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Inventory Control
17-2
OBJECTIVES
17-3
Inventory System
17-4
Purposes of Inventory
17-5
Inventory Costs
17-6
Independent Demand (Demand for the final endproduct or demand not related to other items)
Finished
product
E(1
)
Component parts
Dependent
Demand
(Derived demand
items for
component
parts,
subassemblies,
raw materials,
etc)
17-7
Inventory Systems
17-8
C
Cuu
P
P
C
Coo C
Cuu
This
Thismodel
modelstates
statesthat
thatwe
we
should
shouldcontinue
continueto
toincrease
increase
the
thesize
sizeof
ofthe
theinventory
inventoryso
so
long
longas
asthe
theprobability
probabilityof
ofnot
not
selling
sellingthe
thelast
lastunit
unitadded
addedisis
equal
equalto
toor
orless
lessthan
thanthe
theratio
ratio
of:
of:Cu/Co+Cu
Cu/Co+Cu
Where :
Co Cost per unit of demand over estimated
Cu Cost per unit of demand under estimated
P Probability that the unit will not be sold
17-9
17-10
Multi-Period Models:
Fixed-Order Quantity Model Model Assumptions (Part 1)
17-11
Multi-Period Models:
Fixed-Order Quantity Model Model Assumptions (Part 2)
17-12
R = Reorder point
Q = Economic order quantity
L = Lead time
Time
L
3. When you reach down to
a level of inventory of R,
you place your next Q
sized order.
17-13
By
Byadding
addingthe
theitem,
item,holding,
holding,and
andordering
orderingcosts
costs
together,
together,we
wedetermine
determinethe
thetotal
totalcost
costcurve,
curve,which
whichin
in
turn
inventory order point that
turnis
isused
usedto
tofind
findthe
theQ
Qopt
opt inventory order point that
minimizes
minimizestotal
totalcosts
costs
Total Cost
C
O
S
T
Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
17-14
Total
Annual =
Cost
Annual
Annual
Annual
Purchase + Ordering + Holding
Cost
Cost
Cost
D
Q
D
Q
TC
TC == DC
DC ++ SS++ H
H
Q
22
Q
TC=Total
TC=Totalannual
annual
cost
cost
DD=Demand
=Demand
CC=Cost
=Costper
perunit
unit
QQ=Order
=Orderquantity
quantity
SS=Cost
=Costof
ofplacing
placing
an
anorder
orderor
orsetup
setup
cost
cost
RR=Reorder
=Reorderpoint
point
LL=Lead
=Leadtime
time
H=Annual
H=Annualholding
holding
and
andstorage
storagecost
cost
per
perunit
unitof
ofinventory
inventory
17-15
Using
Using calculus,
calculus, we
we take
take the
the first
first derivative
derivative of
of
the
the total
total cost
cost function
function with
with respect
respect to
to Q,
Q, and
and
set
set the
the derivative
derivative (slope)
(slope) equal
equal to
to zero,
zero,
solving
solving for
for the
the optimized
optimized (cost
(cost minimized)
minimized)
value
value of
of Q
Qopt
opt
QQOPT
=
OPT =
2DS
2DS =
=
HH
We
Wealso
alsoneed
needaa
reorder
reorderpoint
pointto
to
tell
tellus
uswhen
whento
to
place
placean
anorder
order
2(Annual
2(AnnualDemand)(Order
Demand)(Orderor
orSetup
SetupCost)
Cost)
Annual
AnnualHolding
HoldingCost
Cost
__
Reorder
Reorder point,
point, R
R == ddLL
17-16
Given
Giventhe
theinformation
informationbelow,
below,what
what are
arethe
theEOQ
EOQ and
and
reorder
reorderpoint?
point?
17-17
Q
=
QOPT
OPT =
2DS
2DS =
=
H
H
2(1,000
2(1,000)(10)
)(10) = 89.443 units or 90 units
= 89.443 units or 90 units
2.50
2.50
1,000
units
//year
1,000
units
year = 2.74 units / day
dd ==
= 2.74 units / day
365
days
/
year
365 days / year
__
Reorder
Reorderpoint,
point, RR==dd LL==2.74units
2.74units//day
day(7days)
(7days)==19.18
19.18or
or 20
20units
units
In
Insummary,
summary,you
youplace
placean
anoptimal
optimalorder
orderof
of90
90units.
units. In
In
the
thecourse
courseof
ofusing
usingthe
theunits
unitsto
tomeet
meetdemand,
demand,when
when
you
youonly
onlyhave
have20
20units
unitsleft,
left,place
placethe
thenext
nextorder
orderof
of90
90
units.
units.
17-18
Determine
Determine the
the economic
economic order
order quantity
quantity
and
and the
the reorder
reorder point
point given
given the
the following
following
17-19
2DS
2(10,000
)(10)
2DS
2(10,000
)(10) = 365.148 units, or 366 units
Q
=
=
QOPT
=
= 365.148 units, or 366 units
OPT =
H
1.50
H
1.50
10,000
units
//year
10,000
units
year = 27.397 units / day
dd==
= 27.397 units / day
365
days
/
year
365 days / year
__
R
R ==dd LL==27.397
27.397units
units//day
day(10
(10days)
days)==273.97
273.97or
or 274
274units
units
Place
Placean
anorder
orderfor
for366
366units.
units. When
Whenin
in the
thecourse
courseof
of
using
usingthe
theinventory
inventoryyou
you are
areleft
left with
with only
only274
274units,
units,
place
placethe
thenext
next order
orderof
of366
366units.
units.
17-20
qq==Average
Averagedemand
demand++Safety
Safetystock
stockInventory
Inventorycurrently
currentlyon
onhand
hand
qq==dd(T
(T++L)
L)++ZZTT++LL--II
Where
Where::
qq==quantitiy
quantitiyto
tobe
beordered
ordered
TT==the
thenumber
numberof
ofdays
daysbetween
betweenreviews
reviews
LL==lead
leadtime
timein
indays
days
dd==forecast
forecast average
averagedaily
dailydemand
demand
zz==the
thenumber
numberof
ofstandard
standarddeviations
deviationsfor
foraaspecified
specifiedservice
serviceprobabilit
probabilityy
T + L ==standard
standarddeviation
deviationof
ofdemand
demandover
overthe
thereview
reviewand
andlead
leadtime
time
T+L
II==current
currentinventory
inventorylevel
level(includes
(includesitems
itemson
onorder)
order)
17-21
T+T+LL ==
T+
L
T+L
i i 11
22
ddi
i
Since
Sinceeach
eachday
dayisisindependent
independentand
anddd isisconstant,
constant,
22
T+T+LL == (T
+
L)
(T + L)dd
17-22
Given
Given the
the information
information below,
below, how
how many
many units
units
should
should be
be ordered?
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.
17-23
T+T+LL ==
(T
(T++ L)
L) ==
22
dd
30
30++10
10 44 == 25.298
25.298
22
The
The value
value for
forz
z isis found
found by
byusing
using the
theExcel
Excel
NORMSINV
NORMSINVfunction,
function, or
oras
as we
we will
will do
do here,
here, using
using
Appendix
Appendix D.
D. By
Byadding
adding 0.5
0.5 to
to all
all the
the values
values in
in
Appendix
Appendix D
D and
and finding
finding the
the value
value in
in the
the table
table that
that
comes
comes closest
closest to
to the
the service
service probability,
probability,the
the z
z
value
value can
can be
be read
read by
by adding
adding the
thecolumn
column heading
heading
label
label to
to the
the row
rowlabel.
label.
So,
So,by
byadding
adding0.5
0.5to
tothe
thevalue
valuefrom
fromAppendix
AppendixDDof
of0.4599,
0.4599,
we
wehave
haveaaprobability
probabilityof
of0.9599,
0.9599,which
whichisisgiven
givenby
byaazz==1.75
1.75
17-24
qq==dd(T
(T++L)
L)++ZZTT++LL --II
qq==20(30
20(30++10)
10)++(1.75)(25.
(1.75)(25.298)
298)--200
200
qq==800
80044.272
44.272--200
200==644.272,
644.272,or
or645
645units
units
So,
So, to
to satisfy
satisfy 96
96 percent
percent of
of the
the demand,
demand,
you
you should
should place
place an
an order
order of
of 645
645 units
units at
at
this
this review
review period
period
17-25
Q OPT
2DS
2(Annual Demand)(Order or Setup Cost)
=
=
iC
Annual Holding Cost
17-26
A
Acompany
company has
has aa chance
chance to
to reduce
reduce their
theirinventory
inventory
ordering
ordering costs
costs by
by placing
placing larger
largerquantity
quantity orders
orders using
using
the
the price-break
price-breakorder
orderquantity
quantity schedule
schedule below.
below. What
What
should
should their
theiroptimal
optimal order
orderquantity
quantity be
be ifif this
this company
company
purchases
purchases this
this single
single inventory
inventoryitem
item with
with an
an e-mail
e-mail
ordering
ordering cost
cost of
of $4,
$4, aa carrying
carrying cost
cost rate
rate of
of 2%
2%of
of the
the
inventory
inventory cost
cost of
of the
the item,
item, and
and an
an annual
annual demand
demand of
of
10,000
10,000 units?
units?
Order Quantity(units) Price/unit($)
0 to 2,499
$1.20
2,500 to 3,999 1.00
4,000 or more .98
17-27
Q OPT =
2DS
=
iC
2(10,000)(4)
= 1,826 units
0.02(1.20)
Q OPT =
2DS
=
iC
2(10,000)(4)
= 2,000 units
0.02(1.00)
2DS
=
iC
2(10,000)(4)
= 2,020 units
0.02(0.98)
17-28
Since
Sincethe
thefeasible
feasiblesolution
solution occurred
occurredin
inthe
thefirst
firstpricepricebreak,
values occur
break,itit means
means that
thatall
all the
theother
othertrue
trueQ
Qopt
opt values occur
at
at the
thebeginnings
beginningsof
ofeach
eachprice-break
price-breakinterval.
interval. Why?
Why?
Because
Becausethe
thetotal
total annual
annualcost
costfunction
functionis
is
aau
ushaped
shapedfunction
function
Total
annual
costs
So
So the
thecandidates
candidates
for
forthe
thepricepricebreaks
breaks are
are1826,
1826,
2500,
2500,and
and4000
4000
units
units
0
1826
2500
4000
Order Quantity
17-29
Next,
values into the total cost
Next,we
weplug
plugthe
thetrue
trueQ
Qopt
opt values into the total cost
annual
annualcost
costfunction
functionto
todetermine
determinethe
thetotal
total cost
costunder
under
each
eachprice-break
price-break
D
Q
D
Q iC
TC
=
DC
+
S
+
TC = DC +
S+
iC
Q
2
Q
2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
==$12,043.82
$12,043.82
TC(2500-3999)=
TC(2500-3999)=$10,041
$10,041
TC(4000&more)=
TC(4000&more)=$9,949.20
$9,949.20
Finally,
, which is this
Finally,we
weselect
select the
theleast
least costly
costlyQ
Qopt
opt, which is this
problem
problem occurs
occursin
in the
the4000
4000 &&more
more interval.
interval. In
In summary,
summary,
our
ouroptimal
optimal order
orderquantity
quantityis
is4000
4000units
units
17-30
Miscellaneous Systems:
Optional Replenishment System
q=M-I
Actual Inventory Level, I
M
I
17-31
Miscellaneous Systems:
Bin Systems
Two-Bin System
Empty
One-Bin System
Order Enough to
Refill Bin
Periodic Check
17-32
dollars invested
60
% of
$ Value 30
profit potential
Use
30
A
B
60
stock-out penalties
17-33
17-34
Question Bowl
17-35
Question Bowl
17-36
Question Bowl
17-37
Question Bowl
17-38
Question Bowl
17-39
Question Bowl
316
units
(Sqrt[(2x1000x10
0)/10=316.2277)
17-40
Question Bowl
17-41
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?
a. Cycle counting
b. Mathematical programming
c. Pareto principle
d. ABC classification
e. Stockkeeping unit (SKU)
17-42
End of Chapter