Transcript Document

This chapter presents the concepts and knowledge base for
effective inventory management, including:
 What types of inventories business carry, and why they
carry them.
 The cost related to inventory management
 Why it is essential to be able to keep track of inventory
items, both within the organization and throughout the
supply chain
 How the A-B-C approach to inventory increases the
effectiveness of inventory management.
 The model most retail business use to determine how much
to order
 What models are available to answer the question of when
to order.
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Inventory
Inventory: a stock or store of goods
Dependent Demand
A
C(2)
B(4)
D(2)
Independent Demand
E(1)
D(3)
F(2)
Independent demand is uncertain.
Dependent demand is certain.
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Inventory Models
 Independent demand – finished goods, items
that are ready to be sold
 E.g. a computer
 Dependent demand – components of
finished products
 E.g. parts that make up the computer
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Types of Inventories
 Raw materials & purchased parts
 Partially completed goods called
work in progress
 Finished-goods inventories

(manufacturing firms)
or merchandise
(retail stores)
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Types of Inventories(Cont’d)
 Tools, & supplies
 Maintenance and repair (MRO) inventory
 Goods-in-transit to warehouses or
customers
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Functions of Inventory
 To meet anticipated demand
 To smooth production requirements
 To decouple operations
 To protect against stock-outs
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Functions of Inventory (Cont’d)
 To take advantage of order cycles
 To help hedge against price increases
 To take advantage of quantity
discounts
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Objective of Inventory Control
 To achieve satisfactory levels of
customer service while keeping
inventory costs within reasonable
bounds
 Level of customer service
 Costs of ordering and carrying inventory
Inventory turnover is the ratio of
average cost of goods sold to
average inventory investment.
12-8
Inventory Counting Systems
 Periodic System
Physical count of items made at periodic
intervals
 Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
12-9
Inventory Counting Systems
(Cont’d)
 Two-Bin System - Two containers of
inventory; reorder when the first is
empty
 Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
0
214800 232087768
12-10
Key Inventory Terms
 Lead time: time interval between ordering and
receiving the order
 Holding (carrying) costs: cost to carry an item in
inventory for a length of time, usually a year
（interest, insurance, breakage, warehousing costs，
opportunity costs）
 Ordering costs: costs of ordering and receiving
inventory （shipping costs, inspecting goods, moving
the goods to temporary storage）
 Shortage costs: costs when demand exceeds supply
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ABC Classification System
Figure 12.1
Classifying inventory according to some
measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. important
C - least important
High
A
Annual
$ value
of items
B
C
Low
Low
High
Percentage of Items
12-12
 A items generally account for about 10 to 20
percent of the number of items in inventory
but about 60 to 70 percent of the annual
dollar value
 C items might account for about 50-60
percent of the number of items buy only
about 10 to 15 percent of the annual dollar
value.
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 To solve the A-B-C problem, follow these
steps:
 For each item, multiply annual volume by unit price
to get the annual dollar value.
 Arrange annual dollar values in descending order
 The few (10 to 15 percent) with the highest annual
dollar value are A items. The most ( about 50
percent) with the lowest annual dollar value are C
items. Those in between (about 35 percent) are B
items.
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Material
code
Annual
volume
Unit price
001
10000
4.8
002
10000
1.4
003
14000
28
004
7000
8
005
8000
3205
006
10000
3.4
007
10000
1.5
008
2000
4.5
009
1000
3
010
10000
3.2
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Economic Order Quantity Models
 Economic order quantity (EOQ) model
 The order size that minimizes total annual
cost
 Economic production quantity (EPQ)
model
 Quantity discount model
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Assumptions of EOQ Model
 Only one product is involved
 Annual demand requirements known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single
delivery
 There are no quantity discounts
12-17
The Inventory Cycle
Figure 12.2
Profile of Inventory Level Over Time
Q
Quantity
on hand
Usage
rate
Reorder
point
Receive
order
Place Receive
order order
Place Receive
order order
Time
Lead time
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Total Cost
Annual
Annual
Total cost = carrying + ordering
cost
cost
TC =
Q
H
2
+
DS
Q
12-19
Cost Minimization Goal
Figure 12.4C
Annual Cost
The Total-Cost Curve is U-Shaped
Q
D
TC  H  S
2
Q
Ordering Costs
QO (optimal order quantity)
Order Quantity
(Q)
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Deriving the EOQ
Using calculus, we take the derivative of
the total cost function and set the
derivative (slope) equal to zero and solve
for Q.
QOPT =
2DS
H
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Minimum Total Cost
The total cost curve reaches its
minimum where the carrying and
ordering costs are equal.
Q
H
2
=
DS
Q
12-22
 Piddling manufacturing assembles security
monitors. It purchases 3600 black- andwhite cathode ray tubes a year at￥ 60 each.
Ordering cost are ￥30, and annual carrying
costs are 20 percent of the purchase price.
Compute the optimal quantity and the total
annual cost of ordering and carrying the
inventory.
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Exercise in class
 A large law firm uses an average of 40 boxes of copier
paper a day. The firm operates 260 days a year. Storage
and holding costs for the paper are $ 30 year per box, and it
costs approximately $60 to order the receive a shipment of
paper.
 a. what order size would minimize the sum of the annual
ordering and carrying cost?
 b. Compute the total annual cost using your order size from
part a
 c. the officer manager is currently using an order size of 200
boxes. Would you recommended the optimal order size
instead of 200 boxes? Justify your answer
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Economic Production Quantity (EPQ)
 Production done in batches or lots
 Capacity to produce a part exceeds the
part’s usage or demand rate
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Economic Production Quantity
Assumptions







Only one item is involved
Annual demand is known
Usage rate is constant
Usage occurs continually
Production rate is constant
Lead time does not vary
No quantity discounts
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 Figure 12.6 EPQ with incremental inventory buildup
Production
and usage
Usage only
Production
and usage
Usage only
Production
and usage
Usage only
Run
size
Imax
Amount
on hand
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 TC=Carry cost + Setup cost
=(Imax/2)H+(D/Q)S
Imax????
We can find the minimum point of total cost
curve by differentiating TC with respect to Q
setting the result equal to zero, and solve for
Q
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Economic Run Size
Q0 
2DS
p
H p u
12-29
A toy manufacturer uses 48000 rubber wheels per year for
its popular dump truck series. The firm makes its own
wheels, which it can produce at a rate of 800 per day. The
toy trucks are assembled uniformly over the entire year.
Carrying cost is $1 per wheel per year. Setup cost for a
production run of wheels is $45. the firm operates 240 days
per year. Determine the
a.Optimal run size
b.Minimum total annual cost for carrying and setup
c.Cycle time for the optimal run size
d.Run time
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Total Costs with Purchasing Cost
Annual
Annual
Purchasing
+
TC = carrying + ordering cost
cost
cost
Q
H
TC =
2
+
DS
Q
+
PD
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Total Costs with PD
Cost
Figure 12.7
Adding Purchasing cost
doesn’t change EOQ
TC with PD
TC without PD
PD
0
EOQ
Quantity
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Total Cost with Constant
Carrying Costs
Figure 12.9
Total Cost
TCa
TCb
Decreasing
Price
TCc
PD $2.00 each
PD $1.70 each
CC a,b,c
PD $1.40each
EOQ
OC
Quantity
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The maintenance department of a large hospital uses
about 816 cases of liquid cleanser annually. Ordering
costs are $ 12, carrying cost are $ 4 per case a year, and
the new price schedule indicates that orders of less than
50 cases will cost $ 20 per case, 50 to 79 cases will cost $
18 per case, 80 to 99 cases will cost $ 17 per case, and
larger will cost $ 16 per case. Determine the optimal order
quantity and the total cost.
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When to Reorder with EOQ
Ordering
 Reorder Point - When the quantity on
hand of an item drops to this amount,
the item is 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 supply during lead time.
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Determinants of the Reorder
Point




The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)
12-36
Safety Stock
Quantity
Figure 12.12
Maximum probable demand
during lead time
Expected demand
during lead time
ROP
Safety stock reduces risk of
stockout during lead time
Safety stock
LT
Time
12-37
Wish you success in the examination!
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