stock or store of goods Independent Demand
A Dependent Demand
B(4) C(2)
12-5
Types of Inventories
Raw materials & purchased parts
Partially completed goods called
work in progress
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
12-6
Types of Inventories (Contd)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or
customers
12-7
Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs
12-8
Functions of Inventory (Contd)
12-9
Objective of Inventory Control
To achieve satisfactory levels of
customer service while keeping
inventory costs within reasonable
bounds
Level of customer service
Costs of ordering and carrying inventory
12-12
Inventory Counting Systems
(Contd)
Two-Bin System - Two containers of
inventory; reorder when the first is
empty
Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached 0
214800 232087768
12-13
Key Inventory Terms
Lead time: time interval between
ordering and receiving the order
Holding (carrying) costs: cost to carry
an item in inventory for a length of time,
usually a year
Ordering costs: costs of ordering and
receiving inventory
Shortage costs: costs when demand
exceeds supply
12-14
ABC Classification System
Figure 12.1
Low C
Low High
Percentage of Items
12-15
Cycle Counting
12-16
Economic Order Quantity Models
12-17
Assumptions of EOQ Model
12-18
The Inventory Cycle
Figure 12.2
Reorder
point
Time
Receive Place Receive Place Receive
order order order order order
Lead time
12-19
Total Cost
Annual Annual
Total cost = carrying + ordering
cost cost
Q DS
TC = H +
2 Q
12-20
Cost Minimization Goal
Figure 12.4C
2 Q
Ordering Costs
Order Quantity
QO (optimal order quantity)
(Q)
12-21
Deriving the EOQ
12-22
Minimum Total Cost
Q DS
H =
2 Q
12-23
Economic Production Quantity (EPQ)
Production done in batches or lots
Capacity to produce a part exceeds the
parts usage or demand rate
Assumptions of EPQ are similar to EOQ
except orders are received
incrementally during production
12-24
Economic Production Quantity
Assumptions
Only one item is involved
Annual demand is known
Usage rate is constant
Usage occurs continually
Production rate is constant
Lead time does not vary
No quantity discounts
12-25
Economic Run Size
2DS p
Q0
H p u
12-26
Total Costs with Purchasing Cost
12-27
Total Costs with PD
Figure 12.7
Cost
TC without PD
PD
0 EOQ Quantity
12-28
Total Cost with Constant Carrying
Figure 12.9 Costs
TCa
Total Cost
TCb
Decreasing
TCc Price
CC a,b,c
OC
EOQ Quantity
12-29
When to Reorder with EOQ
Ordering
Reorder Point - When the quantity on
hand of an item drops to this amount,
the item is reordered
Safety Stock - Stock that is held in
excess of expected demand due to
variable demand rate and/or lead time.
Service Level - Probability that demand
will not exceed supply during lead time.
12-30
Determinants of the Reorder
Point
The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)
12-31
Safety Stock
Figure 12.12
Quantity
Expected demand
during lead time
ROP
12-32
Reorder Point
Figure 12.13
Service level
Risk of
a stockout
Probability of
no stockout
ROP Quantity
Expected
demand Safety
stock
0 z z-scale
12-33
Fixed-Order-Interval Model
12-35
Fixed-Interval Disadvantages
12-36
Single Period Model
12-37
Single Period Model
Continuous stocking levels
Identifies optimal stocking levels
Optimal stocking level balances unit
shortage and excess cost
Discrete stocking levels
Service levels are discrete rather than
continuous
Desired service level is equaled or exceeded
12-38
Optimal Stocking Level
Cs Cs = Shortage cost per unit
Service level =
Cs + Ce Ce = Excess cost per unit
Ce Cs
Service Level
Quantity
So
Balance point
12-39
Example 15
Ce = $0.20 per unit
Cs = $0.60 per unit
Service level = Cs/(Cs+Ce) = .6/(.6+.2)
Service level = .75
Ce Cs
Quantity
12-41