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Managing Facilitating Goods: Replenishment Order Replenishment Order Replenishment Order Customer Order
Managing Facilitating Goods: Replenishment Order Replenishment Order Replenishment Order Customer Order
Production
Delay Shipping Shipping Item Withdrawn
Delay Delay
• Shortage costs
Inventory Management Questions
• What should be the order quantity
(Q)?
• When should an order be placed,
called a reorder point (ROP)?
• How much safety stock (SS) should
be maintained?
Inventory Models
• Economic Order Quantity (EOQ)
• Special Inventory Models
With Quantity Discounts
Planned Shortages
• Demand Uncertainty - Safety Stocks
• Inventory Control Systems
Continuous-Review (Q,r)
Periodic-Review (order-up-to)
• Single Period Inventory Model
Inventory Levels For EOQ Model
Units on Hand
0
Q Time
D
Annual Costs For EOQ Model
900
800
700
Annual Cost, $
600
Holding Cost
500
Ordering Cost
400 Total Cost
300
200
100
0
0
20
40
60
80
100
120
140
Order Quantity, Q
EOQ Formula
• Notation
D = demand in units per year
H = holding cost in dollars/unit/year
S = cost of placing an order in dollars
Q = order quantity in units
• Total Annual Cost for Purchase Lots
TCp S ( D / Q) H (Q / 2)
• EOQ
2 DS
EOQ
H
Annual Costs for Quantity
Discount Model
22,000
C = $20.00 C = $19.50 C = $18.75
21000
20000
2000
1000
0 TIME
-K
T1 T2
T
Formulas for Special Models
• Quantity Discount Total Cost Model
TCqd CD S ( D / Q) I (CQ / 2)
• Model with Planned Shortages
D (Q K ) 2 K2
TCb S H B
Q 2Q 2Q
2 DS H B
Q
*
H B
H
K Q
* *
H B
Values for Q* and K* as A
Function of Backorder Cost
B Q* K* Inventory Levels
B 2DS 0
0
H
2DS H B H
0 B Q*
H B
0
H B
B 0 undefined Q* 0
Demand During Lead Time
Example
L 3
15
. 15
. 15
. 15
.
+ + + =
EOQ
Reorder point, ROP
d3
Average lead time usage, dL
d1
d2 EOQ
Time
Order 1 placed Order 2 placed Order 3 placed
RP RP RP
Target inventory level, TIL
Q2 Q3
d1 d3
Amount used during
first lead time
d2
Time
Order 1 placed Order 2 placed Order 3 placed
10
0
0
10
20
30
40
50
60
70
80
90
100
Percentage of inventory items (SKUs)
Inventory Items Listed in
Descending Order of Dollar Volume
Monthly Percent of
Unit cost Sales Dollar Dollar Percent of
Inventory Item ($) (units) Volume ($) Volume SKUs Class
.028 2 4 2 0 -2 -4
.055 3 12 10 8 6 4
.083 4 20 18 16 14 12
.111 5 28 26 24 22 20
.139 6 36 34 32 30 28
.167 7 36 42 40 38 36
.139 8 36 42 48 46 44
.111 9 36 42 48 54 52
.083 10 36 42 48 54 60
.055 11 36 42 48 54 60
.028 12 36 42 48 54 60
P( D Q)Cu P( D Q)Co
P(D>Q)
(Cu applies)
Probability
0.722
0 2 4 6 8 10 12 14
New spaper demand, Q
Retail Discounting Model
• S = current selling price
• D = discount price
• P = profit margin on cost (% markup as decimal)
• Y = average number of years to sell entire stock of “dogs” at
current price (total years to clear stock divided by 2)
• N = inventory turns (number of times stock turns in one year)
Loss per item = Gain from revenue
S – D = D(PNY)
S
D
(1 PNY )
Topics for Discussion
• Discuss the functions of inventory for different
organizations in the supply chain.
• How would one find values for inventory costs?
• How can information technology create a competitive
advantage through inventory management?
• How valid are the assumptions for the EOQ model?
• How is a service level determined for inventory
items?
• What inventory model would apply to service capacity
such as seats on an aircraft?
Interactive Exercise
The class engages in an estimation of the
cost of a 12-ounce serving of Coke in
various situations (e.g., supermarket,
convenience store, fast-food restaurant,
sit-down restaurant, and ballpark).
What explains the differences?