Inventory Part 2

SESSION 6
Copyright 2014 - Fadi Kotob
Chapter 12
!
Managing Inventories Part 2
Last week, I started covering chapter 12

Managing Inventories.
!
What do you remember from what was covered?
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
Learning Objectives
Explain and calculate the economic order quantity and

inventory cost
Briefly explain the importance of safety stock and service

levels when managing a fixed order system when demand is
uncertain
Briefly explain the principal decisions when managing a fixed

period system
Briefly explain some of the additional types of inventory

systems
- Explain the different approaches that an organisation could use

to minimise the problem of inaccurate inventory
The EOQ Model

This week I will start by explaining the Economic Order
Quantity (EOQ).
What is the Economic Order Quantity (EOQ)?
It is a classic economic model developed in the early 1900s

that minimises total cost, which is the sum of the inventory
holding cost and the ordering cost.
!
The EOQ Model Assumptions

EOQ is based on the following assumptions:
- Only 2 types of costs are relevant: ordering/setup (S) and
holding (H)
- Demand is constant
- Demand for items is independent (Only a single item (SKU)
is considered)
- There is certainty in demand, lead time and supply
- The entire order quantity (Q) arrives in the inventory at
one time.
- No stockouts are allowed.
FROM THESE ASSUMPTIONS, LETS MOVE TO LEARN HOW TO

CALCULATE EOQ & THE ANNUAL INVENTORY COST
The
EOQ Calculation
!
CHAPTER 12
MANAGING INVENTORIES
The Economic Order Quantity (EOQ) can be calculated

using the formula below:
Where:
D = Annual Demand
EOQ =
2DCo
Ch
Co = Ordering Cost Per Order

Ch = Annual Holding Cost Per Unit
How to calculate annual ordering cost and annual holding cost?

Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning.
ISBN-13: 978-0-618-74933-1
Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited,
ISBN: 9780273766834
2013 OM4
Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
CHAPTER 12
The EOQ Model Annual Inventory Cost Calculation
Annual holding cost
= (Average cycle inventory) (Unit holding cost)
Q
(Ch)
2
Where:
Q = Order Quantity
Ch= Annual Holding Cost Per Unit
Annual ordering cost (Co)
= (Number of orders/Year) (Ordering or setup costs)
D
(Co)
Q
Where:
D = Annual Demand
Co = Ordering Cost Per Order
Total annual inventory cost
!! = Annual holding cost + Annual ordering cost

ISBN: 9780273766834
2013 OM4
CHAPTER 12
EOQ & Inventory Cost Exercise
A museum of natural history opened a gift shop which operates 52

weeks per year.
Top-selling SKU is a bird feeder.
Sales are 18 units per week, the supplier charges $60 per unit.
Ordering cost is $45.
Annual holding cost is 25 percent of a feeders value.
!
Question:
What is the EOQ?
What is the annual inventory cost?

Operating Weeks = 52
Sales Per Week = 18 Units
Lets start by understanding the data
Cost Per Unit = $60

Ordering Cost Per Order (Co)= $45
Annual Holding Cost Per Unit (Ch) = 0.25% Of Cost
!!
ISBN: 9780273766834
2013 OM4
What Is The EOQ?
EOQ
=
CHAPTER 12
2DCo
Ch
Question:
What is the economic order quantity for this item?
Annual Demand (D) = 18 * 52 = 936 Units
Ordering Cost (Co) = $45
Cost Per Unit = $60
!
!
Answer:
!
Annual Holding Cost (Ch) = 0.25% Of Cost
EOQ=
2(936)(45)
0.25 * 60
= 74.94 or 75 units
Now we can answer the second questions, What is the annual inventory cost?
!!
ISBN: 9780273766834
2013 OM4
Annual Cycle Inventory Exercise
C=
Q
(Ch) +
2
CHAPTER 12
D
Q(Co)
Question:
Annual Demand (D) = 18 * 52 = 936 Units

Cost Per Unit = $60
Answer:
1. Calculate annual holding cost
Ordering Cost (Co)= $45

Annual Holding Cost (Ch) = 0.25% Of Cost
Ordering Quanitity (Q) = EOQ = 75 Units
= (Average cycle inventory) (Unit holding cost)

= (75/2) ($0.25 * $60) = 37.5 * $15
= 562.50
2. Calculate annual ordering cost
= (Number of orders/Year) (Ordering or setup costs)
Annual Holding Cost = $562.50
= ((936 units/year) / (75 order size)) $45
Annual Ordering Cost = $561.6
!! = 12.48 orders per year * $45 setup cost = $561.6

ISBN: 9780273766834
2013 OM4
Annual Cycle Inventory Exercise
C=
Q
(Ch) +
2
CHAPTER 12
D
Q(Co)
Question:
Answer:
Annual cycle inventory cost
= Annual holding cost + Annual ordering cost
= $562.50 + $561.60 = $1124.10
Annual Holding Cost = $562.50

Annual Ordering Cost = $561.6
!
THE ANNUAL CYCLE INVENTORY COST IS $1124.10
!!
ISBN: 9780273766834
2013 OM4
Ordering In A Fixed Order System When Demand Is Uncertain
When demand is uncertain, using EOQ based on the average

demand will result in a high probability of a stockout.
This is why safety stock is often kept to deliver the required
service level.
Safety stock is additional planned on-hand inventory that
acts as a buffer to reduce the risk of a stockout.
A service level is the desired probability of not having a
stockout during a lead-time period.
Calculations relating to 12-4b on page 264 are not examinable

Other calculations covered in the lecture are examinable
The Periodic Review Or Fixed Period System

!
An alternative to a fixed order quantity system is a

fixed period system (FPS)sometimes called a
periodic review systemin which the inventory
position is checked only at fixed intervals of time, T,
rather than on a continuous basis.
Two principal decisions in a FPS:
1.
The time interval between reviews (T), and
2.
The replenishment level (M)
The Periodic Review Or Fixed Period System Graph
Calculations relating to 12-5b on page 267 are not examinable

Other calculations covered in the lecture are examinable
Other Types of Inventory System
CHAPTER 12
Other Inventory Systems:

ABC Systems
Bin Systems
Can Order Systems
Base Stock Systems
The Newsvendor Problem
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western,
Cengage Learning. ISBN-13: 978-0-618-74933-1
2013 OM4
ABC Systems
CHAPTER 12
ABC Systems:
Classifies inventory in categories based on importance
Allocate control efforts accordingly to importance
Uses the 80/20 rule (20% of items usually account for 80% of the value)
!
Category A contains the most important items
A items account for a large dollar value but relatively small percentage of
total items (e.g., 10% to 30 % of items, yet 60% to 80% of total dollar value)
Category B contains moderately important items
Category C contains the least important items
C items account for a small dollar value but a large percentage of total
items (e.g., 50% to 60% of items, yet about 5% to 15% of total dollar
value)
Preferred to order C items in large quantities and carry excess safety stock
especially if the setup cost is high
2013 OM4
CHAPTER 12
Bin, Can Order and Base Stock Systems
Bin System:
An inventory system that uses one or two bins to hold a
quantity of the item being inventoried
New order placed when one bin is empty or reaches an order
point
!
Can Order System:
An inventory system that reviews the inventory position at fixed
time intervals
New order placed to bring the inventory up to an expected
target level, but only if the inventory position is below a
minimum quantity
Method that mixes both the continuous and periodic systems
!
Base Stock System:
An inventory system that issues an order whenever a
withdrawal is made from inventory
2013 OM4
Newsvendor Problem
CHAPTER 12
Newsvendor Problem: a technique that determines how much inventory

to order when handling perishable products or items that have a limited
life span
Shortage Cost: the lost profit from not being able to make a sale,
plus any loss of customer goodwill
Excess Cost: the different between the purchase cost of an item
and its salvage or discounted value
2013 OM4
Achieving Inventory Accuracy
CHAPTER 12
The inventory count on the system is often different that the

physical inventory on hand
!
!
Resolving this issue:
Dedicate employees to issue and receive orders

Place inventory in a locked and secured location
Cycle Counting
2013 OM4
Thank You For Your Time
Chapter 14
!
Operations Scheduling
Learning Objectives
- Explain the concepts of scheduling and sequencing.

- Describe staff scheduling and appointment system decisions.
- Explain sequencing performance criterias and rules.
-
Describe how to solve single and two resource sequencing
problems.
- Explain the need for monitoring schedules.
Understanding Scheduling & Sequencing

Scheduling and sequencing are some of the more
common activities that operations managers perform
everyday in every business.
Good schedules and sequences lead to efficient

execution of manufacturing and service plans and
better customer service.
WHAT IS SCHEDULING AND SEQUENCING?
Understanding Scheduling & Sequencing
Scheduling refers to the assignment of start and

completion times to particular jobs, people, or equipment.
Examples: scheduling restaurant employees, airline
crews and planes, sports teams, factory jobs
Sequencing which is a concept related to scheduling

refers to determining the order in which jobs or tasks are
processed.
Examples: emergency room patients, automobile
models on an assembly line, outgoing flights on
runways
Scheduling
Applications
&
Approaches
!
Scheduling applies to all aspects of the value chain, from
planning and releasing orders in a factory, determining work
shifts for employees, and making deliveries to customers.
Scheduling tools include:
Spreadsheets
Software packages
Web-based tools
We will cover 2 common applications of scheduling that are

prevalent in operations management. These are:
Staff scheduling
Appointment systems
Staff
Scheduling
!
Staff scheduling attempts to match available personnel with the
needs of the organisation by:
1. Accurately forecasting demand and translating it into the
quantity and timing of work to be done.
2. Determining the staffing required to perform the work
by time period.
3. Determining the personnel available and the full- and
part-time mix.
4. Matching capacity to demand requirements and
developing a work schedule that maximises service and
minimises costs.
The
Staff Scheduling Problem & Solution Procedure
!
The Problem:
Consider the minimum number of workers required for each
day of the week and schedule employees so that each has
two consecutive days off and all demand requirements are
met.
Solution Procedure:
1. Locate the set of at least two consecutive days with the
smallest requirements, circle the requirements for these
days, and assign a worker to all days not circled.
2. Subtract 1 from the requirement of each day not circled,
removing existing circles, and repeat this process until all
requirements are satisfied.
The Staff Scheduling Example

Example: T. R. Accounting Service is developing a workforce schedule for three weeks
from now, and has forecast demand and translated it into the following minimum
personnel requirements for the week.
Day
Min Personnel
Mon
8
Tue
6
Employee 1:
New requirements:
Employee 2:
New requirements:
Wed
6
Thur
6
Fri
9
Sat
5
Sun
3
The Staff Scheduling Example Continued

Employee 3:
New requirements:
Remaining assignments:
The Staff Scheduling Example Continued

Exhibit 14.2 Final Accountant Schedule
Appointment
Systems
!
Appointment Systems
Appointments systems on the other hand can be viewed as a
reservation for service time and capacity.
Four decisions:
1. Determine the appointment time interval.
2. Determine the length of each workday and time offduty.
3. Decide how to handle overbooking.
4. Develop customer appointment rules that maximise
customer satisfaction.
Sequencing
After covering the scheduling applications and approaches,
lets start by explaining sequencing which is required when
several activities must be processed using a common
resource.
First, it is important to understand the sequencing performance

criteria and the sequencing rules.
Sequencing Performance Criteria

!
The criteria is often classified into 3 categories:

1. Process-focused performance criteria
2. Customer-focused due date criteria
3. Cost-based criteria
Sequencing - The Process Focused Performance Criteria
Process-focused performance criteria looks at information about

the start and end times of jobs and focus on shop performance
such as equipment utilisation and work in process inventory.
Two common measures which are:
Flow time
Makespan
Flow time is the amount of time a job spent in the shop or

factory.
Fi = pij + wij = Ci - Ri
where
Fi = flow time of job i
pij = sum of all processing times of job i at workstation or
area j (run + setup times)
wij = sum of all waiting times of job i at workstation or area j
Ci = completion time of job i
Ri = ready time for job i where all materials, specifications,
and so on are available

!
Makespan is the time needed to process a given set of jobs.

M= C-S
where
M = makespan of a group of jobs
C = completion time of last job in the group
S = start time of first job in the group
Sequencing - The Customer Focused Due Date Criteria
Customer focused due dates considers the due dates promised

to customers or the internally pre-determined shipping dates.
Two common measures which are:
Lateness
Tardiness
Sequencing
- The Customer Focused Due Date Criteria
!
Lateness is the difference between the completion time

and the due date (either positive or negative).
Tardiness is the amount of time by which the completion

time exceeds the due date.
(Tardiness is defined as zero if job is completed before due

date.)
where
Li = Ci - Di
[14.3]
Ti = Max (0, Li)
[14.4]
Li = lateness of job i
Ti = tardiness of job i
Ci = completion time of job i
Di = due date of job i
Sequencing - The Cost Based Criteria
Cost based criteria focuses on costs which typically include:
Inventory
Changeover or setup
Processing
Materials handling
Sequencing Rules
!
The are many sequencing rules that can be used. These rules
are divided into 2 categories:
1. Rules for fixed set of jobs
2. Rules for intermittent set of jobs
The
Sequencing Rules For Fixed Set Of Jobs
!
Sequencing rules for a fixed set of jobs are:

!
Shortest Processing Time (SPT)

SPT sequencing maximises resource utilisation and
minimises average flow time and work-in-process
inventory.
!
Earliest Due Date (EDD)

EDD minimises the maximum job tardiness and
lateness.
The Sequencing Rules For Intermittent Set Of Jobs

!
Priority rules when new jobs arrive intermittently:
First come-first served (FCFS) used in many service

delivery systems and does not consider any job or
customer criterion.
Fewest number of operations remaining (FNO) but does

not consider the length of time for each operation.
Least work remaining (LWR) the sum of all processing

times for operations not yet performed.
Least amount of work at the next process queue (LWNQ)

amount of work awaiting the next process in a jobs
sequence. Rule tries to keep downstream work stations
and associated resources busy.
Application Of Sequencing Rules
We will illustrate scheduling on a single resource scheduling

problem and on the two resourcing sequencing problem.

Single-Resource Sequencing Problem
!
Process a set of jobs on a single processor.

FCFS (First come-first served) rule works well when
processing times are relatively equal.
SPT (Shortest processing time) sequencing finds a
minimal average flow time sequence.
EDD (Earliest due date) rule minimises the maximum
job tardiness and lateness.
FCFS Sequencing Rule Example

Job
1
2
3
4
5
Processing Time (days)

4
7
2
6
3
Due Date
15
16
8
21
9
SPT Sequencing Rule Example

Job
1
2
3
4
5

4
7
2
6
3
Due Date
15
16
8
21
9
EDD Sequencing Rule Example

Job
1
2
3
4
5

4
7
2
6
3
Due Date
15
16
8
21
9
Comparing The Three Sequencing Rules
Exhibit 14.3 Comparison of Three Ways (By-the Numbers, SPT, and EDD)
to Sequence the Five Jobs

Two-Resource Sequencing Problem
For a two-resource sequencing problem, S. M. Johnson

developed a sequencing rule to minimise the time needed to
process a given set of jobs (Makespan). The steps to
achieve this are:
1. List the jobs and their processing times on Resources
#1 and #2.
2. Find the job with the shortest processing time (on
either resource).
3. If this time corresponds to Resource #1, sequence the
job first; if it corresponds to Resource #2, sequence
the job last.
4. Repeat steps 2 and 3, using the next-shortest
processing time and working inward from both ends of
the sequence until all jobs have been scheduled.
Two-Resource Sequencing Example
There are 5 jobs to be completed with each job requiring

first a shearing operation (Resource #1) and then a punchpress operation (Resource #2).
STEP 1
1. List the jobs and their processing times on Resources #1
and #2.
Two-Resource Sequencing Example Continued
STEPS 2 & 3
2. Find the job with the shortest processing time (on either
resource).
3. If this time corresponds to Resource #1, sequence the job
first; if it corresponds to Resource #2, sequence the job last.
Job 2 has the shortest processing time;

since it is on Resource 2, schedule it last.
Job 5 has the next shortest processing
time; since it is on Resource 1, schedule it
first:
STEPS 4
4. Repeat steps 2 and 3, using the nextshortest processing time and working
inward from both ends of the sequence
until all jobs have been scheduled.
Next, both job 1 on the shear have the next shortest time.
Choose job 1:
Continuing, choose job 3 and finally job 4:
If jobs are completed by order number, the punch press often

experiences idle time awaiting the next job. The makespan is
37 days.
Exhibit 14.5 Gantt Job Sequence Chart for Hirsch Product Sequence 1-2-3-4-5
Johnsons Rule results in a reduction in makespan from 37

days to 27 days, as shown in the Gantt chart.
Exhibit 14.6 Gantt Job Sequence Chart for Hirsch Product Sequence 5-1-4-3-2
Using Johnsons Rule
Schedule Monitoring & Control

!
Finally, it is important to bear in mind that even

with a great schedule, things could go wrong. This
is why it is important to monitor how schedules are
progressing on a continuing basis. Reschedules are
a normal part of scheduling.
!
Gantt chart is a useful tool for monitoring

schedules. This helps to track jobs that are behind,
on, or ahead of schedule.
Final Notes - Your Tasks For This Week

!
Review the lecture slides and the notes you have taken
!
Read chapters 13 and 17
!
Read the materials covered in the tutorial
!
Continue working on assignment 2, part 2
Thank You For Your Time

Inventory Part 2

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SESSION 6

Copyright 2014 - Fadi Kotob

Managing Inventories Part 2

Copyright 2014 - Fadi Kotob

Last week, I started covering chapter 12

What do you remember from what was covered?

Explain and calculate the economic order quantity and

Briefly explain the importance of safety stock and service

Briefly explain the principal decisions when managing a fixed

Briefly explain some of the additional types of inventory

- Explain the different approaches that an organisation could use

Copyright 2014 - Fadi Kotob

The EOQ Model

What is the Economic Order Quantity (EOQ)?

It is a classic economic model developed in the early 1900s

The EOQ Model Assumptions

FROM THESE ASSUMPTIONS, LETS MOVE TO LEARN HOW TO

The Economic Order Quantity (EOQ) can be calculated

Co = Ordering Cost Per Order

How to calculate annual ordering cost and annual holding cost?

Copyright 2014 - Fadi Kotob

The EOQ Model Annual Inventory Cost Calculation

Annual holding cost

= (Average cycle inventory) (Unit holding cost)

Annual ordering cost (Co)

= (Number of orders/Year) (Ordering or setup costs)

Total annual inventory cost

!! = Annual holding cost + Annual ordering cost

Copyright 2011 - Fadi Kotob

EOQ & Inventory Cost Exercise

A museum of natural history opened a gift shop which operates 52

What is the EOQ?

What is the annual inventory cost?

Lets start by understanding the data

Cost Per Unit = $60

Copyright 2014 - Fadi Kotob

What Is The EOQ?

Ordering Cost (Co) = $45

Cost Per Unit = $60

Annual Holding Cost (Ch) = 0.25% Of Cost

Copyright 2014 - Fadi Kotob

Annual Cycle Inventory Exercise

Annual Demand (D) = 18 * 52 = 936 Units

Ordering Cost (Co)= $45

= (Average cycle inventory) (Unit holding cost)

= ((936 units/year) / (75 order size)) $45

Annual Ordering Cost = $561.6

!! = 12.48 orders per year * $45 setup cost = $561.6

Annual Cycle Inventory Exercise

Annual Holding Cost = $562.50

Copyright 2014 - Fadi Kotob

Ordering In A Fixed Order System When Demand Is Uncertain

When demand is uncertain, using EOQ based on the average

Calculations relating to 12-4b on page 264 are not examinable

The Periodic Review Or Fixed Period System

An alternative to a fixed order quantity system is a

The time interval between reviews (T), and

The replenishment level (M)

The Periodic Review Or Fixed Period System Graph

Calculations relating to 12-5b on page 267 are not examinable

Other Types of Inventory System

Other Inventory Systems:

Bin, Can Order and Base Stock Systems

Newsvendor Problem: a technique that determines how much inventory