7155000 Chap 12 Inventory Management
Transcript of 7155000 Chap 12 Inventory Management
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Inventory ControlInventory Control
Chapter 12
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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.
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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.
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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.
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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.
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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.)
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Independent Demand
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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)
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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.
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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.)
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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
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Cost Minimization Goal
Ordering Costs
HoldingCosts
QOPT
Order Quantity (Q)
COST
Annual Cost of
Items (DC)
Total Cost
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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
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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)
_
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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 = $15
Given the information below, what are the EOQ andreorder point?
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EOQ Example Solution
Q =2DS
H=
2(1,000 )( 10)
2.50= 89.443 un its orOPT 90 units
d =
1,000 unit s / year
365 days / year = 2.74 unit s / day
Reorder p oint, R = d L = 2.74units / day (7days ) = 19.18 or_
20 units
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Safety Stock
LT Time
Expected demandduring lead time
Maximum probable demandduring lead time
ROP
Quan
tity
Safety stock
Figure 12.12
Safety stock reduces risk ofstockout during lead time
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Reorder Point
ROP
Risk ofa stockout
Service level
Probability ofno stockout
Expected
demand Safetystock
0 z
Quantity
z-scale
Figure 12.13
The ROP based on a normalDistribution of lead time demand
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Special Purpose Model: Price-Break ModelFormula
CostHoldingAnnual
Cost)SetuporderDemand)(Or2(Annual=
iC
2DS=QOPT
Based on the same assumptions as the EOQ model,the price-break model has a similar Qopt formula:
i = annual percentage of unit cost attributed to carryinginventoryC = cost per unit
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Price-Break Example Problem Data(Part 1)
Order Quantity(units) Price/unit($)0 to 2,499 $1.202,500 to 3,999 1.00
4,000 or more .98
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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.
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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) = $9,949.20
Next, Compare total cost for the feasible root Q and price breakQ values.
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Price-Break Example
Since the feasible solution occurred in the first price-break,it means that all the other true Qopt values occur at the
beginnings of each price-break interval. Why?
0 1826 2500 4000 Order Quantity
Totalannualcosts
Because the total annual cost function is au shaped function.
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ABC Classification System
Items kept in inventory are not of equalimportance in terms of:
dollars invested
profit potential
sales or usage volume
stock-out penalties
0
30
60
30
60
A BC
% of$ 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.