Professional Documents
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Inventory
Management
11-2 Inventory Management
outline
Concepts on inventory and inventory management
Inventory Counting Systems
ABC classification
Key inventory terms
How much to order (perpetual system)
Economic Order Quantity
A Dependent Demand
B(4) C(2)
Types of Inventories
Functions of Inventory
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
11-11 Inventory Management
Low C
Few Many
Number of Items
11-12 Inventory Management
4021 50 1400
9402 300 12
4066 40 700
6500 150 20
9280 10 1020
4050 80 140
6850 2000 15
3010 400 20
4400 7000 5
11-15 Inventory Management
Receiving cost
Average
Cycle
Inventory
Time
Receive Place Receive Place Receive
order order order order order
11-21 Inventory Management
Total Cost
TC without PD
CC a,b,c
OC PD
0 EOQ Quantity
11-23 Inventory Management
2 Q
Ordering Costs
Order Quantity
QO (optimal order quantity)
(Q)
11-24 Inventory Management
S = $ 75 per order
2DS 2(9600)75
a)....EOQ Qopt 300tires
H 16
b) Number of order per year = D/ Qopt = 9600 /300 = 32 times
c) Length of Order Cycle = Qopt/ D = 300 / 9600 = 1/32 of a year or
(1/32)*288 = 9 working day.
d) Total Annual Cost = Ordering cost + Holding cost + Product cost
= ( D / Qopt ) * S + (Qopt / 2)*H + P * D
= 32 * 75 + 150 * 16 + 2 * 9600
= 20904
11-28 Inventory Management
Run time
Cycle time
2 DS p 2(48000)45 800
Q0 2,400wheels
H p u 1 800 200
I max D
TCmin carrying cos t Setup cos t H S
2 Q0
Q0 2,400
I max ( p u) (800 200) 1,800wheels
p 800
1,800 48,000
TC $1 $45 $900 $900 $1,800
2 2,400
11-34 Inventory Management
Q0 2,400wheels
Run _ time 3 _ days
p 800wheels / day
Exercise
Exercise 10:
The Friendly Sausage Factory (FSF) can produce hot dogs at a rate of
5000 per day, FSF supplies hot dogs to local restaurants at a steady
rate of 250 per day. The cost to prepare the equipment for producing
hot dogs is $66. Annual holding costs are 45 cents per hot dog. The
factory operates 300 days a year. Find
a) The optimal run size
b) The number of runs per year
c) The length (in days) of a run
d) What is the total inventory cost?
11-36 Inventory Management
TC with PD
TC without PD
CC a,b,c
OC PD
PD
0 EOQ Quantity
11-38 Inventory Management
TCa
Total Cost
TCb
Decreasing
TCc Price
CC a,b,c
OC
EOQ Quantity
11-40 Inventory Management
The 70 cases can be bought at $18 per case because 70 falls in the range of
50 to 79 cases. The total cost to purchase 816 cases a year, at the rate of 70 cases
Q0 D
per order, will be TC70 H S PD
2 Q0
70 816
4 12 18 816 $14,968
2 70
11-46 Inventory Management
Because lower cost ranges exist, each must be checked against the minimum cost
Exercise-13
A mail-order house uses 18,000 boxes a year. Carrying costs are 60 cents per
box a year, and ordering cost are $96. The following price schedule applies.
Determine
a) The optimal order quantity
b) The number of orders per year
2DS 2 4000 30
Minimum _ po int 0.80 866 _ switches
H 0.32
2DS 2 4000 30
Minimum _ po int 0.85 840 _ switches
H 0.34
Because an order size of 866 switches will cost $0.85 each rather than $0.80
each, 866 is not a feasible minimum point for $0.80 per switch. Next, try $0.85 per
unit. This is feasible; it falls in the $0.85 per switch range of 500 to 999.
11-50 Inventory Management
Exercise-16
A company will begin stocking remote control devices. Expected monthly demand is
800 units. The controllers can be purchased from either supplier A or supplier B.
Their price lists are as follows:
Supplier A Supplier B
Quantity Unit price Quantity Unit price
1-199 $14.00 1-149 $14.10
200 499 13.80 150 349 13.90
500+ 13.60 350+ 13.70
Ordering cost is $ 40 and annual holding cost is 25 percent of unit price per unit.
Which supplier should be used and what order quantity is optimal if the intent is to
minimize total annual cost?
11-52 Inventory Management
Reorder
point
Time
Receive Place Receive Place Receive
order order order order order
Lead time
11-53 Inventory Management
Time
Safety Stock
Service level
Risk of
a stockout
Probability of
no stockout
ROP Quantity
Expected
demand Safety
stock
0 z z-scale
11-57 Inventory Management
Probability of
a stockout
Safety stock
zd LT
dL R
Expected Demand
d = Demand rate (units per day or week)
where
d = average daily demand
LT = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd LT = safety stock
11-59 Inventory Management
The carpet store wants a reorder point with a 95% service level
and a 5% stockout probability
R = dL + z d LT Safety stock = z d LT
= 30(10) + (1.65)(5)( 10) = (1.65)(5)( 10)
= 326.1 yards = 26.1 yards
Reorder Point
11-60 Inventory Management
SS = z d LT
ROP = d x LT + z d LT
where
d = Daily or weekly demand
LT = Average lead time in days or weeks
LT = Standard deviation of lead time in days or weeks
z = number of standard deviations corresponding to
the service level probability
z d LT = safety stock
11-61 Inventory Management
Example
Q. The EOQ is 75 units. Suppose that the average
demand is 18 units per week. Average lead time is 14
days with a standard deviation of 3 days (6 working
days in a week). Determine safety stock and reorder
point if management wants a 90 percent cycle-service
level.
Given that: EOQ =75 units, d = 18/6 = 3 units,
2
___ ____
ROP d LT z LT d d LT
2 2
where
d = average daily demand
LT = average lead time
LT = Standard deviation of lead time in days or weeks
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
2
____ probability
z LT d d LT = safety stock
2 2
11-63 Inventory Management
Example
The mote replaces broken grasses at a rate of 25 per day. In the
past, this quantity has tended to vary normally and have a standard
deviation of 3 glasses per day. Glasses are ordered from a
Cleveland supplier. Lead time is normally distributed with an
average of 10 days and a standard deviation of 2 days. What ROP
should be used to achieve a service level of 95%?
Solution:
SL = 95 percent, so z = 1.65 2
___ ____
ROP d LT z LT d d LT
2 2
Fixed-Interval Benefits
Fixed-Interval Disadvantages
Various amounts (Qi) are ordered at regular time intervals (p) based
on the quantity necessary to bring inventory up to target maximum
Target maximum
Q1 Q2 Q4
Q3
d Inventory
p p p
Time
11-69 Inventory Management
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)
Fixed-Time Period Model:
11-70 Inventory Management
T+ L 2
T+ L = di
i 1
Q = d(T + L) + zd T+L - I
where
d = average demand rate
T = the fixed time between orders
L = lead time
d = standard deviation of demand
zd T + L = safety stock
I = inventory level
z = the number of standard deviations
for a specified service level
11-72 Inventory Management
Fixed-Period Model with Variable
Demand (Example 1)
Q = d(T + L) + zd T+L -I
= (6)(60 + 5) + (1.65)(1.2) 60 + 5 - 8
= 397.96 bottles
Fixed-Time Period Model with
11-73 Inventory Management
T+ L = (T + L) d =
2
30 + 10 4 2 = 25.298
q = d(T + L) + Z T + L - I
Example: Cindys Cider Bar sells a blend of cherry juice and apple cider.
Demand for the blend is approximately normal, with a mean of 200 liters
per week and a standard deviation of 10 liters per week. Cs = 60 cents
per liter and Ce = 20 cents per liter. Find the optimal stocking level for the
apple-cherry blend
11-78 Inventory Management
Operations Strategy
Wise strategy
Reduce lot sizes
Reduce safety stock
11-79 Inventory Management
APPENDIX
Relationship between desired lot size and
11-80 Inventory Management
ordering cost
in a Single Order
Transportation is a significant contributor to the fixed cost per order
Can possibly combine shipments of different products from the same
supplier
same overall fixed cost
shared over more than one product
effective fixed cost is reduced for each product
lot size for each product can be reduced
Can also have a single delivery coming from multiple suppliers or a
single truck delivering to multiple retailers
Aggregating across products, retailers, or suppliers in a single order
allows for a reduction in lot size for individual products because
fixed ordering and transportation costs are now spread across
multiple products, retailers, or suppliers
10-81
Example 4:Aggregating Multiple Products in
11-82 Inventory Management
a Single Order
Suppose there are 4 computer products in the previous
example: Deskpro, Litepro, Medpro, and Heavpro
Annual figures for each is D=12000, H =100, S =4000
If each product is ordered separately:
Q* = 980 units for each product
Total cycle inventory = 4(Q/2) = (4)(980)/2 = 1960 units
Aggregate orders of all four products:
Combined Q* = 1960 units
For each product: Q* = 1960/4 = 490
Cycle inventory for each product is reduced to 490/2 = 245
Total cycle inventory = 1960/2 = 980 units
Average flow time, inventory holding costs will be reduced
10-82
Lot Sizing with Multiple
11-83 Inventory Management
Products or Customers
In practice, the fixed ordering cost is dependent at least in part
on the variety associated with an order of multiple models
A portion of the cost is related to transportation (independent
of variety)
A portion of the cost is related to loading and receiving (not
independent of variety)
Three scenarios:
Lots are ordered and delivered independently for each product
Lots are ordered and delivered jointly for all three models
10-83
11-84 Inventory Management
10-84
11-85 Inventory Management
Delivery Options
10-85
Multiple products ordered and delivered
11-86 Inventory Management
independently
Item L Item- M Item- H Total
Demand per year 12000 1200 120
Fixed cost/order 5000 5000 5000
Holding cost 100 100 100
Optimal order size 1095 346 110
Cycle Inventory 548 173 55 776
Annual holding cost 54772 17321 5477 77570
Order frequency 11.0 3.5 1.1
Annual ordering cost 54772 17321 5477 77570
Average flow time 0.05 0.14 0.46
Annual Inventory cost 109545 34641 10954 155140
11-87 Inventory Management
delivered jointly
Item L Item- M Item- H Total
Demand per year 12000 1200 120
Common cost/order 4000
Specific cost/order 1000 1000 1000
Holding cost/unit/year 100 100 100
Optimal number of order 9.75
Optimal order size 1230 123.0 12.3 1366
Avg.(cycle) Inventory 615 61.5 6.15 683
Annual holding cost 61512 6151 615 68279
Annual ordering cost 68279 68279
Annual Inventory cost 136558 136558
11-89 Inventory Management
Then , QL=(12000/11.1)=1081
QM=(1200/11.1)=108
QH=(120/11.1)=11
Total Inventory Cost =
11.1*7000+(1081/2)*100+(108/2)*100+(11/2)*100 =137700
11-90 Inventory Management
continued
Step #1: Identify optimal frequency of order for
each product assuming each product is ordered
independently and than select the most frequently
ordered product.
continued
Step #3: Calculate relative frequency of all
product to the most frequently ordered product
and round them up
Step #4: Recalculate the ordering frequency of
the most frequently ordered product using
following formula:
h m D
i i i
n mf
s
2( S i
m i
Tailored Aggregation (Example)
11-93 Inventory Management
continued
Step #5: For each product calculate order
frequency and total cost.
Ordering frequency is calculated by dividing
recalculated frequency of the most frequently
ordered product (step 4) with respective products
relative ordering frequency (step 3)
Total cost = Annual ordering cost + Annual Holding cost
Annual ordering cost = Common ordering cost + Specific
ordering cost
Annual holding cost = Summation of each products holding cost
11-94 Inventory Management
10-94