Inventory Management
Inventory -- stored resource (raw material, work-in-process, finished goods) that is used to satisfy present or future demand Show Inventory management -- determine how much to order? When to order? ABC Analysis -- classify inventory into 3 groups according to its annual dollar volume/usage Annual dollar volume = annual demand x cost An example:
Exercise Pg.541 Problem 13, 27 Purposes of inventory 1. Smooth-out variations in operation performances 2. Avoid stock out or shortage 3. Safeguard against price changes and inflation 4. Take advantage of quantity discounts Inventory costs 1. Holding or carrying costs: storage, insurance, investment, pilferage, etc.
Annual holding cost = average inventory level x holding cost per unit per year = order quantity/2 x holding cost per unit per year
Annual ordering cost = no. of orders placed in a year x cost per order = annual demand/order quantity x cost per order
Assumptions 1. Order arrives instantly 2. No stockout 3. Constant rate of demand What is the order quantity such that the total cost is minimized? 1. Total cost = holding cost + ordering cost = (order quantity/2) x holding cost per unit per year + (annual demand/order quantity) x cost per order
4. Time between orders = No. of working days per year / number of orders 5. Reorder point = daily demand x lead time + safety stock Example: Given: Annual Demand = 60,000Then, it can be computed: Q* = 1000 Total cost = $3000 Number of orders = 60000/1000 = 60 Time between orders = 240/60 = 4 days Daily demand = 60000/240 = 250 If lead time = 3 days (lead time < time between orders) Reorder point = (60000/240)x3=750
Reorder point = 250x5 = 1250
Pg.540, Problems 10 EOQ = sqrt(2*2000*10/5) = 89 Exercise Pg. 539, Problem 1, 7a Quantity Discount Model 1. Total cost = holding + ordering + purchasing 2. Holding cost is a % of the purchasing cost Case 1 Ordering cost = 45 per order Holding cost = 20% of cost of item
Case 2 Same as case 1 except:
Need to compare: Total cost (Q=54) and Total cost (Q=100) Total cost (Q=54) = (100/54)x45 + (54/2)x(0.2x16) + 16x100 =1780.53 Total cost (Q=100) = (100/100)x45 + (100/2)x(0.2x12) + 12x100 = 1425 à Order 100 units Case 3 Same as case 1 except:
Need to compare: Total cost (Q=50), Total cost (Q=56) and Total cost (Q=100) Total cost (Q=50) = (100/50)x45 + (50/2)x(0.2x18) + 18x100 = 1980 Total cost (Q=56) = (100/56)x45 + (56/2)x(0.2x16) + 16x100 =1781.16 Total cost (Q=100) = 1425 à Order 100 units Pg.540, problem 7b Exercise Does EOQ change with lead time?EOQ assumes immediate availability of stock
The EOQ model does not take into account supplier lead times, it simply tells you how much to order based on demand.
What is lead time in EOQ model?Lead time is the minimum time needed between placing an order and receiving it. Therefore, lead time in the EOQ model is the maximum amount of lead time acceptable to keep inventory holding costs low.
What is the basic EOQ formula?To calculate the economic order quantity, you will need the following variables: demand rate, setup costs, and holding costs. The formula is: EOQ = square root of: [2(setup costs)(demand rate)] / holding costs.
Is lead time constant in EOQ?(Harris, 1913) The purpose of the EOQ model is to help the manufacturer determine the best order size that could minimize the total inventory holding cost and ordering cost. However, in reality, the demand and production lead-time both are not constant.
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