Professional Documents
Culture Documents
and Operations
Management: Eighth Edition
Manufacturing and
Services
Ordering costs
Shortage costs
Dependent Demand
(Derived)
E(1)
Number
of units
on hand Q Q Q
R
L L
Time
R = Reorder point
Q = Economic order quantity
L = Lead time
© The McGraw-Hill Companies, Inc., 1998 10
Irwin/McGraw-Hill
Cost Minimization Goal
C
O Total Cost
S
T Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
_
R
e
or
de
rp
oi
nt
,R=
dL
_
d=a
v
er
ag
ed
a
il
yde
ma
nd
(c
o
ns
ta
nt
)
L
=Le
a
dt
ime
(c
on
s
ta
nt
)
© The McGraw-Hill Companies, Inc., 1998 13
Irwin/McGraw-Hill
EOQ Example
_
Reorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 units
2D S 2(10,000 )(10)
Q OPT = = = 365.148 units, or 366 u n its
H 1.50
1
0
,
00
0u
n
i
ts
/ye
a
r
d
= =2
7
.
39
7u
n
i
ts
/d
a
y
3
65
da
y
s/
ye
ar
_
R
=
d
L
=2
7
.
3
9
7u
ni
t
s
/d
a
y(
1
0
da
y
s
)=
2
7
3
.
9
7o
r
27
4
u
n
i
ts
q = d(T + L) + Z T+ L - I
Where:
q = quantitiy to be ordered
T = the number of days between reviews
L = lead time in days
d = forecast average daily demand
z = the number of standard deviations for a specified service level
T+ L = standard deviation of demand over the review and lead time
I = current inventory level (includes items on order)
dT(1- P)
E(Z) =
T+ L
where
E(Z) = expected number units short from a normalized
table where = 1
P = service level desired
dT = demand during the review period where d is daily
demand and T is the number of days
T+ L = standard deviation over the review period and the
lead time
© The McGraw-Hill Companies, Inc., 1998 19
Irwin/McGraw-Hill
Determining the Value of sT+L
T+ L 2
T+ L = di
i 1
T+ L = (T + L) d =
2
30 + 10 4 2 = 25.298
dT(1- P) 20(30)(1-.96)
E(Z) = = = .949
T+ L 25.298
q = d(T + L) + Z T + L - I
q=M-I
Two-Bin System
Order Enough to
Refill Bin
Periodic Check
© The McGraw-Hill Companies, Inc., 1998 25
Irwin/McGraw-Hill
ABC Classification System
Items kept in inventory are not of equal
importance in terms of:
– dollars invested
60
% of
– profit potential $ Value 30 A
0 B
– sales or usage volume % of 30 C
Use 60
– stock-out penalties
Inventory accuracy
– Do inventory records agree with physical count?
Cycle Counting
– Frequent counts
» Which items?
» When?
» By whom?