Professional Documents
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Inventory Control
OBJECTIVES
Inventory System Defined Inventory Costs Independent vs. Dependent Demand Single-Period Inventory Model
Inventory System
Inventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-process An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be
Purposes of Inventory
1. To maintain independence of operations
size
Inventory Costs
Setup (or production change) costs Costs for arranging specific equipment setups, etc
Ordering costs Costs of someone placing an order, etc Shortage costs Costs of canceling an order, etc
Finished product
Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc)
E(1 )
Component parts
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)
Cu P Co Cu
Where :
This model states that we should continue to 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
Co Cost per unit of demand over estimated Cu Cost per unit of demand under estimated P Probability that theunit will be sold
Our college basketball team is playing in a tournament game this weekend. Based on our past experience we sell on average 2,400 shirts with a standard deviation of 350. We make Rs100 on every shirt we sell at the game, but lose Rs50 on every shirt not sold. How many shirts should we make for the game?
Cu = Rs100 and Co = Rs50; P 100 / (100 + 50) = .667 Z.667 = .432 (use NORMSDIST(.667) or Appendix E) therefore we need 2,400 + .432(350) = 2,551 shirts
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for the product is constant and uniform throughout the period time (time from ordering to receipt) is constant per unit of product is constant
Lead
Price
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Q R
L
Time
L 3. When you reach down to a level of inventory of R, you place your next Q sized order.
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D Q TC = DC + 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
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R eo rd er p o in t, R = d L
_
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Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = Rs10 Holding cost per unit per year = Rs2.50 Lead time = 7 days Cost per unit = Rs15
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In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units.
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Annual Demand = 10,000 units Days per year considered in average daily demand = 365 Cost to place an order = Rs10 Holding cost per unit per year = 10% of cost per unit Lead time = 10 days Cost per unit = Rs15
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Place an order for 366 units. When in the course of using the inventory you are left with only 274 units, place the next order of 366 units.
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T+ L =
di
T+ L =
(T + L) d 2
The standard deviation of a sequence of random events equals the square root of the sum of the variances
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Given the information below, how many units should be ordered? Average daily demand for a product is 20 units. The review period is 30 days, and lead time is 10 days. Management has set a policy of satisfying 96 percent of demand from items in stock. At the beginning of the review period there are 200 units in inventory. The daily demand standard deviation is 4 units.
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30 + 10 4 2 = 25.298
The value for z is found by using the Excel NORMSINV function, or as we will do here, using Appendix D. By adding 0.5 to all the values in Appendix D and finding the value in the table that comes closest to the service probability, the z value can be read by adding the column heading label to the row label.
So, by adding 0.5 to the value from Appendix D of 0.4599, we have a probability of 0.9599, which is given by a z = 1.75
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So, to satisfy 96 percent of the demand, you should place an order of 645 units at this review period
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2DS 2(Annual Demand)(Or der or Setup Cost) QOPT = = iC Annual Holding Cost
i = percentage of unit cost attributed to carrying inventory C = cost per unit Since C changes for each price-break, the formula above will have to be used with each price-break cost value
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Price-Break Example Problem Data (Part 1) A company has a chance to reduce their inventory ordering costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an e-mail ordering cost of Rs4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units?
Order Quantity(units) Price/unit(Rs) 0 to 2,499 Rs1.20 2,500 to 3,999 1.00 4,000 or more .98
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Carrying cost % of total cost (i)= 2% Cost per unit (C) = $1.20, $1.00, $0.98
QOPT = QOPT =
2(10,000)( 4) = 1,826 units 0.02(1.20) 2(10,000)( 4) = 2,000 units 0.02(1.00) 2(10,000)( 4) = 2,020 units 0.02(0.98)
Interval from 4000 & more, the QOPT = Qopt value is not feasible
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D Q TC = DC + S+ iC Q 2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20) = Rs12,043.82 TC(2500-3999)= Rs10,041 TC(4000&more)= Rs9,949.20
Finally, we select the least costly Qopt, which is this problem occurs in the 4000 & more interval. In summary, our optimal order quantity is 4000 units
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M
I
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Full
Empty
One-Bin System
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% of Rs Value 30
0
30
60
A B C
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So, identify inventory items based on percentage of total dollar value, where A items are roughly top 15 %, B items as next 35 %, and the lower 65% are the C items
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accuracy refers to how well the inventory records agree with physical count Cycle Counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year
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Question Bowl
The average cost of inventory in the United States is which of the following? a. 10 to 15 percent of its cost b. 15 to 20 percent of its cost c. 20 to 25 percent of its cost d. 25 to 30 percent of its cost e. 30 to 35 percent of its cost Answer: e. 30 to 35 percent of its cost
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Question Bowl
Which of the following is a reason why firms keep a supply of inventory? To maintain independence of operations To meet variation in product demand To allow flexibility in production scheduling To take advantage of economic purchase order size All of the above
a. b. c. d.
e.
Answer: e. All of the above (Also can include to provide a safeguard for variation in raw material delivery time.)
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Question Bowl
An Inventory System should include policies that are related to which of the following?
a.
How large inventory purchase orders should be Monitoring levels of inventory Stating when stock should be replenished All of the above None of the above
b. c. d. e.
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Question Bowl
Which of the following is an Inventory Cost item that is related to the managerial and clerical
Carrying costs
Shortage costs None of the above
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Question Bowl
Which of the following is considered a Independent Demand inventory item?
a.
b. c.
d.
e.
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Question Bowl
If you are marketing a more expensive independent demand inventory item, which
c.
d. e.
Periodic system
Periodic review system P-model
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Question Bowl
If the annual demand for an inventory item is 5,000 units, the ordering costs are Rs100 per order, and the cost of holding a unit is stock for a year is Rs10, which of the following is approximately the Qopt? 5,000 units Rs5,000 Answer: d. 316 500 units units 316 units (Sqrt[(2x1000x10 None of the above
a. b. c. d. e.
0)/10=316.2277)
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Question Bowl
The basic logic behind the ABC Classification system for inventory management is which of the
following?
a. b. c. d. e.
Pareto principle
All of the above None of the above
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Question Bowl
A physical inventory-taking technique in which inventory is counted frequently rather than once or twice a year is which of the following? Cycle counting Mathematical programming Pareto principle ABC classification Stockkeeping unit (SKU)
a. b.
c.
d. e.
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End of Chapter 15