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What Is Inventory?
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Types of Inventory
▶ Raw material
▶ Purchased but not processed
▶ Work-in-process (WIP)
▶ Undergone some change but not completed
▶ A function of cycle time for a product
▶ Maintenance/repair/operating (MRO)
▶ Necessary to keep machinery and processes productive
▶ Finished goods
▶ Completed product awaiting shipment
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Demand Types
Independent demand – the
demands for various items are
unrelated to each other
• For example, a workstation may
produce many parts that are
unrelated but meet some external
demand requirement
Dependent demand – the need for
any one item is a direct result of the
need for some other item
• Usually a higher-level item of
which it is part
Inventory Costs
• Carrying cost
• cost of holding an item in inventory
• Ordering cost
• cost of replenishing inventory
• Shortage cost
• temporary or permanent loss of sales when demand cannot be met
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Inventory Control Systems
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Continuous system Continuous system
Fixed-Order Quantity Fixed-Time Period
• Class A
• 5 – 15 % of units
• 70 – 80 % of value
• Class B
• 30 % of units
• 15 % of value
• Class C
• 50 – 60 % of units
• 5 – 10 % of value
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ABC Classification
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ABC Classification
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ABC Classification
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0
B 1, 4, 3 16.5 28.0
C 6, 5, 10, 7 12.5 60.0
Example 10.1
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Economic Order Quantity
(EOQ) Models
• EOQ
• continuous inventory system
• optimal order quantity that will minimize total inventory costs
• Basic EOQ model
• Production quantity model
• Order cycle
• the time between receipt of orders in an inventory system
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Assumptions of Basic EOQ Model
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Inventory Order Cycle
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EOQ Cost Model
CoD
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
CoD CcQ
Total cost = +
Q 2
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EOQ Cost Model
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EOQ Cost Model
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EOQ Example
Qopt = TCmin =
Qopt = TCmin =
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EOQ Example
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Production Quantity Model
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Production Quantity Model
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Production Quantity Model
=Q1- d 2CoD
p
Qopt = d
Q d Cc 1 -
Average inventory level = 1- p
2 p
CoD CcQ d
TC = Q + 2 1 - p
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Production Quantity Model
2CoD
Qopt = =
Cc 1 - d
p
CoD CcQ d
TC = Q + 2 1 - p =
Q
Production run = =
p
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Production Quantity Model
D
Number of production runs = =
Q
d
Maximum inventory level = Q 1 - =
p
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Production Quantity Model
2CoD 2(150)(10,000)
Qopt = = = 2,256.8 gallons
Cc 1 - d 0.75 1 -
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p 150
CoD CcQ d
TC = Q + 2 1 - p = $1,329
Q 2,256.8
Production run = = = 15.05 days per order
p 150
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Production Quantity Model
D 10,000
Number of production runs = = = 4.43 runs/year
Q 2,256.8
d 32.2
Maximum inventory level = Q 1 - = 2,256.8 1 -
p 150
= 1,772 gallons
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Reorder Point
R = dL
where
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Reorder Point
R = dL =
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Reorder Point
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Safety Stock
• Safety stock
• buffer added to on hand inventory during lead time
• Stockout
• an inventory shortage
• Service level
• probability that the inventory available during lead time will meet
demand
• P(Demand during lead time <= Reorder Point)
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Quantity Discounts
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Quantity Discount Model
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Quantity Discount
QUANTITY PRICE
Co = $2,500
1 - 49 $1,400 Cc = $190 per TV
50 - 89 1,100 D = 200 TVs per year
90+ 900
2CoD
Qopt = =
Cc
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Quantity Discount
QUANTITY PRICE
Co = $2,500
1 - 49 $1,400 Cc = $190 per TV
50 - 89 1,100 D = 200 TVs per year
90+ 900
2CoD 2(2500)(200)
Qopt = = = 72.5 TVs
Cc 190
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