2167 Inventory Management

7/31/2019 2167 Inventory Management

1/39


2/39

Inventory Management


3/39

A. Introduction

B. Requirements for Effective Inventory

ManagementC. Fixed Order Quantity/Reorder Point Model

(FOQRP)

D. FOQRP: Determining the Reorder Point

E. Fixed Order Interval Model

F. The Single Period Model


4/39

A. Introduction

Inventory: An idle material or product


5/39


6/39

A. Objectives of Inventory Control

Inventory turnover: Ratio of average cost of goods sold toaverage inventory investment


7/39

A. Objectives of Inventory Control Inadequate control of inventories can result in both under and

overstocking of items

Under stocking results in:

Missed deliveries, lost sales, dissatisfied customer,production stoppage

Overstocking results in:

Excessive cost of the inventory

Objectives of Inventory Control

Have the right goods, in sufficient quantitative, in theright place, at the right time

Have a Low cost of ordering and carrying inventories


8/39

B. Requirements for Effective InventoryManagement

1. A system to safely store and use inventory

2. A system to keep track of the inventory, and areplenishment model

3. Reliable forecasts of demand and knowledge of leadtimes

4. Reasonable estimate of inventory holding,ordering, and shortage costs

5. ABC classification


9/39

Periodic System

Physical count of items

made at periodic intervals

Perpetual Inventory System

System that keeps track ofremovals from and

additions to inventorycontinuously, thusmonitoring current levelsof each item.

B2. Inventory Counting and ReplenishmentModels


10/39


11/39

Lead time time interval between ordering and receiving

the order

Point of Sale system

Software for electronically recording salesand updating inventory levels at the time andlocation of sale

B3. Demand Forecast


12/39

Holding (carrying) costs

cost to carry an item in inventory Ordering costs

costs determining order quantity,preparing purchase orders, and fixed costportion of receiving, inspection, andmaterial handling

Shortage costs

costs when demand exceeds supply; oftenunrealized profit per unit

B4. Cost Information


13/39

B5. ABC Classification

A-very important

B- mod. Important

C- least important

Annual$ volumeof items

A

BC

High

Low

Few ManyNumber of Items

Classifying inventory according to some measure ofimportance and allocating control efforts accordingly.


14/39

1. The basic economic order quantity (EOQ)

2. The economic production quantity (EPQ)

3. The EOQ with quantity discount

4. The EOQ with planned shortage

C. Fixed Order Quantity/Reorder Point Model:Economic Order Quantity


15/39

Only one product is involved

Annual demand requirements known Demand is spread evenly throughout the year so

the demand rate is reasonably constant

Lead time does not vary

Each order is received in a single delivery

There are no quantity discounts

C1. Basic EOQ assumptions


16/39

C1. The Inventory CycleProfile of Inventory Level Over Time

Quantityon hand

Q

Receiveorder

Placeorder

Receiveorder

Placeorder

Receiveorder

Lead time

Reorder

point

Demandrate

Time


17/39

C1. Total Cost

SQ

DH

QTC

2

Cost

Ordering

Annual

Cost

Carrying

Annual

CostTotal


18/39


19/39


20/39

C1. Deriving the optimal order quantity

DQ

H

DSQ

0

0

cycleorderofLength

2


21/39

Production done in batches or lots

Capacity to produce a part exceeds theparts usage or demand rate

Assumptions of EPQ are similar to EOQexcept orders are received incrementallyduring production

C2. Economic Production Quantity (EPQ)


22/39


23/39

C2. Deriving theoptimal run size

rateDemand

rateProduction

RunProductionperCostSetup

sizeRunInventoryMaximum

2

;TimeRun;TimeCycle

2Cost

SetupAnnual

Cost

HoldingAnnual

TC

max

0

max

max

d

p

S

QI

dp

p

H

DSQ

dpp

QI

p

Q

d

Q

SQ

DH

I


24/39

C3. EOQ with Quantity Discounts

Quantity Discounts: Price reductions for large orders

PriceUnit

2

Cost

Purchasing

Annual

Cost

Ordering

Annual

Cost

Holding

Annual

TC

R

RDSQ

DH

QTC


25/39

C3. Total Costs with RD

Cost

EOQ

TC with RD

TC without RD

RD

0 Quantity

Adding Purchasing cost

doesnt change EOQ

Cost

EOQ

TC with RD

TC without RD

RD

0 Quantity

Adding Purchasing cost

doesnt change EOQ


26/39


27/39


28/39

D. Fixed Order Quantity/Reorder Point Model:Determining the Reorder Point

Reorder Point (ROP)

When the quantity on hand of an item drops to this

amount, the item should be reordered

Safety Stock Stock that is held in excess of expected demand due

to variable demand rate and/or lead time.

Service Level

Probability that demand will not exceed supplyduring lead time.


29/39

D. Safety Stock

LT Time

Expected demandduring lead time

Maximum probable demandduring lead time

ROP

Quantity

Safety stock

LT Time



ROP

Quantity

Safety stock

LT Time



ROP

Quantity

Safety stock


30/39

D. Reorder Point

ROP

Risk ofa stockout

Service level

Probability ofno stockout

Expecteddemand Safety

stock

0 z

Quantity

z-scale


31/39


32/39


33/39


34/39


35/39


36/39

Single period model

model for ordering of perishables and other

items with limited useful lives Shortage cost Cs

generally the unrealized profits per unit

Excess cost Ce

difference between purchase cost and salvagevalue of items left over at the end of a period

F. Single Period Model


37/39


38/39

Continuous stocking levels

Identifies optimal stocking levels

Optimal stocking level balances unitshortage and excess cost

Discrete stocking levels Service levels are discrete rather than

continuous

Desired service level is equaled orexceeded

F. Single Period Model


39/39

Too much inventory

Tends to hide problems Easier to live with problems than to

eliminate them

Costly to maintain

Wise strategy Reduce lot sizes

Reduce safety stock

F. Operations Strategy

Documents

2167 Inventory Management