Professional Documents
Culture Documents
Operations Management
by
R. Dan Reid & Nada R. Sanders
2nd Edition Wiley 2005
2DS
EOQ
H
When to Order:
The Reorder Point
Without safety stock:
R dL
where R reorder point in units
d daily/weekly demand in units
L lead time in days/weeks
d
Maximum inventory: I MAX Q1
p
2 DS
EPQ
Adjusted order quantity: d
H 1
p
EPQ Example
Annual demand = 18,000 units
Production rate = 2500 units/month
Setup cost = $800
Annual holding cost = $18 per unit
Lead time = 5 days
No. of operating days per month = 20
EPQ Example Solution
18,000
d 1500 units / month; p 2500 units / month
12
2 DS 2 18,000 800
Q 2000 units
d 1500
H 1 18 1
p 2500
d 1500
I MAX Q1 2000 1 800 units
p 2500
D I 18,000 800
TC S MAX H 800 18
Q 2 2000 2
7,200 7,200 14,400
EPQ Example Solution (cont.)
The reorder point:
1500
R dL 5 375 units
20
2 5,000 49
QP $4.80 714 not feasible
0.2 4.80
2 5,000 49
QP $5.00 700 feasible
0.2 5.00
QD Example Solution (Cont.)
Step 2
5,000 700
TCQ 700 49 0.2 5.00 5.00 5000 $25,700
700 2
5,000 1000
TCQ 1000 49 0.2 4.80 4.80 5000 $24,725
1000 2
5,000 2000
TCQ 2000 49 0.2 4.75 4.75 5000 $24,822.50
2000 2
What if Demand is Uncertain?
Safety Stock and Service Level
Order-cycle service level is the
probability that demand during lead
time wont exceed on-hand inventory.
Risk of a stockout = 1 (service level)
More safety stock means greater
service level and smaller risk of
stockout
Safety Stock and Reorder
Point
Without safety stock:
R dL
where R reorder point in units
d daily demand in units
L lead time in days
Item Annual Usage ($) Percentage of Total $ Cumulative Percentage of Total $ Item Classification
106 16,500 34.4 34.4 A
110 12,500 26.1 60.5 A
115 4500 9.4 69.9 B
105 3200 6.7 76.6 B
111 2250 4.7 81.3 B
104 2000 4.2 85.5 B
114 1200 2.5 88 C
107 1000 2.1 90.1 C
101 960 2 92.1 C
113 875 1.8 93.9 C
103 750 1.6 95.5 C
108 600 1.3 96.8 C
112 600 1.3 98.1 C
102 500 1 99.1 C
109 500 1 100.1 C
Inventory Record Accuracy
Inaccurate inventory records can cause:
Lost sales
Disrupted operations
Poor customer service
Lower productivity
Planning errors and expediting