Inventory Need, Types,EOQ Model
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Transcript of Inventory Need, Types,EOQ Model
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8/3/2019 Inventory Need, Types,EOQ Model
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Inventory Management-Need, Types,EOQ Model
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What Is Inventory?
Stock of items kept to meet future demand.
or Inventory is an idle resource of any kind,
which has some economic valueor
Inventory is the material held in an idle orincomplete state awaiting future sale, use, or
transformation
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving post
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 1
Raw Materials forproduct 2
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving post
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 1
Raw Materials forproduct 2
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving post
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 1
Raw Materials forproduct 2
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving post
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 1
Raw Materials forproduct 2
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving post
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 1
Raw Materials forproduct 2
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving post
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 1
Raw Materials forproduct 2
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Storagearea
Empty containers
Full containers
Manufacturing System
Receiving postRaw Materials forproduct 1
Fabricationcell
O1
O2
O3
O2
Assembly line 1
Assembly line 2
Raw Materials forproduct 2
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Inventory Types - 1
Raw Material (RM) purchasedo true raw materialo Component parts
Work-in-process (WIP) manufactured in-houseo Sub-assemblieso Fabricated parts
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Inventory Types - 2
Finished Goods (FGI)o Completed products
Operating supplies
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Objective of Inventory Management
Never have a stockout.o Customer dissatisfactiono Production disruption
Never carry excess inventoryo Inventory is an asset but it is not free
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Importance of Inventory Management
By effectively managing inventory:o Wal-Mart became the largest retail company
utilizing efficient inventory managemento
GM has reduced parts inventory andtransportation costs by 26% annually- Growth forced AMAZON.com to excel ininventory management!
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Importance of Inventory Management
By not managing inventory successfullyo In 1994, IBM continues to struggle with
shortages in their ThinkPad line (WSJ, Oct 7,1994)
o Shares of Intel Corp. fell to an 11-month lowon Wednesday, leading a decline insemiconductor-industry stocks a day after the
worlds largest chipmaker warned that itsinventories had risen sharply, this despite96% growth in quarterly profit.Reuters, July14, 2004
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Importance of Inventory Management
Cisco Systems Inc. on Tuesday reported thatquarterly profit surges 41%, but its shares fellsharply in after-hours trade on a rise in
inventories. - Reuters, August 10, 2004
General Motors was down 3.1%, or $1.37, at $42.75,after analysts with Goldman Sachs and LehmanBrothers downgraded their ratings of the stock, amidworries of inventory buildup. AP, July 30, 2004
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Inventory Control
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Answer 2 questionso When to ordero How much to order
Historical Evolution of I/C - 1
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When to order (Reorder Point)
B i Fi d O d Q tit M d l d R d
17-19
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Basic Fixed-Order Quantity Model and ReorderPoint Behavior
R = Reorder pointQ = Economic order quantityL = Lead time
L L
Q QQ
R
Time
Numberof unitson hand
1. You receive an order quantityQ.
2. Your start usingthem up overtime.
3. When you reach downto a level of inventory ofR, you place your next Qsized order.
4. The cycle thenrepeats.
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Inventory Related Costs
Cost of ordering Cost of carrying, or holding, inventory Stock out cost
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Inventory Related Costs
Cost of ordering Developing and sending purchase order Processing and inspecting incoming inventory Bill Paying
inquiries Utilities, phone bills, and so on , for purchasing
department Salaries and wages of purchasing departmentemployees Supplies such as forms and paper of the purchasing
dept
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Inventory Related Costs
Cost of carrying, or holding,inventory
Personnel Equipment Occupancy (rent and utilities) Interest Insurance Taxes Security Shrinkage and damage
Inventory Related Costs
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Inventory Related Costs
Cost of carrying, or holding, inventoryCategory
Housing costs
Material handling costsLabor cost from extra handlingInvestment costsPilferage, scrap, and obsolescence
Cost as a % of Inventory Value6%3%3%11%
3%26%
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Inventory Related Costs
Shortage Costs/Stock out CostTemporary or Permanent loss of sales,when demand cannot be met. Loss of goodwill
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Inventory Control Decisions
Major objective in controlling inventory is tominimize total inventory costs:
Cost of ordering Cost of carrying, or holding, inventory
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Historical Evolution of I/C - 2
How much to order Introduced in 1913 by Ford W. Harris,
How Many Parts to order at OnceThe Economic Order Quantity (EOQ)
model
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Cost Minimization Goal
OrderingCosts
HoldingCosts
QOPTIMAL Order Quantity (Q)
COST
Total Cost
EOQ M d li A ti
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EOQ Modeling Assumptions
1.Production is instantaneous there is no capacityconstraint and the entire lot is produced simultaneously.2.Delivery is immediate there is no time lag betweenproduction and availability to satisfy demand.3.Demand is deterministic there is no uncertainty
about the quantity or timing of demand.4.Demand is constant over time in fact, it can berepresented as a straight line, so that if annual demandis 365 units this translates into a daily demand of oneunit.5.A production run incurs a fixed setup costregardless of the size of the lot or the status of thefactory, the setup cost is constant.6.Products can be analyzed singly either there is
only a single product or conditions exist that ensure
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Derivation of EOQ formula
Q = lot size D = average annual demand H = unit annual carrying cost (=i*c) S = cost per order Total Cost = Total annual setup cost +
Total annual inventory carrying cost
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Derivation of EOQ formula
Total setup/order cost = S(D/Q) Maximum inventory = Q Minimum inventory = 0 Average inventory = Q/2 Total carrying cost = H(Q/2) TC = SD/Q + HQ/2 Goal: Find the Order Quantity that
Minimizes TC
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Some Important Formulae
Reorder Point (R) = daily demand x lead time (days)
Total Inventory Cost (TC) = Total annual setup/orderingcost
+ Total annual inventory carrying cost= (D/EOQ) * S + (EOQ/2) * H
EOQ
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EOQExample
SaveMart needs 1000 coffee makers peryear. The cost of each coffee maker is $78.Ordering cost is $100 per order. Carrying
cost is 40% of per unit cost. Lead time is 5days. SaveMart is open 365 days/yr. What isthe optimal order quantity & ROP?
D = 1000S = $100H = i*c = .4*$78H = $31.20
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SaveMart ROP
EOQ = 80coffeemakers
SaveMart ROP
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SaveMart ROP
D = annual demand = 1000Days / year = 365Daily demand = 1000 / 365 = 2.74Lead time = 5 daysROP = daily demand x lead time (days)= d x L
ROP = 2.74 x 5 = 13.7 => 14
Example
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Example
Megallite has annual demand of 500,000CFLs. They want to determine EOQ for glassblank which have an annual holding cost (H)of Rs.75 per unit, and an ordering cost (S) of
Rs6000. They want to calculate TC and thereorder point (R) if the purchasing lead timeis 1 day. (The Company works for 250 days ina year)
Ans :D = 500,000H = Rs. 75S = Rs.6000
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Thank You