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Chapter Outline
When to order:
Reorder point
Inventory level
Q1
Q2
Reorder point
Time
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Demand rate
Reorder point, R
Time
Demand is known exactly, is continuous and is constant over time All costs are known exactly and do not vary
Ex: holding cost, purchase price, and reorder costs do not vary with the quantity ordered
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Amount leaving stock in cycle, DxT Reorder Cost component Holding Cost component
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Reorder Cost
Optimal order Qo
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Ex 1: Carpet Sales
The I-75 Carpet store stocks carpet in its warehouse and sells it through a showroom. The store keeps several brands and styles of carpet in stock; however, its bigger seller is the BIG C carpet. The store wants to determine the optimal order size and total inventory cost for this brand of carpet given an estimated annual demand of 10,000 yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost of $150.
The store would like to know the number of orders that will be made annually and the time between orders given that the store is open every except Sunday, Thanksgiving Day and Christmas Day.
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Adjusting EOQ
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Sensitivity Analysis
Use estimates of relevant costs Ignore uncertainty in demand What happen if the holding / ordering cost is off by 20%, 30%?
Consider 4 cases of variations of the model parameters. Both ordering and carrying costs are 10% less than the original estimates Both are 10% higher Ordering cost is 10% higher and carrying cost is10% lower Ordering cost is 10% lower and carrying cost is 10% higher
1. 2. 3. 4.
Determine EOQ in each case. Remark on the sensitivity of Q on the estimated total cost.
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Reorder Level
Additional assumption: Lead time is known and constant No need to carrying stock from one cycle to the next So each order should be scheduled to arrive as existing stock runs out
Reorder level = demand during lead time = lead time x demand per unit tim ROL = LT x D
Revisit Ex 1: Carpet Sell. Given that product lead time is 5 days. Calculate reorder level (ROL) 17
The stock on hand plus the outstanding order must be enough to last until B arrive or equal the lead time demand
ROL Stock on hand ROL
+ -
LT x D
LT x D
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= =
Stock on order n x Qo
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Ex 2
Demand for an item is steady at 1,200 units a year with an ordering cost of $16 and holding cost of $0.24 per unit per year. Describe a appropriate ordering policy if the lead time is constant at
(a) (b) (c)
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Discussion Questions
What are the benefit of short lead times? How can these be achieved in practice?
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EOQ. Derivation