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Learning Objectives
After completing this chapter, students will be able to:
5.
6.
7.
8.
Chapter Outline
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
Introduction
Importance of Inventory Control
Inventory Decisions
Economic Order Quantity: Determining
How Much to Order
Reorder Point: Determining When to Order
EOQ Without the Instantaneous Receipt
Assumption
Quantity Discount Models
Use of Safety Stock
Chapter Outline
6.9 Single-Period Inventory Models
6.10 ABC Analysis
6.11 Dependent Demand: The Case for Material
Requirements Planning
6.12 Just-in-Time Inventory Control
6.13 Enterprise Resource Planning
Introduction
Inventory is an expensive and important
Introduction
Inventory may account for 50% of the total
Introduction
All organizations have some type of inventory
control system
Inventory planning helps determine what
goods and/or services need to be produced
Inventory planning helps determine whether
the organization produces the goods or
services or whether they are purchased from
another organization
Inventory planning also involves demand
forecasting
Introduction
Inventory planning and control
Planning on What
Inventory to Stock
and How to Acquire
It
Forecasting
Parts/Product
Demand
Controlling
Inventory
Levels
Feedback Measurements
to Revise Plans and
Forecasts
Figure 6.1
manufacturing process
Reduces delays and improves efficiency
over time
Inventory can be used to buffer the variability
Inventory Decisions
There are only two fundamental decisions
in controlling inventory
How much to order
When to order
inventory costs
Common inventory costs are
Cost of capital
Taxes
Bill paying
Insurance
Inventory inquiries
Spoilage
Theft
Obsolescence
Table 6.1
of order quantity
Assumptions
1.
2.
3.
4.
5.
6.
Minimum
Inventory
0
Time
Figure 6.2
costs
Q
Average inventory level
2
INVENTORY LEVEL
DAY
BEGINNING
ENDING
AVERAGE
10
April 2
April 3
April 4
April 5
Table 6.2
Number of
Ordering
orders placed cost per
per year
order
D
Co
Q
Average
Annual holding cost inventory
Q
Ch
2
Carrying
cost per unit
per year
Minimum
Total
Cost
Carrying Cost Curve
Ordering Cost Curve
Figure 6.3
Optimal
Order
Quantity
Order Quantity
Solving for Q
2 DC o Q 2C h
2 DC o
Q2
Ch
2 DC o
Q EOQ Q *
Ch
D
Annual ordering cost C o
Q
Q
Annual holding cost C h
2
EOQ Q *
2 DC o
Ch
companies
Would like to reduce inventory costs by finding
optimal order quantity
Annual demand = 1,000 units
Ordering cost = $10 per order
Average carrying cost per unit per year = $0.50
2 DC o
2(1,000 )(10 )
Q
(10 )
(0.5 )
200
2
$50 $50 $100
Program 6.1A
Program 6.1B
C h IC
thus,
2 DC o
Q
IC
*
2(1,000 )(10)
EOQ
200 units
0.50
If the ordering cost were increased four times from
Reorder Point:
Determining When To Order
Once the order quantity is determined, the
120 units
The order arrives 3 days later just as the
inventory is depleted
Maximum
Inventory
t
Figure 6.5
There is No Production
During This Part of the
Inventory Cycle
Time
cost
The model uses the following variables
Q
number of pieces per order,
or production run
Cs
setup cost
Ch
holding or carrying cost per
unit per year
p
daily production rate
d
daily demand rate
t length of production run in days
Total produced Q pt
since
we know
Q
t
p
Maximum
Q
Q
d
inventory pt dt p d Q 1
p
p
p
level
maximum
Q
d
Average inventory 1
2
p
and
Q
d
Annual holding cost 1 C h
2
p
D
Annual setup cost C s
Q
and
D
Annual ordering cost C o
Q
2 DC s
Q
d
C h 1
p
Q
d
Annual holding cost 1 C h
2
p
D
Annual setup cost C s
Q
2 DC s
Optimal production quantity Q
d
C h 1
p
Annual demand
Setup cost
Carrying cost
Daily production rate
Daily demand rate
D 10,000 units
Cs $100
Ch $0.50 per unit per year
p 80 units daily
d 60 units daily
2.
2 DC s
Q
d
C h 1
p
Q
Production cycle
p
2 10,000 100
Q
60
0.5 1
80
2,000,000
16,000,000
0.5 1
4
4,000 units
4,000
50 days
80
Program 6.2A
Program 6.2B
purchase
materials
cost
I holdingorcost
as a percentage
of the unit cost (C)
DISCOUNT
QUANTITY
DISCOUNT (%)
DISCOUNT
COST ($)
0 to 999
5.00
1,000 to 1,999
4.80
4.75
Table 6.3
best choice
1,000
2,000
Order Quantity
discount
(2)(5,000 )( 49)
EOQ 1
700 cars per order
(0.2)(5.00)
(2)(5,000 )( 49)
EOQ 2
714 cars per order
(0.2)( 4.80)
(2)(5,000 )( 49)
EOQ 3
718 cars per order
(0.2)( 4.75 )
each quantity
ANNUAL
ORDERING
COST ($)
= (D/Q)Co
ANNUAL
CARRYING
COST ($)
= (Q/2)Ch
TOTAL ($)
DISCOUNT
NUMBER
UNIT
PRICE
(C)
ORDER
QUANTITY
(Q)
ANNUAL
MATERIAL
COST ($)
= DC
$5.00
700
25,000
350.00
350.00
25,700.00
4.80
1,000
24,000
245.00
480.00
24,725.00
4.75
2,000
23,750
122.50
950.00
24,822.50
Table 6.4
Program 6.3A
Program 6.3B
ROP d L
d
SS safety stock
Time
Figure 6.7(a)
Stockout
Safety
Stock, SS
Stockout is Avoided
Time
Figure 6.7(b)
are unknown
An alternative approach to determining safety
stock levels is to use a service level
A service level is the percent of time you will not
be out of stock of a particular item
X
SS
Figure 6.9
5% Area of
Normal Curve
SS
350
X?
X
SS
Figure 6.9
5% Area of
Normal Curve
SS
350
X?
be developed as follows
X
1. We know that Z
4. So we have
SS Z
Z(10)
Z VALUE FROM
NORMAL CURVE TABLE
SAFETY STOCK
(UNITS)
CARRYING
COST ($)
90
1.28
12.8
12.80
91
1.34
13.4
13.40
92
1.41
14.1
14.10
93
1.48
14.8
14.80
94
1.55
15.5
15.50
95
1.65
16.5
16.50
96
1.75
17.5
17.50
97
1.88
18.8
18.80
98
2.05
20.5
20.50
99
2.33
23.3
23.20
99.99
Table 6.7
3.72
37.2
37.20
ABC Analysis
The purpose of ABC analysis is to divide the
these items
ABC Analysis
Summary of ABC analysis
INVENTORY
GROUP
DOLLAR
USAGE (%)
INVENTORY
ITEMS (%)
70
10
Yes
20
20
In some cases
10
70
No
Table 6.10
4 Steps of Kanban
1.
2.
4 Steps of Kanban
3.
4.
C-kanban
and
Container
Producer
Area
Storage
Area
3
Figure 6.17
User
Area
2
customize
dollars
Large systems can cost hundreds of millions