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 and purchased parts
Partially completed goods called
work-in-process (WIP)
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
12-6
Types of Inventories
Replacement parts, tools, and 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 stockouts
12-8
Functions of Inventory
To take advantage of order cycles
To help hedge against price increases
To permit operations
To take advantage of quantity
discounts
12-9
Objectives 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
Two-bin system: Two containers of
inventory; reorder when the first is
empty
Universal Product Code (UPC): Bar
code printed on a label that has
information about the item
to which it is attached 0
Radio Frequency Identification
(RFID) Tags 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 of inventory
12-14
ABC Classification System
Figure 12.1
Classifying inventory according to some
measure of importance and allocating
control efforts accordingly.
A - very important
B - moderately High
A
important Annual
$ value B
C - least important of items
Low C
Low High
Percentage of Items
12-15
Cycle Counting
A physical count of items in inventory
Cycle counting management
How much accuracy is needed?
When should cycle counting be performed?
Who should do it?
12-16
Economic Order Quantity Models
Economic order quantity (EOQ) model
The order size that minimizes total annual
cost
12-17
Assumptions of EOQ Model
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single
delivery
There are no quantity discounts
12-18
The Inventory Cycle
Figure 12.2
Profile of Inventory Level Over Time
Q Usage
Quantity rate
on hand
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
Using calculus, we take the derivative of
the total cost function and set the
derivative (slope) equal to zero and solve
for Q.
2DS 2( Annual Demand )(Order or Setup Cost )
Q OPT = =
H Annual Holding Cost
12-22
Minimum Total Cost
The total cost curve reaches its
minimum where the carrying and
ordering costs are equal.
Q = DS
H
2 Q
12-23
Economic Production Quantity (EPQ)
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
Q0 = Order quantity in units
H = Holding (carrying) cost per unit
D = Demand, usually in units per year
S = Ordering cost
p = Production or delivery rate
u = Usage rate
12-26
Total Costs with Purchasing Cost
Q + DS + PD
TC = H
2 Q
12-27
Total Costs with PD
Figure 12.7
Cost
TC without PD
PD
0 EOQ Quantity
12-28
When to Reorder with EOQ Ordering
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
Reorder Point
If demand and lead time are both constant,
the reorder point is simply
ROP = d X LT
Where
d = Demand rate (units per day or week)
LT = Lead times in days or weeks
12-32
Safety Stock
Figure 12.12
Quantity
Expected demand
during lead time
ROP
12-33
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
12-34
Fixed-Order-Interval Model
Orders are placed at fixed time intervals
Order quantity for next interval?
Suppliers might encourage fixed
intervals
May require only periodic checks of
inventory levels
Risk of stockout
Fill rate: the percentage of demand
filled by the stock on hand
12-35
Fixed-Interval Benefits
Tight control of inventory items
Items from same supplier may yield
savings in:
Ordering
Packing
Shipping costs
May be practical when inventories
cannot be closely monitored
12-36
Fixed-Interval Disadvantages
Requires a larger safety stock for given
risk of stockout
Increases carrying cost
Costs of periodic reviews
12-37
Single Period Model
Single period model: model for ordering
of perishables and other items with
limited useful lives
Shortage cost: unrealized profits per
unit (generally)
Excess cost: difference between
purchase cost and salvage value of
items left over at the end of a period
12-38
Single Period Model
Continuous stocking levels
Identifies optimal stocking levels
Optimal stocking level balances unit
shortage and excess cost
Ce Cs
Service Level
Quantity
So
Balance point
12-40
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