Transcript Chapter 11

Chapter 12
Inventory Management
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Russell/Taylor Oper Mgt 3/e
Inventory
 Stock
of items held to meet future
demand
 Inventory management answers two
questions
 How
much to order
 When to order
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Ch 12 - 2
2
Types of Inventory

Raw materials
 Purchased parts and supplies
 Labor
 In-process (partially completed) products
 Component parts
 Working capital
 Tools, machinery, and equipment
 Finished goods
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Ch 12 - 3
3
Reasons To Hold Inventory
 Meet
unexpected demand
 Smooth seasonal or cyclical demand
 Meet variations in customer demand
 Take advantage of price discounts
 Hedge against price increases
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Ch 12 - 4
4
Two Forms Of Demand
 Dependent
 items
used to produce final products
 Independent
 items
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demanded by external customers
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Ch 12 - 5
5
Inventory Costs
 Carrying
 cost
Cost
of holding an item in inventory
 Ordering
 cost
Cost
of replenishing inventory
 Shortage
Cost
 temporary
or permanent loss of sales
when demand cannot be met
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Ch 12 - 6
6
Inventory Control Systems
 Fixed-order-quantity
system
(Continuous)
 constant
amount ordered when inventory
declines to predetermined level
 Fixed-time-period
system (Periodic)
 order
placed for variable amount after
fixed passage of time
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Ch 12 - 7
7
ABC Classification System
 Demand
volume & value of items vary
 Classify inventory into 3 categories
Class
% of Units
% of Dollars
A
B
C
5 - 15
30
50 - 60
70 - 80
15
5 - 10
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Ch 12 - 8
8
ABC Classification Example
Cost
60
350
30
80
30
20
10
320
510
20
Usage
90
40
130
60
100
180
170
50
60
120
Part
9
8
2
1
4
3
6
5
10
7
Value
30,600
16,000
14,000
5,400
4,800
3,900
3,600
3,000
2,400
1,700
$ 85,400
Class
A
B
C
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Value
Quantity Cumulative
35.8
6.0
6.0
18.7
5.0
11.0
16.4
4.0
15.0
6.3
9.0
24.0
5.6
6.0
30.0
4.6
13.0
43.0
4.2
18.0
61.0
3.5
10.0
71.0
2.8
12.0
83.0
2.0
17.0
100.0
Items
9,8,2
1, 4, 3
6, 5, 10, 7
% Value % Units
71
15
16.5
25
12.5
60
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Ch 12 - 9
9
Assumptions Of Basic EOQ
Model
 Demand
is known with certainty
 Demand is relatively constant over time
 No shortages are allowed
 Lead time for the receipt of orders is
constant
 The order quantity is received all at
once
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Ch 12 - 10
10
The Inventory Order Cycle
Demand
rate
Inventory Level
Order qty, Q
Reorder point, R
0
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Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
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Ch 12 - 11
11
EOQ Cost Model
CoD CcQ
TC 

CO - cost of placing order
Q
2
D - annual demand
TC
CoD Cc
CC - annual per-unit carrying cost


Q
2
Q2
Q - order quantity
Annual ordering cost = COD/Q
Annual carrying cost = CCQ/2
Total cost = COD/Q + CCQ/2
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CoD Cc
0

2
Q2
Qopt 
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2CoD
Cc
Ch 12 - 12
12
EOQ Model Cost Curves
Slope = 0
Annual
cost ($)
Total Cost
Minimum
total cost
Carrying Cost = CcQ/2
Ordering Cost = CoD/Q
Optimal order
Qopt
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Order Quantity, Q
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Ch 12 - 13
13
EOQ With
Noninstantaneous Receipt
Inventory
level
Maximum
inventory level
Q(1-d/p)
Begin
Order
Q
(1-d/p)
2
0
Order
receipt period
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Average
inventory level
receipt
End
Order
Time
receipt
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Ch 12 - 15
14
Quantity Discounts
Price per unit decreases as order quantity
increases
Order
Size
0-99
100-199
200+
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Price
$10
8 (d1)
6 (d2)
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Co D Cc Q

 PD
Q
2
P  per unit price
TC 
D = annual demand
Ch 12 - 18
16
Quantity Discount Model
TC = ($10 )
TC (d1 = $8 )
Inventory cost ($)
TC (d2 = $6 )
Carrying cost
Ordering cost
Q(d1 ) = 100 Qopt
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Q(d2 ) = 200
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Ch 12 - 19
17
When to Order
Reorder Point -level of inventory at which
to place a new order
R = dL
where
d = demand rate per period
L = lead time
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Ch 12 - 21
18
Safety Stocks
 Safety
stock
 buffer
added to on hand inventory during
lead time
 Stockout
 an
inventory shortage
 Service
level
 probability
that the inventory available
during lead time will meet demand
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Ch 12 - 23
20
Inventory level
Reorder Point With
A Safety Stock
Q
Reorder
point, R
Safety stock
0
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LT
Time
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LT
Ch 12 - 24
21
Reorder Point With
Variable Demand
R  dL  z d L
where
d = average daily demand
L = lead time
 d  standard deviation of daily demand
z = number of standard deviations for desired service level
z d L  safety stock
Variance  (daily variances) x (number of days of lead time)
= 2
dL
2L
d
 d L
S tan dard deviation 
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Ch 12 - 25
22
Reorder Point For
A Service Level
Probability of
meeting demand during
lead time = service level
Probability of
a stockout
Safety stock
z d L
R
dL
Demand
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Ch 12 - 26
23
Determining Z Value For
Service Level
Z
..
.
0.00
..
.
1.6 0.4452
0.01
..
.
0.4463
...
…
Service level =
area to left of Z value or 95%
0.5000
0.4505
0
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0.05
..
.
0.4505
Probability of
a stockout = 5%
Z = 1.65
Ch 12 - 28
24
Order Quantity For A
Periodic Inventory System
Q  d t b  L   z d t b  L  I
where
d = average demand rate
tb  fixed time between orders
L = lead time
 d  standard deviation of demand
z d tb  L  safety stock
I = inventory in stock
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2000 by Prentice-Hall, Inc
Ch 12 - 29
25