Module:

Independent Inventory

Operations Management as a Competitive Weapon

OM Course Framework

1. Cost

- Design & Selection

2. Quality

- TQM

- SQC

3. Dependability

- Project Management

- JIT 4. Flexibility

- Inventory

- Supply Chain

- Location

- Forecasting

- Aggregate Planning

3Module: Independent Inventory

Learning Objectives

At the end of this module, each student will be able to:

1. Discuss basic functions of inventory

2. Describe two basic inventory systems

3. Calculate inventory parameter values

4Module: Independent Inventory

1. Functions of Inventory

1. Anticipate customer demand

2. Decouple

3. Quantity discounts

4. Inflation

5. WIP

6. Delivery variation

5Module: Independent Inventory

Types of Inventory

1. Cycle inventory

6Module: Independent Inventory

Cycle InventoryO

n-h

and invento

ry

(unit

s)

Time

Q

1 cycle

Receive order

Inventory depletion (demand rate)

Averagecycleinventory

Q

2

7Module: Independent Inventory

Types of Inventory

1. Cycle inventory

2. Safety Stock inventory

3. Anticipation inventory

4. Pipeline inventory

8Module: Independent Inventory

1. Fixed-order quantity models

2. Fixed-time period models

2. Inventory Systems

9Module: Independent Inventory

Basic System Comparison

Fixed-amount

models

Fixed-time

models

Amount

When

I tem type

qVariable amount

QFixed amount

TTime between

orders

RReorder level

High-priced

Critical

“A” items

Low priced

Less important

“C” items

10Module: Independent Inventory

Comparative Advantages

Fixed-amount systems (Q systems)1. Individualized review frequency2. Quantity discounts3. Lower safety stocks

Fixed-period systems (P systems)1. Convenient administration2. Multiple items on single purchase order3. Inventory known only at review period

11Module: Independent Inventory

Individual Cost Elements

D Demand (annual)

C Unit cost

S Setup cost (manufactured item)

Ordering cost (purchased item)

H Holding cost (annual)

i Holding rate (H = iC)

Q Optimal low-cost amount to order

12Module: Independent Inventory

Inventory Cost Equations

Total Annual Cost = DC + (Q/2)H + (D/Q)S

Annual Purchase Cost: (DC)

Annual Holding Cost: (Q/2)(H)

Annual Ordering Cost: (D/Q)(S)

13Module: Independent Inventory

Economic Order Quantity

Ordering Costs: (D/Q)S

HoldingCosts: (Q/2)(H)

Order Quantity (Q)

COST

Item Cost: (DC)

Total Cost

Q*

TC*

14Module: Independent Inventory

Fixed-Order Inventory Equations

Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S)

Optimal Order Quantity = =Q DSH

2

D = Demand per yearC = Unit costS = Setup (order) cost per orderH = Annual holding costL = Lead timed = Average daily demand

R = dL

15Module: Independent Inventory

Fixed-Order Model Example

D = 21,900 C = $5 L = 6 daysS = $10 H = $0.50 d = 60 units

EOQDS

Hunits

2 2 21 900 10

050

438 000

050936

( , )( )

.

,

.

60(6) 360R dL units Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S)

= (21,900)(5) + (936/2)(.5) + (21,900/936)(10)

= $109, 968

16Module: Independent Inventory

Fixed-Period Inventory Equations

Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S)

=Q DSH

2 q = quantity to be orderedT = time between ordersI = current inventory amountD = Demand per yearC = Unit costS = Setup (order) cost per orderH = Annual holding costL = Lead timed = Average daily demand

T = Q / D

q = d(L + T) - I

17Module: Independent Inventory

Fixed-Period Model Example

D = 21,900 C = $5 L = 6 daysS = $10 H = $0.50 d = 60 units

EOQDS

Hunits

2 2 21 900 10

050

438 000

050936

( , )( )

.

,

.

TQ

Dyr days

936

21 9000 043 11

,.

q d L T I I I ( ) ( ) ,60 6 11 1 020