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Factory
Production
Delay
Replenishment Replenishment
order
order
Wholesaler
Distributor
Shipping
Delay
Wholesaler
Inventory
Retailer
Shipping
Delay
Distributor
Inventory
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Customer
order
Customer
Item Withdrawn
Retailer
Inventory
Learning Objectives
Discuss the role of information technology in managing
inventories.
Describe the functions and costs of an inventory system.
Determine the order quantity.
Determine the reorder point and safety stock for inventory
systems with uncertain demand.
Design a continuous or periodic review inventory-control
system.
Conduct an ABC analysis of inventory items.
Determine the order quantity for the single-period inventory
case.
Describe the rationale behind the retail discounting model.
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Decoupling inventories
Seasonal inventories
Speculative inventories
Cyclical inventories
In-transit inventories
Safety stocks
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Inventory Models
Economic Order Quantity (EOQ)
Special Inventory Models
With Quantity Discounts
Planned Shortages
Demand Uncertainty - Safety Stocks
Inventory Control Systems
Continuous-Review (Q,r)
Periodic-Review (order-up-to)
Single Period Inventory Model
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Units on Hand
0
Q
D
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Time
Annu al Cost, $
800
700
600
Holding Cost
Ordering Cost
Total Cost
500
400
300
200
100
Order Quantity, Q
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140
120
100
80
60
40
20
EOQ Formula
Notation
D = demand in units per year
H = holding cost in dollars/unit/year
S = cost of placing an order in dollars
Q = order quantity in units
Total Annual Cost for Purchase Lots
TCp S ( D / Q) H (Q / 2)
EOQ
2 DS
EOQ
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C = $19.50
C = $18.75
21000
20000
2000
1000
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0
100
200
300
400
Order quantity, Q
500
600
700
Q
TIME
-K
T1
T2
T
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2 DS H B
H
B
H
K Q
H B
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*
Q*
2DS
H
0 B
2DS H B
H B
B0
K*
0
H
Q*
H B
undefined
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Q*
Inventory Levels
u=3
u=3
15
.
15
.
15
.
u=3
u=3
d L 12
ROP
ss
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ROP SS d L
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EOQ
Reorder point, ROP
d3
Safety stock, SS
d1
d2 EOQ
First lead
time, LT1
LT2
LT3
Time
Order 1 placed
Order 2 placed
Shipment 1 received
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Order 3 placed
Shipment 2 received
Shipment 3 received
RP
RP
RP
Q3
Q2
d3
d1
d2
Safety stock, SS
LT2
LT3
Time
Order 1 placed
Order 2 placed
Shipment 1 received
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Order 3 placed
SS zr LT
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100
90
80
70
60
50
30
20
10
40
100
90
80
70
60
50
40
30
20
10
0
0
Monthly
Sales
(units)
Dollar
Volume ($)
Computers
Entertainment center
3000
2500
50
30
150,000
75,000
Television sets
Refrigerators
Monitors
400
1000
200
60
15
50
Stereos
Cameras
Software
Computer disks
CDs
150
200
50
5
20
60
40
100
1000
200
Inventory Item
Totals
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Percent of
Dollar
Volume
Percent of
SKUs
Class
74
20
24,000
15,000
10,000
16
30
9,000
8,000
5,000
5,000
4,000
10
50
100
100
305,000
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Stock Q
8
.028
.055
.083
.111
.139
.167
.139
.111
.083
.055
.028
2
3
4
5
6
7
8
9
10
11
12
4
12
20
28
36
36
36
36
36
36
36
2
10
18
26
34
42
42
42
42
42
42
0
8
16
24
32
40
48
48
48
48
48
-2
6
14
22
30
38
46
54
54
54
54
-4
4
12
20
28
36
44
52
60
60
60
$31.54
$34.43
$35.77
$35.99
$35.33
Expected Profit
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10
P( D Q)Cu P( D Q)Co
1 P( D Q)C
P( D Q)Co
Cu
P ( D Q)
Cu Co
(Critical Fractile)
where:
Cu = unit contribution from newspaper sale ( opportunity cost of underestimating demand)
Co = unit loss from not selling newspaper (cost of overestimating demand)
D = demand
Q = newspaper stocked
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Probability
P(D>Q)
(Cu applies)
0.722
10
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12
14
S
D
(1 PNY )
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Interactive Exercise
The class engages in an estimation of the
cost of a 12-ounce serving of Coke in
various situations (e.g., supermarket,
convenience store, fast-food restaurant,
sit-down restaurant, and ballpark).
What explains the differences?
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