This action might not be possible to undo. Are you sure you want to continue?

BooksAudiobooksComicsSheet Music### Categories

### Categories

### Categories

Editors' Picks Books

Hand-picked favorites from

our editors

our editors

Editors' Picks Audiobooks

Hand-picked favorites from

our editors

our editors

Editors' Picks Comics

Hand-picked favorites from

our editors

our editors

Editors' Picks Sheet Music

Hand-picked favorites from

our editors

our editors

Top Books

What's trending, bestsellers,

award-winners & more

award-winners & more

Top Audiobooks

What's trending, bestsellers,

award-winners & more

award-winners & more

Top Comics

What's trending, bestsellers,

award-winners & more

award-winners & more

Top Sheet Music

What's trending, bestsellers,

award-winners & more

award-winners & more

Welcome to Scribd! Start your free trial and access books, documents and more.Find out more

Inventory Control

MULTI-PERIOD MODELS

2

Fixed-Order

Quantity

y

**A system where the order quantity remains constant but the time between orders varies.
**

Preferred for important or expensive items because average inventory is lower. Provides a quicker response to stockouts Is more expensive to maintain due to inventory record-keeping costs.

3

**BASIC FIXED-ORDER QUANTITY MODEL AND REORDER POINT BEHAVIOR
**

1. You receive an order quantity Q. 4. The cycle then repeats.

Number of units on hand

Q R

Q

Q

2. You start using them up over time.

L

Time

R = Reorder point Q = Economic order quantity L = Lead time

L 3. When you reach down to a level of inventory of R, you place your next Q sized order.

Price per unit of product is constant (no quantity discounts).FIXED-ORDER-QUANTITY MODEL ASSUMPTIONS: y y y y y 4 Demand for the product is known. constant. which is the time from ordering to receipt. and uniform throughout the period. Ordering or setup costs are constant All demands for the product are known with certainty. no back orders or stock outs. Lead time (L). . is constant.

5 COST MINIMIZATION GOAL By adding the item. and ordering costs together. holding. we determine the total cost curve. which in turn is used to find the Qopt inventory order point that minimizes total costs Total Cost C O S T Holding Costs Annual Cost of Items (DC) Ordering Costs QOPT Order Quantity (Q) .

6 BASIC FIXED-ORDER QUANTITY (EOQ) MODEL FORMULA Total Annual = Cost Annual Annual Annual Purchase + Ordering + Holding Cost Cost Cost D Q TC = DC + S + H Q 2 TC=Total annual cost D =Demand C =Cost per unit Q =Order quantity S =Cost of placing an order or setup cost R =Reorder point L =Lead time H=Annual holding and storage cost per unit of inventory .

R = d L _ d = average daily demand (constant) L = Lead time (constant) .7 DERIVING THE EOQ Using calculus. solving for the optimized (cost minimized) value of Qopt QOPT = 2DS = H 2(Annual Demand)(Order or Setup Cost) Annual Holding Cost _ We also need a reorder point to tell us when to place an order R eo rd er p o in t. we take the first derivative of the total cost function with respect to Q. and set the derivative (slope) equal to zero.

8 EOQ EXAMPLE (1) PROBLEM DATA Given the information below. what are the EOQ and reorder point? Annual Demand = 1.000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15 .

000 units / year 365 days / year _ 2.50 89. you place an optimal order of 90 units. .18 or 20 u its In summary.9 EOQ EXAMPLE (1) SOLUTION Q 2 T H 2(1.74 units / day R eorder p oint. when you only have 20 units left. R d L 2.000 )(10) 2.74units / day (7days) 19. In the course of using the units to meet demand.443 units or 90 u its d 1. place the next order of 90 units.

10 EOQ EXAMPLE (2) PROBLEM DATA Determine the economic order quantity and the reorder point given the following« Annual Demand = 10.000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = 10% of cost per unit Lead time = 10 days Cost per unit = $15 .

11 EOQ EXAMPLE (2) SOLUTION Q OPT = 2D S = H 2 (1 0 . o r 3 6 6 1 .000 units / year d= = 27.1 4 8 u nits. .397 units/day days) 273.0 0 0 )(1 0 ) = 3 6 5 . place the next order of 366 units.97 274 nits (10 = or Place an order for 366 units. When in the course of using the inventory you are left with only 274 units.397 units / day 365 days / year _ = d = 27.5 0 n its 10.

12 FIXED-ORDER QUANTITY MODEL WITH SAFETY STOCK FORMULA R ! dL z W L WL = W §.

di i !1 L 2 .

. The lead time for receiving a new order of carpet is 10 days.13 REORDER POINT FOR VARIABLE DEMAND (EXAMPLE) At Discount Carpet Store. daily demand for Super Shag Ccarpet stocked by the store is normally distributed with an average daily demand of 30 yards and a standard deviation of 5 yards of carpet per day. Determine the reorder point and safety stock if the store wants a service level of 95% with the probability of a stockout equal to 5 %.

z = 1.14 SOLUTION The carpet store wants a reorder point with a 95% service level and a 5% stockout probability d = 30 yards per day L = 10 days Wd = 5 yards per day For a 95% service level.65)(5)( 10) = 326.1 yards = 30(10) + (1.65)(5)( 10) = 26.1 yards .65 R = dL + z Wd L Safety stock= z Wd L stock= = (1.

15 FIXED-TIME-PERIOD MODEL Inventory is counted at fixed intervals. y Ceiling (par) inventory is established. y . y Safety stock level is established. y Order quantity to return inventory to ceiling level varies based on on-hand inventory less safety stock at time inventory is counted.

. Inc.16 FIXED-TIME PERIOD INVENTORY MODEL © The McG rawHill Com panie s. 2003 .

17 FIXED-TIME PERIOD MODEL WITH SAFETY STOCK FORMULA q = Average demand + Safety stock ± Inventory currently on hand q d (T ) ZWT -I Where : q quantitiy to be ordered T the number o days bet een revie s lead time in days d z WT I orecast average daily demand the number o standard deviations or a speci ied service probabilit y standard deviation o demand over the revie current inventory level (includes items on order) and lead time .

18 MULTI-PERIOD MODELS: FIXED-TIME PERIOD MODEL: DETERMINING THE VALUE OF 7T+L T WT W §.

WT The (T )W d 2 standard deviation of a sequence of random events equals the square root of the sum of the variances . i !1 di 2 ince each day is independent and W d is constant.

Management has set a policy of satisfying 96 percent of demand from items in stock. The daily demand standard deviation is 4 nits. and lead time is 10 days. . how many nits sho ld be ordered? Average daily demand for a prod ct is 20 nits. At the beginning of the review period there are 200 nits in inventory.19 EXAMPLE OF THE FIXED-TIME PERIOD MODEL Given the information below. The review period is 30 days.

20 EXAMPLE OF THE FIXED-TIME PERIOD MODEL: SOLUTION (PART 1) 2 W T+ L = (T + L)W d 2 = .

30 + 10 .

298 From Appendix D . z = 1.75 .4 = 25.

21 EXAMPLE OF THE FIXED-TIME PERIOD MODEL: SOLUTION (PART 2) q q d(T ) ZWT -I 20(30 10) (1. to satisfy 96 perce t of the dema d.272.272 .75)(25. or 645 u its So. you should place a order of 645 u its at this review period .200 644.298) .200 q 800 44.

2 bottles.22 EXAMPLE OF THE FIXED-TIME PERIOD MODEL The corner drug store stocks a popular brand of sunscreen. A vendor for the sunscreen producer checks the drugstore stock every 60 days. The average demand for the sunscreen is 6 bottles per day. with a standard deviation of 1. During one visit the drugstore had 8 bottles in stock. The lead time to receive an order is 5 days. . Determine the order size for this order period that will enable the drug store to maintain a 95% service level.

65 (for a 95% service level) Q = d(T + L) + zWd T + L .2 bottles = 60 days = 5 days = 8 bottles = 1.65)(1.8 = 397.I = (6)(60 + 5) + (1.96 bottles .2) 60 + 5 .23 EXAMPLE OF THE FIXED-TIME PERIOD MODEL: SOLUTION d Wd T L I z = 6 bottles per day = 1.

the formula above will have to be used with each price-break cost value .24 PRICE-BREAK MODEL FORMULA Based on the same assumptions as the EOQ model. the price-break model has a similar Qopt formula: Q OPT 2 i 2( nnual emand)( rder or etup ost) nnual Holding ost i = percentage of unit cost attributed to carrying inventory C = cost per unit Since ³C´ changes for each price-break.

00 4. a carrying cost rate of 2% of the inventory cost of the item.20 2.500 to 3.98 .000 nits? Order Quantity(units) Price/unit($) 0 to 2.999 1. and an ann al demand of 10.499 $1.000 or more .25 PRICE-BREAK EXAMPLE PROBLEM DATA (PART 1) A company has a chance to red ce their inventory ordering costs by placing larger q antity orders sing the price-break order q antity sched le below. What sho ld their optimal order q antity be if this company p rchases this single inventory item with an e-mail ordering cost of $4.

plug data into formula for each price-break value of ³C´ Annual Demand (D)= 10.20.000)( 4) 0.000)( 4) 0.000 units Interval from 0 to 2499.826 units .02(.26 PRICE-BREAK EXAMPLE SOLUTION (PART 2) First.02(1.02(1.00.98) 2(10.000 units Cost to place an order (S)= $4 Carrying cost % of total cost (i)= 2% Cost per unit (C) = $1.00) 2(10. the Qopt value is feasible Q OPT 1.000)( 4) 0. $0.98 Next.020 units Q OPT 2. $1.20) 2. the Qopt value is not feasible Q OPT 2 i 2 i 2 i 2(10. the Qopt value is not feasible Interval from 2500-3999. determine if the computed Qopt values are feasible or not Interval from 4000 and more.

it means that all the other true Qopt values occur at the beginnings of each price-break interval. 2500.27 PRICE-BREAK EXAMPLE SOLUTION (PART 3) Since the feasible solution occurred in the first pricebreak. and 4000 units 0 1826 2500 4000 Order Quantity Total annual costs . Because the total annual cost function is a ³u´ shaped function So the candidates for the pricebreaks are 1826.

949.20 Finally.043. which is this problem occurs in the 4000 & more interval.28 PRICE-BREAK EXAMPLE SOLUTION (PART 4) Next.82 TC(2500-3999)= $10.20) = $12. we select the least costly Qopt.02*1.20)+(10000/1826)*4+(1826/2)(0. our optimal order quantity is 4000 units . we plug the true Qopt values into the total cost annual cost function to determine the total cost under each price-break D Q TC = DC + S + iC Q 2 TC(0-2499)=(10000*1.041 TC(4000&more)= $9. In summary.

4 per case a year and the new price schedule indicates that the orders of less than 50 cases will cost Rs 20 per case. 17 per case. 12. carrying costs are Rs. 50-79 cases will cost Rs 18 per case. Ordering costs are Rs.29 PRICE-BREAK EXAMPLE PROBLEM DATA The maintenance department of a large hospital uses about 816 cases of liquid cleanser annually. 16 per case. 80-99 cases will cost Rs. . Determine the optimum order quantity and the total cost. and larger orders will cost Rs.

M q=M-I Actual Inventory Level.30 MISCELLANEOUS SYSTEMS: OPTIONAL REPLENISHMENT SYSTEM Maximum Inventory Level. otherwise do not order any. . order q. I M I Q = minimum acceptable order quantity If q > Q.

31 MISCELLANEOUS SYSTEMS: BIN SYSTEMS Two-Bin System Order One Bin of Inventory Full Empty One-Bin System Order Enough to Refill Bin Periodic Check .

32 ABC CLASSIFICATION SYSTEM Items kept in inventory are not of equal importance in terms of: y y y y dollars invested profit potential sales or usage volume stock-out penalties .

33 ABC CLASSIFICATION Class y A 5 ² 15 % of units y 70 ² 80 % of value Class y B 30 % of units y 15 % of value Class y C 50 ² 60 % of units y 5 ² 10 % of value .

34 ABC CLASSIFICATION: EXAMPLE PART 1 2 3 4 5 6 7 8 9 10 UNIT COST $ 60 350 30 80 30 20 10 320 510 20 ANNUAL USAGE 90 40 130 60 100 180 170 50 60 120 .

800 5 3.0 170 C 83.0 B 100 40.400 4 4.0 40 A 15.0 12.000 2 14.400 A 8 1.630 10. 4.0 9. 8.960 6.0 30 6.0 4.35 ABC CLASSIFICATION: EXAMPLE (CONT.0 1. 10. Inc.0 120 Copy right 2006 John Wile Example 10.0 320 17. 7 12.3 9. .0 4.0 100.0 90 11.680 6.8 2 71.0 60 30.4 4.5 20 6.0 ITEMS VALUE 3.600 6 CLASS 3.0 130 24.220 % OF TOTAL 18.000 3 5.900 3.0 60 60.700 B 9 C $85.510 13.0 180 OF TOTAL QUANTITY 71. 5.600 1 16. 2.0 350 16.0 $ 18.5 510 6.) PART TOTAL PART VALUE % OF TOTAL % OF TOTAL UNIT COSTQUANTITY % CUMMULATIVE ANNUAL USAGE VALUE 9 8 2 1 4 3 6 5 10 7 $30.0 50 15.0 25.000 7 2.0 % 58.0 5. 2.7 5.1 y& Sons.0 3 16.400 10 35.

36 INVENTORY ACCURACY AND CYCLE COUNTING Inventory accuracy refers to how well the inventory records agree with physical count Cycle Counting is a physical inventorytaking technique in which inventory is counted on a frequent basis rather than once or twice a year .

37 END OF CHAPTER .

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

We've moved you to where you read on your other device.

Get the full title to continue

Get the full title to continue listening from where you left off, or restart the preview.

scribd