Inventory Models

Inventory
• Manufacturing and retailing organisations
• Represent…
– Raw material
– Work in progress
– Spare parts/consumables
– Finished goods
 Types of inventories
• Movement inventories
– Transit or pipeline inventories
• Buffer inventories
– Uncertainties of demand/supply
– Lead time
– Safety stock
 Types of inventories
• Anticipation inventories
• Decoupling inventories
– Disengage activities of various machines/workers
• Cycle inventories
 Inventory Decisions
• How much to order ?
• When should be the order placed?
• How much safety stock is needed?
 Inventory Costs
• Purchase cost
– Also known as Nominal cost
– Purchase/Production
• Ordering cost
– Also known as Procurement cost
– Purchase order + transportation+ inspection…..
– Set up cost
– Independent of order size
– Per unit ordering cost reduces as order size increases
 Inventory costs contd.
• Carrying cost
– Also known as Holding cost / Storage cost
– Proportional to the amount of inventory
• Stockout cost
– Cost associated with not serving the customers
– Shortages
 Inventory Management Systems
• Fixed order quantity system
– Re-order point system
– Q-system
– Size of order fixed
• Periodic review system
– Fixed intervals
– Size of order not fixed
• Ss System
 Fixed-Order Quantity System
• Classical EOQ model
• EOQ with price breaks
• EOQ with shortages
• Probabilistic EOQ model
 The classical EOQ Model
• Economic Order Quantity (EOQ) model
• Wilson formulation
• Cost model - > Inventory model
 The classical EOQ Model contd.
• Demand is certain, continuous and constant
• Lead time is known
• Per unit holding cost, ordering cost are
constant and independent of the quantity
ordered
• Purchase price is constant
• The inventory is replenished immediately, as
stock level reaches zero
 Inventory Profile : EOQ model
• Q = Maximum stock level
• d = Consumption in units / day
• R = Reorder point
• T = Inventory cycle
 EOQ Cost Model
T(Q) = O (Q) + H(Q)
Where ….
Q = The ordering quantity
T(Q) = Total (variable) annual inventory cost
O(Q) = Total annual ordering cost
H(Q) = Total annual holding cost