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Inventory Mangement, EOQ Model
Inventory Mangement, EOQ Model
Lecture 21 - 22
Dr. Bilal Anwar
Inventory
Inventory everywhere:
• my desk drawer
• piles of coal in a Tokyo steel plant
• supply room, retail stores
• vast global network of industry
• inventories in transit
• inventories in the service industries
• immense scale, $1.1 billion in March 1999 in the USA
Inventory
• Inventory is the stock of items held to meet future
demand.
• Equipment inventory is part of the management cycle
of medical equipment
• Inventory starts after procurement or receipt of
donations and is the main input to a medical
equipment management program
• Inventory is a primary component of a Computerized
Maintenance Management System (CMMS) and
assists to organize the maintenance of equipment
Definition
• An inventory is a detailed itemized list of assets held by an
organization or institution
– Must be continually maintained and updated to reflect the current
status of each asset
– Depending on the nature of the organization and its assets,
different details are tracked and updated as changes occur
• Medical equipment inventory is a list of the technology on
hand, including details of the type and quantity of
equipment and the current operating status
– Accessories, consumables and spare parts inventories are directly
correlated with the main medical equipment inventory
An Inventory Disaster!
• Imagine the following scenario, in which the healthcare
supply chain manager has to explain to a member of senior
management why the emergency room found itself without
the syringes.
… Sorry sir, but when she (the patient) came into the ER, we were out of
syringes. Our anticipation stocks were depleted because we hadn’t
corrected the ordering patterns for seasonal variations. Then, the snow
delayed shipments from supplier, and our safety stocks just weren’t good
enough! You know we usually order in bulk to take advantages of large
economic lot size and lower our ordering cycle. Our last order was
especially large because we wanted to hedge against predicted price
increases! In the final analysis, our inventory just wasn’t sufficient to
permit smooth operations…
The COO’s Response
(i.e., Inventory objectives and requirements)
S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
S HEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
‘B’ ITEM
Intermediate
• Must have:
• Moderate control
• Purchase based on rigid requirements
• Reasonably strict watch & control
• Moderate safety stocks
• Managed by middle level management
Inventory Tracking
• Track additions and removals
– Bar-coding
– Point of use or point of sale (POS)
– RFID
• Physical count of items
– Periodic intervals
– Cycle count
– Find and correct errors
Effective Inventory Management
• Inventory counting systems can be either:
– Periodic
– Perpetual
• Batch
• Line
Inventory Counting Systems
• Periodic System
Physical count of items made at periodic intervals
214800 232087768
Inventory Counting Systems (Cont’d)
• Universal Product Codes (UPCs). The UPCs have been
around since late 1970s and are used in industry. A UPC
can have up to 20 character numbers that uniquely
identify a product, for example, of pharmaceutical or
medical-surgical supply, using bars with different variety
and thickness that can be read by scanners. The order
of the information in UPCs identifies the type of
product, its manufacturer, and the product itself.
0
214800 232087768
Inventory Counting Systems (Cont’d)
• Only 26 percent of medical-surgical products can be scanned
on nursing units, and only fifty percent of drugs have bar codes
for unit doses.
• According to the final regulation issued by the Food and Drug
Administration (FDA) in 2004, drug manufacturers must adopt
bar coding to single-dose units within two years, and hospitals
must eventually implement bedside scanning systems.
• The FDA estimates, however, that it may take up to two
decades for all hospitals to implement such systems because of
their high costs: from $.5 to $1 million. Only a few more than
100 hospitals currently them.
Inventory Counting Systems (Cont’d)
• Yet bar code systems would significantly improve the
quality of patient care through reduction of medication
errors. It is estimated that over a 20-year period, fully
implemented bar code systems would prevent about .5
million medical errors. Moreover, by improving the cost-
efficiency of medical supply management, hospitals
would also reap $90 billion in savings, which would help
to pay for the technology (Becker, 2004).
Lead Time
• Inventories are used to satisfy demand requirements, so reliable
estimates of the amounts and timing of demand are essential. It is
also essential to know how long it will take for orders to be delivered
(Stevenson, 2002, p.547).
• Now that healthcare organizations increasingly rely on their vendors
to maintain adequate inventory levels in their facilities, their data
relevant to demand must be transferred to their vendors.
• Healthcare managers also need to know the extent to which demand
and lead time (the time between submitting an order and receiving
it) may vary; the greater the potential variability, the greater the
need for additional stock to avoid a shortage between deliveries.
Costs of Inventory
Holding (carrying costs)-- interest, insurance,
depreciation, obsolescence, deterioration, spoilage,
warehousing costs
Ordering costs-- associated with ordering and
receiving inventory
Shortage costs-- when demand > supply on hand;
opportunity costs of lost customers loss of goodwill;
death of a patient and potential lawsuits
Effective Inventory Management
The A-B-C Approach: Classifying inventory according to some measure
of importance and allocating control efforts accordingly.
2 D S
EOQ
H
D= Annual demand (units)
S= Cost per order ($)
C= Cost per unit ($)
I = Holding cost (%)
H= Holding cost ($) = I x C
EOQ Model Equations
2 D S
Optimal Order Quantity Q *
H
D
Expected Number Orders N
Q*
Working Days / Year
Expected Time Between Orders T
N
D
d D = Demand per year
Working Days / Year S = Setup (order) cost per order
H = Holding (carrying) cost
ROP d L
d = Demand per day
L = Lead time in days
EOQ
Example
You’re a buyer for SaveMart.
2 D S
EOQ
H
D= 1000
2 1000 $100
S= $100 EOQ
C= $ 78 $31.20
I= 40%
H= CxI
H= $31.20 EOQ = 80 coffeemakers
Independent Demand Inventory Models
• Introduction
The average manufacturing company spends over one-half of
its sales revenue on inventory. Because of the large investment
and expenditure required for acquiring and controlling
inventories and their effect on profits, successful companies
devote a great deal of attention to inventory management.
• How much inventory is enough?
- Marketing department wants large inventory, it does not
like stock outs.
- Finance department likes low inventory and high turnover
to minimize funds tied up in inventories.
Inventory Management
Inventory: An idle resource of any kind that has potential
economic value
- raw materials
- component parts
- work-in-process
- finished products, etc.
Reasons for carrying inventory
1) To provide service
- finished good inventory to meet demand and keep customers happy
- work-in-progress inventory to increase flexibility by decoupling production
stages and keep machines running
- raw material inventory keeps production moving
- protection against uncertainty
Inventory Management
2) To save money
- buying in large quantities allows spreading of fixed costs such as
ordering costs and obtaining quantity discounts.
- stocking of seasonal items allow production smoothing or
work-load balancing.
“The aborigine knew nothing of inventory control, and, quite
possibly his 20th century corporate counterpart is equally as
unenlightened. The changeover from inventory to inventory control
bears no date. Some concerns plunged into the healthful waters of
scientific management of inventories well before the first world
war. Others are still on the shore contemplating on the advisability
of wetting their toes. (Benjamin Melnitsky).
Inventory Management
• History
1915 F.W.Harris (Westinghouse)
Lot size formula (EOQ model); independently
developed by Wilson and sold to many companies as
an integral part of an inventory control scheme.
1931 F.E. Raymond (MIT)
Wrote the first full length book.
WWII Christmas tree problem (Newsboy problem)
Whitin’s stochastic extension of the EOQ model.
Early Computer made it possible to handle large data
requirement
1950’s Of the inventory models, Whitin published a book on
stochastic inventory models in 1953.
Inventory Management
1958 Arrow, Karlin and Scarf published their now classical
book, which is a definitive work on inventory theory,
inspired a great deal of research for next decade.
Mid Material requirement planning (MRP)
1970’s Books by Orlicky, Wight in 1974
Functions of inventory control
Lead time: The period between the order time and the delivery time
ECONOMIC ORDER OF
QUANTITY(EOQ)
PURCHASING CARRYING
COST COST