7155000 chap 12 inventory management

8/14/2019 7155000 Chap 12 Inventory Management

1/25

1

Inventory ControlInventory Control

Chapter 12


2/25

2

Chapter 12

Inventory ControlInventory System DefinedInventory Costs

Independent vs. Dependent Demand

Basic Fixed-Order Quantity Models

Basic Fixed-Time Period Model- we will omit.

Economic Production Quantity Model- we will omit.

Single Time Period Model- we will omit.

Quantity Discounts-also known as price break models.


3/25

3

Inventory System

DefinedInventory

raw materials, finished products, component

parts, supplies, and work-in-process.

An inventory system is the set of policiesand controls that monitor levels of inventory

and determines what levels should bemaintained, when stock should bereplenished, and how large orders should be.


4/25

4

Purposes of Inventory1. To maintain independence of operations.

2. To meet variation in product demand.

3. To allow flexibilityin production scheduling.

4. To provide a safeguard for variation in rawmaterial delivery time.

5. To take advantage ofeconomic purchase-order size.


5/25

5

Inventory CostsHolding (or carrying) costs.

Costs for storage, handling, insurance, etc.Setup (or production change) costs.

Costs for arranging specific equipment setups,etc.

Ordering costs.Costs of someone placing an order, etc.

Shortage costs.Costs of canceling an order, etc.


6/25

6

Independent vs. Dependent Demand

Independent Demand (Demand not related to otheritems or the final end-product)

DependentDemand(Derived demand

items forcomponent

parts,subassemblies,raw materials,

etc.)


7/257

Independent Demand


8/258


9/259

Classifying Inventory ModelsFixed-Order Quantity Models Event triggered (Example: running out of

stock)

The sale of an item reduces the inventoryposition to the re order point.

Fixed-Time Period ModelsTime triggered (Example: Monthly sales callby sales representative)


10/2510

Fixed-Order Quantity Models:Model Assumptions (Part 1)

Demand for the product is constant anduniform throughout the period.

Lead time (time from ordering to receipt)is constant.

Price per unit of product is constant.


11/2511

Fixed-Order Quantity Models:Model Assumptions (Part 2)

Inventory holding cost is based onaverage inventory.

Ordering or setup costs are constant.

All demands for the product will besatisfied. (No back orders are allowed.)


12/2512

Basic Fixed-Order Quantity Model andReorder Point Behavior

R = Reorder pointQ = Economic order quantityL = Lead time

L L

Q QQ

R

Time

Number

of unitson hand


13/2513

Cost Minimization Goal

Ordering Costs

HoldingCosts

QOPT

Order Quantity (Q)

COST

Annual Cost of

Items (DC)

Total Cost


14/2514

Basic Fixed-Order Quantity (EOQ)Model Formula

H2

Q+S

Q

D+DC=TC

Total Annual Cost =

AnnualPurchase

Cost

AnnualOrdering

Cost

AnnualHolding

Cost+ +

TC = Total annual costD = Demand

C = Cost per unit

Q = Order quantity

S = Cost of placing an order

or setup costR = Reorder point

L = Lead time

H = Annual holding and storage

cost per unit of inventory


15/2515

Deriving the EOQ

CostHoldingAnnual

Cost)SetuporderDemand)(Or2(Annual=

H

2DS=QOPT

Reorder p oint, R = d L_

d = average daily demand (constant)L = Lead time (constant)

_


16/2516

EOQ Example Problem Data

Annual Demand = 1,000 unitsDays per year considered in average daily demand = 365Cost to place an order = $10Holding cost per unit per year = $2.50

Lead time = 7 daysCost per unit = $15

Given the information below, what are the EOQ andreorder point?


17/2517

EOQ Example Solution

Q =2DS

H=

2(1,000 )( 10)

2.50= 89.443 un its orOPT 90 units

d =

1,000 unit s / year

365 days / year = 2.74 unit s / day

Reorder p oint, R = d L = 2.74units / day (7days ) = 19.18 or_

20 units


18/25

18

Safety Stock

LT Time

Expected demandduring lead time

Maximum probable demandduring lead time

ROP

Quan

tity

Safety stock

Figure 12.12

Safety stock reduces risk ofstockout during lead time


19/25

19

Reorder Point

ROP

Risk ofa stockout

Service level

Probability ofno stockout

Expected

demand Safetystock

0 z

Quantity

z-scale

Figure 12.13

The ROP based on a normalDistribution of lead time demand


20/25

20

Special Purpose Model: Price-Break ModelFormula

CostHoldingAnnual

Cost)SetuporderDemand)(Or2(Annual=

iC

2DS=QOPT

Based on the same assumptions as the EOQ model,the price-break model has a similar Qopt formula:

i = annual percentage of unit cost attributed to carryinginventoryC = cost per unit


21/25

21

Price-Break Example Problem Data(Part 1)

Order Quantity(units) Price/unit($)0 to 2,499 $1.202,500 to 3,999 1.00

4,000 or more .98


22/25

22

Price-Break Example Solution (Part 2)

units1,826=0.02(1.20)

4)2(10,000)(=

iC

2DS=QOPT

Annual Demand (D)= 10,000 unitsCost to place an order (S)= $4

First, start with the lowest price per unit.

units2,000=0.02(1.00)

4)2(10,000)(

=iC

2DS

=QOPT

units2,020=0.02(0.98)

4)2(10,000)(=

iC

2DS=QOPT

Carrying cost % of total cost (i)= 2%Cost per unit (C) = $1.20, $1.00, $0.98

Interval from 0 to 2499, theQopt value is feasible.

Interval from 2500-3999, the

Qopt value is not feasible.

Interval from 4000 & more, theQopt value is not feasible.

Next, determine if the computed Qopt values are feasible or not.


23/25

23

Price-Break Example Solution (Part 3)

iC

2

Q+S

Q

D+DC=TC

TC(1826)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)= $12,043.82

TC(2500) = $10,041

TC(4000) = $9,949.20

Next, Compare total cost for the feasible root Q and price breakQ values.


24/25

24

Price-Break Example

Since the feasible solution occurred in the first price-break,it means that all the other true Qopt values occur at the

beginnings of each price-break interval. Why?

0 1826 2500 4000 Order Quantity

Totalannualcosts

Because the total annual cost function is au shaped function.


25/25

25

ABC Classification System

Items kept in inventory are not of equalimportance in terms of:

dollars invested

profit potential

sales or usage volume

stock-out penalties

0

30

60

30

60

A BC

% of$ Value

% ofUse

So, identify inventory items based on percentage of total dollarvalue, where A items are roughly top 15 %, B items as next35 %, and the lower 65% are the C items.

7155000 chap 12 inventory management

Documents