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MANAGEMENT
Facts on Inventory Management
INVENTORY MANAGEMENT:
A SHORT STORY
The senior executives of “Alpha
Numerics” were having their annual
retreat to review accomplishments of
the past year and to discuss major
policy issues for the coming year. As
was the norm, the retreat was held at a
small hotel in the mountains of
Pennsylvania, well removed from the
company’s actual manufacturing facility.
INVENTORY MANAGEMENT :
A SHORT STORY
Q- trigger!
What is lacking is an understanding of
* What needs to be done and
* How to do it!
Inventory Management: (Continued)
INTRODUCTION
An Inventory is a stock or sore of goods;
* Firms typically stock hundreds or thousands
of items in inventory; ranging from small things such
as pencil, paper clips, screw, nuts, and bolts to large
items such as machines, trucks, construction
equipment and airplanes.
Dependent Demand
* Items in inventory that are subassemblies
or components parts to be used in the production of
finished goods
Independent Demand
* Items are the finished goods of other end
items.
Inventory Management: (Continued)
FUNCTIONS OF INVENTORY:
Q-TRIGGER
What levels should be
maintained?
When stock should be
replenished, and;
How large orders should be?
Inventory Management: (Continued)
Assumptions of the basic EOQ model
2. Only one product is involved;
3. Annual demand requirements are known;
4. Demand is spread evenly throughout the year so
that the demand rate is reasonable constant;
5. Lead time does not vary;
6. Each order is received in a single delivery;
7. There are no quantity discounts.
IE 1
1. A local distributor for a national tire company
expects to sell approximately 9,600 steel-belted
radial tires of a certain size and tread design next
year. Annual carrying costs are $16 per tire, and
ordering costs are $75. The distributor operates
288 days a year.
b. What is the EOQ?
c. How many times per year does the store reorder?
d. What is the length of an order cycle?
IE 2
2. Piddling Manufacturing assembles television
sets. It purchases 3,600 black-and-white
picture tubes a year at $65 each. Ordering
costs are $31, and annual carrying costs are
20 percent of the purchase price. Compute
the optimal quantity and the total annual cost
ordering and carrying the inventory.
EOQ with Non-instantaneous
Replenishment
The basic EOQ model assumes that
each order is delivered at a single
point in time. In some instances,
however, such as when a firm is both a
producer and user or when deliveries
are spread over time, inventories tend
to build gradually instead of
instantaneously.
IE 3
3. A toy manufacturer uses a 48,000 rubber wheels per year
for its popular dump truck series. The firm makes its own
wheels, which it can produce at a rate of 800 per day.
The toy trucks are assembled uniformly over the entire
year. Carrying cost is &1 per wheel. Setup cost for a
production run of wheels is $45. The firm operates 240
days per year. Determine each of the following:
b. Optimal run size
c. Minimum total annual cost for carrying and setup
d. Cycle time for the optimal run size
e. Run time
Quantity Discounts are price reductions for large orders offered
to customers to induce them to buy in large quantities.
• If quantity discounts are offered, the customer must weigh the
potential benefits of reduced purchase price and fewer orders that will
result from buying in large quantities against the increase in carrying
costs caused by higher average inventories.
• The buyer’s goal with quantity discounts is to select the order quantity
that will minimize total cost, where total cost is the sum of carrying
cost, ordering cost, and purchasing cost.
IE 4
4. The maintenance department of a large hospital
uses about 816 cases of liquid cleanser annually.
Ordering costs are $12, carrying costs are $4 per case
a year, and the new price schedule indicates that
orders of less than 50 cases will cost $20 per case, 50
to 79 cases will cost $18 per case, 80 to 99 cases will
cost $17 per case, and larger orders will costs $16 per
case. Determine the optimal order quantity and the total
cost.
Inventory Management: Illustrative
Examples
When carrying costs are expressed as a percentage of price,
determine the best purchase quantity with the following
procedure;
• Beginning with the lowest price, compute the EOQs for each
price range until a feasible EOQ is found;
• If the EOQ for the lowest price is feasible, it is the optimal
order quantity. If the EOQ is not the lowest price range,
compare the total cost at the price break for all lower prices
with the total cost of the largest feasible EOQ. The quantity
that yields the lowest total cost is the optimum.
IE 5
• Surge Electric uses 4,000 toggle
switches a year. Switches are priced
as follows: 1 to 499, 90 cents each;
500 to 999, 85 cents each; and 1,000
or more, 82 cents of purchase prices
per unit on an annual basis.
Determine the optimal order quantity
and the total annual cost.
When to Reorder with EOQ Ordering
EOQ models answer the question of how much
to order, but not the question of when to
order. The latter is the function of models
that identify the reorder point (ROP) in
terms of quantity: the reorder point occurs
when the quantity on hand drops to a
predetermined amount. The amount that
generally includes expected demand during
lead time and perhaps an extra cushion of
stock, which serves to reduce the
probability of experiencing a stock-out
during lead time.
The basic concern of the manager is to place an
order when the amount of inventory on hand is
sufficient to satisfy demand during the time it
takes to receive that order. There are four
determinants of the reorder point quantity;
2. The rate of demand;
3. The length of lead time;
4. The extent of demand and/or lead time
variability;
5. The degree of stock-out risk acceptable to
management.
IE 6