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Inventory Management
Chapter 9
PreparedProduction
♦ by: Shatina Saad @ Order
9-3
Quantity Model OPM 533
FPP
♦ Quantity Discount Models
Learning Objectives
When you complete this chapter,
you should be able to :
Identify or Define:
♦ ABC analysis
♦ Record accuracy
♦ Cycle counting
♦ Independent and dependent
demand
♦ Holding, Ordering, and Setup Costs
Describe or Explain:
♦ The functions of inventory and
Preparedbasic inventory
by: Shatina Saad @ models
9-4 OPM 533
FPP
What is Inventory?
♦ Stock of materials
♦ Stored capacity © 1995
Corel Corp.
♦ Examples
♦ Difficult to control
♦ Hides production problems
Inventory © 1984-
1994
T/Maker Co.
Raw A
Independ Maintena
Material Items
ent nce
WIP B
Depende Operating
Finished Items
nt
Goods
Prepared by: Shatina Saad @
C OPM 533
9-9
FPP Items
The Material Flow Cycle
Other Wait Move Q Setup Run
Time Time ueu Time Time
Input e Output
T
ime
Cycle Time
♦ Probabilistic models
♦ Fixed order-period models
© 1984-1994
T/Maker Co.
inventory (Q*/2)
level)
Minimum
inventor
0
y Time
C u r ve
C o st v e
al u r
Minimu
Tot o s tC
g C
m total ldin
H o
cost
Optimal Order
Order Quantity (Q*) quantity
Prepared by: Shatina Saad @ 9-22 OPM 533
FPP
Why Holding Costs
Increase
♦ More units must be stored if more are ordered
Purchase Order
Purchase Order Descriptio Qty.
Descriptio Qty. n
Microwave 1000
n
Microwave 1
Order
Order quantity
quantity
Prepared by: Shatina Saad @ 9-23 OPM 533
FPP
Why Order Costs
Decrease
Cost is spread over more units
Example: You need 1000 microwave ovens
1 Order (Postage $ 1000 Orders (Postage
0.33) $330)
Purchase Order PurchaseOrder
Purchase Order
Description Qty. Purchase
Descriptio
Purchase Order
Qty.
Order
Descriptio
Descriptio Qty.
Qty.1
Microwave 1000 nn
Microwave
Description Qty.
Microwave
n
Microwave 11
Microwave 1
Order
quantity
Prepared by: Shatina Saad @ 9-24 OPM 533
FPP
Deriving an EOQ
Slope = units/day
=d
Inventory level
ROP
(Unit
(units)
s)
Time
Lead time (days)
=L
Prepared by: Shatina Saad @ 9-27 OPM 533
FPP
2. Production Order
Quantity Model
♦ Answers how much to order and when to
order
♦ Allows partial receipt of material
♦ Other EOQ assumptions apply
♦ Suited for production environment
♦ Material produced, used immediately
♦ Provides production lot size
Production portion
of cycle
Time
Supply Supply
Begins Ends
Prepared by: Shatina Saad @ 9-30 OPM 533
FPP
POQ Model Inventory
Inventory Level
Levels
Inventory level with no demand
Time
Supply Supply Demand portion
Begins Ends of cycle with no
supply
Prepared by: Shatina Saad @ 9-31 OPM 533
FPP
POQ Model Equations
= Q* = 2*D*S
Optimal Order Quantity
( )
p d
H* 1-
p
= Q*
Maximum inventory level ( )
1-
d
p
D D = Demand per
Setup Cost = *S year
Q
S = Setup cost
Holding Cost =
0.5 * H * Q 1 -
( ) d
p
H = Holding cost
d = Demand per
day
Prepared by: Shatina Saad @ 9-32 OPM 533
FPP p = Production
3. Quantity Discount
Model
♦ Answers how much to order &
when to order
♦ Allows quantity discounts
♦ Reduced price when item is purchased in
larger quantities
♦ Other EOQ assumptions apply
♦ Trade-off is between lower price &
increased holding cost