2167 Inventory Management
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Transcript of 2167 Inventory Management
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Inventory Management
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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
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A. Introduction
Inventory: An idle material or product
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A. Objectives of Inventory Control
Inventory turnover: Ratio of average cost of goods sold toaverage inventory investment
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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
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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
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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
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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
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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
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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.
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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
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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
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C1. The Inventory CycleProfile of Inventory Level Over Time
Quantityon hand
Q
Receiveorder
Placeorder
Receiveorder
Placeorder
Receiveorder
Lead time
Reorder
point
Demandrate
Time
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C1. Total Cost
SQ
DH
QTC
2
Cost
Ordering
Annual
Cost
Carrying
Annual
CostTotal
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C1. Deriving the optimal order quantity
DQ
H
DSQ
0
0
cycleorderofLength
2
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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)
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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
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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
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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
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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.
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D. Safety Stock
LT Time
Expected demandduring lead time
Maximum probable demandduring lead time
ROP
Quantity
Safety stock
LT Time
Expected demandduring lead time
Maximum probable demandduring lead time
ROP
Quantity
Safety stock
LT Time
Expected demandduring lead time
Maximum probable demandduring lead time
ROP
Quantity
Safety stock
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D. Reorder Point
ROP
Risk ofa stockout
Service level
Probability ofno stockout
Expecteddemand Safety
stock
0 z
Quantity
z-scale
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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
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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
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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