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Process A Process B
90 units/hour 110 units/hour
Types of Inventory (Production)
Classification of Inventory
3. Function or Use of Inventory
d. Decoupling Inventory
Example: filling machine labelling
Process A Process B
90 units/hour 110 units/hour
Inventory
(Process A)
Types of Inventory (Production)
Classification of Inventory
3. Function or Use of Inventory
e. Transit Inventory
• Stockouts • Storage
• Excessive setups • Insurance and taxes
• Backorder costs • Cost of capital
• Expediting costs • Obsolescence
• Spoilage
• Production rate problems • Cost of tracking inventory
• Poor facility utilization • Shrinkage
Economic Order Quantity (EOQ)
Holding cost
Ordering cost
Quantity (Q)
Economic Order Quantity (EOQ)
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝐷𝐷𝐷𝐷 + ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝑄𝑄 𝐷𝐷
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐻𝐻 o𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑆𝑆
2 𝑄𝑄
• D = annual demand
• C = cost per item
• Q = order quantity per order
• H = holding cost per year
• S = order cost
Economic Order Quantity (EOQ)
𝑄𝑄 𝐷𝐷
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐻𝐻 o𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑆𝑆
2 𝑄𝑄
𝑄𝑄 𝐷𝐷
𝐻𝐻 = 𝑆𝑆
2 𝑄𝑄
2𝐷𝐷𝐷𝐷
𝐸𝐸𝐸𝐸𝐸𝐸 =
𝐻𝐻
Economic Order Quantity (EOQ)
Example:
Item A has an average annual demand of 2600 units,
with a standard deviation of 6 units per week. The
supplier quotes them a lead time of 3 weeks to replenish
the stock of item A with a unit price of 12 PhP. Order of
item A costs the company a total of 40 PhP every year.
The estimated annual cost of holding inventory is 20%
of the item cost. What is the EOQ of item A?
Economic Order Quantity (EOQ)
Assumptions of EOQ Model
• Demand is constant and uniform
• Inventory is depleted at a constant rate
• Lead time is constant
• Price per unit is constant
• Ordering and setup costs are constant
• No backorders are allowed
Safety stock
Safety stock = “just in case” inventory
you don’t want poor customer service
Safety stock =
(z score of the required customer service level)*
(SD of the demand)*( Lead time )
Safety stock
Safety stock =
(z score of the required customer service level)*
(SD of the demand)*( Lead time )
1. Homebase
2. Random
3. Zoned random
Inventory Control
Location Approaches for Stockrooms and Warehouses
1. Homebase
Each item has its own distinctive location, and that the
item is always stored in just that location.
The location is, therefore, dedicated to that specific
item, and must not be changed.
Inventory Control
Location Approaches for Stockrooms and Warehouses
2. Random
The item is placed in whatever location is available
(open space) anywhere in the storage area.
Inventory Control
Location Approaches for Stockrooms and Warehouses
3. Zoned random
Hybrid of homebase and random approach
Identify a ‘zone’ where items belonging to some defined
class of goods (often commodity-based) will all be
stored.
Inventory Control
• Priority of control/checking
Inventory existing
Priority of control/checking
Inventory existing
Item A
strictest
Cost = 1000 PhP/piece
inventory policy
Item B
Cost = 1 PhP/piece
Item C
Cost = 50 PhP/piece
INVENTORY CONTROL – ABC Analysis
Inventory Classification of Materials
Classification:
ABC Analysis
Value in terms of annual consumption
HML
Classification ABC – letter designation of items
VED A – high value
Classification C – low value
SDE
Classification
FSN Analysis
FSN Analysis
Item Unit Cost Annual Demand Annual Consumption Value % Annual Consumption Value
X1 55 528000 29,040,000 32.52
X2 121 22000 2,662,000 2.98
X3 165 3300 544,500 0.61
X4 88 8800 774,400 0.87
X5 77 52800 4,065,600 4.55
X6 176 13200 2,323,200 2.60
X7 220 198000 43,560,000 48.79
X8 44 3300 145,200 0.16
X9 99 55000 5,445,000 6.10
X10 132 5500 726,000 0.81
Total: 89,285,900 100.00%
Annual
Consumption Cumulative of
Item Unit Cost Annual Demand Value (ACV) % ACV %ACV
X7 220 198000 43560000 48.78 48.78
X1 55 528000 29040000 32.52 81.31
X9 99 55000 5445000 6.09 87.41
X5 77 52800 4065600 4.55 91.96
X2 121 22000 2662000 2.98 94.94
X6 176 13200 2323200 2.60 97.54
X4 88 8800 774400 0.86 98.41
X10 132 5500 726000 0.81 99.22
X3 165 3300 544500 0.60 99.83
X8 44 3300 145200 0.16 100
Total: 89,285,900
INVENTORY CONTROL – ABC Analysis
based on the Pareto principle: 80/20 rule
Cumulative % Value
80
70
60
50 A B C
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100 110
Cumulative % Items