Transcript chap017 - Homework Market

Chapter 17
Inventory Control
McGraw-Hill/Irwin
Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved
Learning Objectives
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3.
4.
5.
6.
Explain the different purposes for keeping inventory.
Understand that the type of inventory system logic that
is appropriate for an item depends on the type of
demand for that item.
Calculate the appropriate order size when a one-time
purchase must be made.
Describe what the economic order quantity is and how
to calculate it.
Summarize fixed–order quantity and fixed–time period
models, including ways to determine safety stock when
there is variability in demand.
Discuss why inventory turn is directly related to order
quantity and safety stock.
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Purposes of Inventory
1. To maintain independence of
operations
2. To meet variation in product demand
3. To allow flexibility in production
scheduling
4. To provide a safeguard for variation in
raw material delivery time
5. To take advantage of economic
purchase-order size
LO 2
17-3
Inventory Costs
1. Holding (or carrying) costs
– Costs for storage, handling, insurance,
and so on
2. Setup (or production change) costs
– Costs for arranging specific equipment
setups, and so on
3. Ordering costs
– Costs of placing an order
4. Shortage costs
– Costs of running out
LO 3
17-4
Inventory Systems
• Single-period inventory model
– One time purchasing decision (Example:
vendor selling t-shirts at a football game)
– Seeks to balance the costs of inventory
overstock and under stock
• Multi-period inventory models
– Fixed-order quantity models
• Event triggered (Example: running out of stock)
– Fixed-time period models
• Time triggered (Example: Monthly sales call by
sales representative)
LO 2
17-5
A Single-Period Inventory Model
• Consider the problem of deciding how
many newspapers to put in a hotel
lobby
• Too few papers and some customers
will not be able to purchase a paper
and they will lose the profit associated
with these sales
• Too many papers and will have paid for
papers that were not sold during the
day, lowering profit
LO 3
17-6
Single-Period Inventory Model
Formulas
Cu
P
Co  Cu
Where :
Co  Cost per unit of demand over estimated
Cu  Cost per unit of demand under estimated
P  Probabilit y that the unit will be sold
We should increase the size of the inventory so
long as the probability of selling the last unit added
is equal to or greater than the ratio of Cu/Co+Cu
LO 3
17-7
Multi-Period Models
•
There are two general types of multiperiod inventory systems
1. Fixed–order quantity models
•
•
Also called the economic order quantity, EOQ,
and Q-model
Event triggered
2. Fixed–time period models
•
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Also called the periodic system, periodic
review system, fixed-order interval system,
and P-model
Time triggered
LO 5
17-8
Key Differences
• To use the fixed–order quantity model,
the inventory remaining must be
continually monitored
• In a fixed–time period model, counting
takes place only at the review period
• The fixed–time period model
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–
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Has a larger average inventory
Favors more expensive items
Is more appropriate for important items
Requires more time to maintain
LO 5
17-9
Fixed-Order Quantity Model
Models
• Demand for the product is constant and
uniform throughout the period
• Lead time (time from ordering to
receipt) is constant
• Price per unit of product is constant
• Inventory holding cost is based on
average inventory
• Ordering or setup costs are constant
• All demands for the product will be
satisfied
LO 4
17-10
Basic Fixed-Order Quantity (EOQ)
Model Formula
TC = DC +
D
Q
S+ H
Q
2
TC  Total annual cost
D  Demand
C  Cost per unit
Q  Order quantity
S  Cost of placing an order or setup cost
R  Reorder point
L  Lead time
H  Annual holding and storage cost per unit of inventory
LO 4
17-11
Establishing Safety Stock Levels
• Safety stock: amount of inventory carried in
addition to expected demand
– Safety stock can be determined based on many
different criteria
• A common approach is to simply keep a
certain number of weeks of supply
• A better approach is to use probability
– Assume demand is normally distributed
• Assume we know mean and standard deviation
• To determine probability, we plot a normal distribution
for expected demand and note where the amount we
have lies on the curve
LO 4
17-12
Fixed–Order Quantity Model with
Safety Stock
R  d L  z L
R  Reorder point in units
d  Average daily demand
L  Lead time in days
z  Number of standard deviations for a service probabilit y
 L  Standard deviation of usage during lead time
LO 5
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Fixed-Time Period Models
q = d(T + L) + Z  T + L - I
Where :
q = quantitiy to be ordered
T = the number of days between reviews
L = lead time in days
d = forecast average daily demand
z = the number of standard deviations for a specified service probabilit y
 T + L = standard deviation of demand over the review and lead time
I = current inventory level (includes items on order)
LO 5
17-14
Price Break Models
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Price varies with the order size
To find the lowest-cost, need to calculate the
order quantity for each price and see if the
quantity is feasible
1. Sort prices from lowest to highest and calculate
the order quantity for each price until a feasible
order quantity is found
2. If the first feasible order quantity is the lowest
price, this is best, otherwise, calculate the total
cost for the first feasible quantity and calculate
total cost at each price lower than the first feasible
order quantity
LO 4
17-15